PALMONE INC - 10-Q Quarterly Report

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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 November 26, 2004

¨ 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

palmOne, Inc.

(Exact name of registrant as specified in its charter)

Delaware

94-3150688

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

400 N. McCarthy Blvd.

Milpitas, California

95035

(Address of principal executive offices and zip code)

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

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

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

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

As of December 21, 2004, 48,776,795 shares of the Registrant’s Common Stock were outstanding.

palmOne, Inc. (*)

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Statements of Operations Three and six months ended November 30, 2004 and 2003	3

	Condensed Consolidated Balance Sheets November 30, 2004 and May 31, 2004	4

	Condensed Consolidated Statements of Cash Flows Six months ended November 30, 2004 and 2003	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	42

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 2.	Changes in Securities and Use of Proceeds	43

Item 4.	Submission of Matters to a Vote of Security Holders	43

Item 6.	Exhibits	45

Signatures		48

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

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

palmOne, the palmOne logo, Zire, the Zire logo, Tungsten, the Tungsten logo, Handspring, the Handspring logo, Treo, Palm, the Palm logo, Palm OS, Graffiti, HotSync, the HotSync logo, and stylizations and design marks associated with all the preceding, and trade dress associated with palmOne, Inc.’s products, are among the trademarks or registered trademarks owned by or licensed to palmOne, Inc. or its subsidiaries. All other brand and product names are or may be trademarks of, and are used to identify products or services of, their respective owners. palmOne, Inc. uses the Bluetooth wireless technology trademark under express license from Bluetooth SIG, Inc.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

palmOne, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended November 30,					Six Months Ended November 30,
	2004		2003			2004		2003
Revenues	$	376,180	$	271,215		$	649,325	$	439,823
Costs and operating expenses:
Cost of revenues (*)		266,478		197,739			448,281		318,963
Sales and marketing		45,048		43,709			82,603		78,287
Research and development		20,407		14,948			38,975		31,776
General and administrative		11,312		9,355			21,111		18,049
Amortization of intangible assets and deferred stock-based compensation (**)		2,527		1,938			4,866		2,059
Restructuring charges		—		918			—		3,588

Total costs and operating expenses		345,772		268,607			595,836		452,722
Operating income (loss)		30,408		2,608			53,489		(12,899	)
Interest and other income (expense), net		611		1,608			577		1,451

Income (loss) before income taxes		31,019		4,216			54,066		(11,448	)
Income tax provision		6,328		1,584			9,781		2,782

Income (loss) from continuing operations		24,691		2,632			44,285		(14,230	)
Loss from discontinued operations (net of taxes of $0, $4, $0 and $252, respectively)		—		(6,750	)		—		(11,634	)

Net income (loss)	$	24,691	$	(4,118	)	$	44,285	$	(25,864	)

Net income (loss) per share:
Basic:
Continuing operations	$	0.51	$	0.07		$	0.92	$	(0.43	)
Discontinued operations		—		(0.18	)		—		(0.35	)

	$	0.51	$	(0.11	)	$	0.92	$	(0.78	)

Diluted:
Continuing operations	$	0.48	$	0.07		$	0.86	$	(0.43	)
Discontinued operations		—		(0.18	)		—		(0.35	)

	$	0.48	$	(0.11	)	$	0.86	$	(0.78	)

Shares used in computing per share amounts:
Basic		48,381		36,696			48,005		33,022

Diluted		51,442		38,743			51,223		33,022

() Cost of revenues excludes the applicable portion of amortization of intangible assets and deferred stock-based compensation. (*) Amortization of intangible assets and deferred stock-based compensation:
Cost of revenues	$	351	$	84		$	663	$	88
Sales and marketing		1,714		1,599			3,368		1,657
Research and development		64		37			128		64
General and administrative		398		218			707		250

	$	2,527	$	1,938		$	4,866	$	2,059

See notes to condensed consolidated financial statements.

palmOne, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except par value amounts)

(Unaudited)


	November 30, 2004			May 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	236,146		$	203,069
Short-term investments		76,737			49,382
Accounts receivable, net of allowance for doubtful accounts of $8,702 and $8,317, respectively		219,427			120,757
Inventories		29,119			14,030
Investment for committed tenant improvements		6,956			7,197
Prepaids and other		9,970			8,067

Total current assets		578,355			402,502
Restricted investments		775			1,175
Land not in use		60,000			60,000
Property and equipment, net		18,620			19,425
Goodwill		253,372			257,363
Intangible assets, net		7,104			10,979
Deferred income taxes		34,800			34,800
Other assets		1,575			1,694

Total assets	$	954,601		$	787,938

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	184,548		$	112,772
Accrued restructuring		20,909			27,156
Provision for committed tenant improvements		6,956			7,197
Other accrued liabilities		155,360			112,679

Total current liabilities		367,773			259,804
Non-current liabilities:
Long-term convertible debt		35,000			35,000
Other non-current liabilities		1,300			1,600
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: 48,723 shares and 47,032 shares, respectively		49			47
Additional paid-in capital		1,399,346			1,383,630
Unamortized deferred stock-based compensation		(3,576	)		(1,995	)
Accumulated deficit		(846,353	)		(890,638	)
Accumulated other comprehensive income		1,062			490

Total stockholders’ equity		550,528			491,534

Total liabilities and stockholders’ equity	$	954,601		$	787,938

See notes to condensed consolidated financial statements.

palmOne, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended November 30,
	2004			2003
Cash flows from operating activities:

Income (loss) from continuing operations	$	44,285		$	(14,230	)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
Depreciation		8,418			10,843
Amortization		4,866			2,578
Changes in assets and liabilities:
Accounts receivable		(98,354	)		(46,214	)
Inventories		(15,089	)		(9,538	)
Prepaids and other		(1,101	)		1,438
Accounts payable		71,776			18,865
Accrued restructuring		(6,061	)		(4,756	)
Other accrued liabilities		46,272			887

Net cash provided by (used in) operating activities		55,012			(40,127	)

Cash flows from investing activities:

Purchase of property and equipment		(7,613	)		(3,459	)
Spin-off of PalmSource, additional cash distribution		—			(6,000	)
Acquisition of Handspring, net cash acquired		—			16,114
Sale of restricted investments		400			1,896
Purchase of restricted investments		—			(2,764	)
Sale of short-term investments		24,626			—
Purchase of short-term investments		(52,495	)		—

Net cash provided by (used in) investing activities		(35,082	)		5,787

Cash flows from financing activities:

Proceeds from issuance of common stock:
Private placements		—			37,015
Employee stock plans		13,147			10,553

Net cash provided by financing activities		13,147			47,568

Change in cash and cash equivalents		33,077			13,228
Cash and cash equivalents, beginning of period		203,069			204,967

Cash and cash equivalents, end of period	$	236,146		$	218,195

Other cash flow information:
Cash paid for income taxes	$	2,864		$	1,145

Cash paid for interest	$	940		$	1,293

Non-cash investing and financing activities are as follows:

Fair value of stock options and warrants assumed in business combination	$	—		$	28,064

Common stock issued for business combination	$	—		$	209,173

See notes to condensed consolidated financial statements.

palmOne, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by palmOne, Inc. (formerly Palm, Inc. or Palm), without audit, pursuant to the rules of the Securities and Exchange Commission, or SEC. References to “palmOne,” “the Company,” “we,” “us,” and “our” in this Form 10-Q refer to palmOne, Inc. and its subsidiaries unless the context requires otherwise. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of palmOne’s financial position as of November 30, 2004 and 2003, results of operations for the three and six months ended November 30, 2004 and 2003 and cash flows for the six months ended November 30, 2004 and 2003. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in palmOne’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004. The results of operations for the six months ended November 30, 2004 are not necessarily indicative of the operating results for the full fiscal year or any future period.

On October 28, 2003, the Company’s stockholders formally approved a plan to spin-off the Company’s operating system, or OS, platform and licensing business through the distribution of all of the shares it owned of its majority-owned subsidiary, PalmSource Inc., or PalmSource, to the stockholders of the Company. The distribution of the shares of PalmSource common stock was intended to be tax-free to palmOne and its stockholders. As a result of the distribution, the Company’s historical condensed consolidated financial statements have been retroactively adjusted to account for PalmSource as discontinued operations for all periods presented in accordance with Statement of Financial Accounting Standards, or SFAS, No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Unless otherwise indicated, the Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations (See Note 4 to condensed consolidated financial statements). Immediately following the PalmSource distribution, palmOne acquired Handspring, Inc., or Handspring, through a merger transaction between Handspring and a wholly-owned subsidiary of palmOne. Commencing with the date of acquisition, October 29, 2003, the Handspring assets acquired and liabilities assumed, as well as the results of Handspring’s operations are included in our condensed consolidated financial statements. (See Note 9 to condensed consolidated financial statements).

palmOne was legally separated from 3Com Corporation, or 3Com, on February 26, 2000 and completed its initial public offering on March 2, 2000. The distribution of palmOne common stock from 3Com to its stockholders was completed on July 27, 2000.

palmOne’s 52-53 week fiscal year ends on the Friday nearest to May 31, with each fiscal quarter ending on the Friday generally nearest to August 31, November 30 and February 28. Fiscal year 2005 contains 53 weeks and fiscal year 2004 contains 52 weeks. For presentation purposes, the periods are shown as ending on August 31, November 30, February 28 and May 31, as applicable.

2.	Stock-Based Compensation

palmOne makes awards to its employees under various employee stock plans, which are described more fully in the notes to consolidated financial statements included in palmOne’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004. palmOne accounts for awards under its employee stock plans under the intrinsic value method prescribed by Accounting Principles Board Opinion, or APB, No. 25, Accounting for Stock Issued to Employees, and Financial Accounting Standards Board Interpretation, or FIN, No. 44, Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB No. 25), and has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and related guidance.

In accordance with APB No. 25, palmOne generally recognizes no compensation expense with respect to shares issued under its employee stock purchase plan and options granted to employees and directors under its stock option plans, collectively referred to as “options.” The Company’s stock option plan also allows for the issuance of restricted stock awards, under which shares of common stock are issued at par value to key employees, subject to certain restrictions, and for which compensation expense equal to the fair market value on the date of the grant is recognized over the vesting period.

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

The following table illustrates the effect on net income (loss) and net income (loss) per share if palmOne had elected to recognize stock-based compensation expense based on the fair value of the options granted to employees at the date of grant as prescribed by SFAS No. 123. As a result of the PalmSource distribution, to preserve the intrinsic value of palmOne’s employee stock options, the exercise prices and the number of shares underlying the options outstanding on the date of distribution were adjusted in accordance with the methodology set forth in FIN No. 44. For the purpose of this pro forma disclosure, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting periods, using the multiple option approach.


	Three Months Ended November 30,						Six Months Ended November 30,
(In thousands, except per share amounts)	2004(2)			2003			2004(2)			2003

Net income (loss), as reported	$	24,691		$	(4,118	)	$	44,285		$	(25,864	)
Add: Stock-based compensation expense included in reported net income (loss), net of related tax effects (1)		589			1,406			990			2,118
Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects (1)		(7,197	)		(6,984	)		(12,431	)		(13,829	)

Pro forma net income (loss)	$	18,083		$	(9,696	)	$	32,844		$	(37,575	)

Net income (loss) per share, as reported:
Basic	$	0.51		$	(0.11	)	$	0.92		$	(0.78	)

Diluted	$	0.48		$	(0.11	)	$	0.86		$	(0.78	)

Pro forma net income (loss) per share
Basic	$	0.37		$	(0.26	)	$	0.68		$	(1.14	)

Diluted	$	0.35		$	(0.25	)	$	0.64		$	(1.14	)

(1)	Amounts include compensation related to options held by PalmSource employees through the distribution date.

(2)	Stock-based compensation expense determined under fair value method for the three and six months ended November 30, 2004 includes amortization related to options cancelled in connection with the option exchange program initiated on March 1, 2004.

The fair value of each option grant during the three and six months ended November 30, 2004 and 2003 was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions:


	Three Months Ended November 30,				Six Months Ended November 30,
	2004		2003		2004		2003
Assumptions applicable to stock options:
Risk-free interest rate	2.9	%	1.8	%	2.9	%	1.8	%
Volatility	75	%	100	%	75	%	100	%
Option term (in years)	3.11		1.87		3.13		2.46
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Assumptions applicable to employee stock purchase plan:
Risk-free interest rate	1.9	%	2.1	%	1.9	%	2.1	%
Volatility	98	%	100	%	98	%	100	%
Option term (in years)	1.99		1.99		1.99		1.99
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%

The weighted average estimated fair value of stock options granted were $15.61 per share and $7.04 per share during the three months ended November 30, 2004 and 2003, respectively, and $15.77 per share and $6.92 per share during the six months ended November 30, 2004 and 2003, respectively. The weighted average estimated fair value of shares issued under the employee stock purchase plan were $6.51 per share during the three and six months ended November 30, 2004, and $8.06 per share during the three and six months ended November 30, 2003.

On March 1, 2004, palmOne tendered an offer to exchange all unexercised options to purchase shares of palmOne’s common stock that were held by eligible employees, whether vested or unvested, that had exercise prices equal to or greater than $20.00 per share, or the Eligible Options. Eligible employees included all persons who were employees of palmOne or one of its subsidiaries as of March 1, 2004 and who remained employees through the date on which the Eligible Options were cancelled, but did not include members of palmOne’s Board of Directors or palmOne’s Section 16 Officers (which term shall mean any persons who are required to file Forms 3, 4 or 5 with respect to palmOne’s securities under the Securities Exchange Act of 1934, as amended). On March 30, 2004, options to purchase approximately 945,000 shares of palmOne common stock, having a

weighted average exercise price of $164.15 per share, were cancelled. Accordingly and as a result of terminations, the Company granted options to purchase approximately 578,000 shares of palmOne common stock on October 1, 2004 at an exercise price equal to the fair market value at the date of grant, or $32.24, the closing sale price per share of palmOne’s common stock as of November 30, 2004 as reported on the Nasdaq National Market, the majority of which will vest over a 12-month period. Under the provisions of APB No. 25 no compensation expense has been, or will be, recognized in our consolidated statement of operations for the grant of the replacement options.

3.	Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. This statement replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires companies to apply a fair-value-based measurement method in accounting for shared-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. In addition, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123(R) will be effective for quarterly periods beginning after June 15, 2005, which is palmOne’s second quarter of fiscal year 2006. Management has not yet determined the impact that SFAS 123(R) will have on its financial position and results of operations.

4.	Discontinued Operations

On October 28, 2003, the Company’s stockholders formally approved a plan that included the PalmSource distribution and the Handspring acquisition. Accordingly, the historical consolidated financial statements of palmOne have been retroactively adjusted to account for PalmSource as discontinued operations for all periods presented in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The discontinued operations data reflects the historical assets and liabilities, results of operations and cash flows of PalmSource, the Palm OS platform and licensing business segment of palmOne, as of and during each respective period presented. No gain or loss was recorded as a result of the PalmSource distribution.

Loss from discontinued operations for the three and six months ended November 30, 2003 included PalmSource net revenues of $2.3 million and $11.1 million, respectively. Also included in loss from discontinued operations for the three and six months ended November 30, 2003 are allocated corporate expenses and historical consolidated separation costs of $3.3 million and $5.2 million, respectively, that ceased after the PalmSource distribution.

5.	Net Income (Loss) Per Share

Basic net income (loss) from continuing operations, loss from discontinued operations and net income (loss) per share are calculated based on the weighted average shares of common stock outstanding during the period, excluding shares of restricted stock subject to repurchase. Diluted loss from continuing operations, loss from discontinued operations and net loss per share for the six months ended November 30, 2003 are calculated based on the weighted average shares of common stock outstanding excluding shares subject to repurchase, because the effect of restricted stock subject to repurchase and stock options and warrants outstanding, calculated using the treasury stock method, would have been anti-dilutive. For the six months ended November 30, 2003, approximately 1,133,000 common equivalent shares were excluded from the computations of diluted loss from continuing operations, diluted loss from discontinued operations and diluted net loss per share. Diluted income from continuing operations, diluted loss from discontinued operations and diluted net income (loss) per share for the three months ended November 30, 2004 and 2003 and the six months ended November 30, 2004 are 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 and warrants outstanding, calculated using the treasury stock method.

6.	Comprehensive Income (Loss)

The components of comprehensive income (loss) are (in thousands):


	Three Months Ended November 30,						Six Months Ended November 30,
	2004			2003			2004			2003
Net income (loss)	$	24,691		$	(4,118	)	$	44,285		$	(25,864	)
Other comprehensive income (loss):
Unrealized loss on available-for-sale investments		(516	)		(38	)		(236	)		(35	)
Recognized loss included in earnings		56			—			165			—
Accumulated translation adjustments		639			559			643			204

Total comprehensive income (loss)	$	24,870		$	(3,597	)	$	44,857		$	(25,695	)

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

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


	November 30, 2004							May 31, 2004
	Adjusted Cost		Unrealized Loss			Carrying Value		Adjusted Cost		Unrealized Loss			Carrying Value
Cash	$	42,612	$	—		$	42,612	$	47,934	$	—		$	47,934
Cash equivalents:
Money market funds		44,309		—			44,309		50,635		—			50,635
Federal government obligations		16,800		—			16,800		—		—			—
State and local government obligations		12,925		—			12,925		12,000		—			12,000
Corporate notes/bonds		105,500		—			105,500		80,500		—			80,500
Foreign corporate notes/bonds		14,000		—			14,000		12,000		—			12,000

		193,534		—			193,534		155,135		—			155,135

Total cash and cash equivalents	$	236,146	$	—		$	236,146	$	203,069	$	—		$	203,069

Short-term investments:
Federal government obligations	$	55,647	$	(375	)	$	55,272	$	30,495	$	(174	)	$	30,321
Corporate notes/bonds		20,343		(134	)		20,209		17,908		(105	)		17,803
Foreign corporate notes/bonds		1,263		(7	)		1,256		1,263		(5	)		1,258

	$	77,253	$	(516	)	$	76,737	$	49,666	$	(284	)	$	49,382

Equity investments in publicly traded companies	$	—	$	—		$	—	$	273	$	(151	)	$	122

Investment for committed tenant improvements, money market funds	$	6,956	$	—		$	6,956	$	7,197	$	—		$	7,197

Restricted investments, certificates of deposit	$	775	$	—		$	775	$	1,175	$	—		$	1,175

palmOne’s unrealized loss positions are less than twelve months in age.

8.	Inventories

Inventories consist of (in thousands):


	November 30, 2004		May 31, 2004
Finished goods	$	25,513	$	12,219
Work-in-process and raw materials		3,606		1,811

	$	29,119	$	14,030

9.	Business Combinations

On October 29, 2003, palmOne acquired Handspring, a leading provider of smartphones and communication devices, exchanging 0.09 of a share of palmOne common stock for each outstanding share of Handspring common stock and assuming outstanding options and warrants to purchase Handspring common stock based on this same exchange ratio. The exchange ratio for the acquisition was determined based on an arm’s length negotiation between palmOne and Handspring. The Handspring acquisition resulted in the issuance of approximately 13.6 million shares of palmOne common stock. The purchase price of $249.9 million is comprised of (a) approximately $209.2 million representing the fair value of palmOne common stock issued to

former Handspring stockholders, (b) $28.0 million representing the estimated fair value of Handspring options and warrants assumed using the Black-Scholes option valuation model, (c) $6.5 million of direct transaction costs and (d) $6.2 million of other liabilities directly related to the acquisition.

The $6.2 million of other liabilities directly related to the Handspring acquisition includes $1.8 million related to workforce reductions primarily in the United States, of approximately 50 Handspring employees, $3.7 million related to Handspring facilities not intended for use for palmOne operations and therefore considered excess, and $0.7 million related to other miscellaneous charges incurred as a result of the acquisition which will not benefit palmOne in the future. As of May 31, 2004, 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 and costs to exit certain facilities. All adjustments were recorded as a net increase in goodwill. As of November 30, 2004, the Company adjusted the estimated costs for employee termination benefits and costs to exit certain facilities. As of November 30, 2004, the workforce reductions were complete.

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


	Initial Liability Recognized at October 29, 2003		Cash Payments			Adjustments		Balance at May 31, 2004		Cash Payments			Adjustments			Balance at November 30, 2004
Workforce reduction costs	$	1,805	$	(2,029	)	$	244	$	20	$	—		$	(20	)	$	—
Excess facilities costs		3,689		(2,065	)		1,913		3,537		(977	)		(137	)		2,423
Other		660		(673	)		13		—		—			—			—

	$	6,154	$	(4,767	)	$	2,170	$	3,557	$	(977	)	$	(157	)	$	2,423

The following unaudited pro forma financial information presents the combined results of operations of palmOne and Handspring as if the Handspring acquisition had occurred as of the beginning of the periods presented. Due to different historical fiscal period ends for palmOne and Handspring, the pro forma results are derived from the same periods for both palmOne and Handspring as follows:


palmOne Reporting Period		Handspring Period Included in Pro Forma Data
Three months ended November 30, 2004		*
Three months ended November 30, 2003		September 1, 2003—October 28, 2003 *
Six months ended November 30, 2004		*
Six months ended November 30, 2003		June 1, 2003—October 28, 2003 *

*	Results from operations of the former Handspring business are included in palmOne results of operations since the date of acquisition (October 29, 2003).

This unaudited pro forma financial information includes an adjustment of $1.5 million and $6.8 million for the three and six months ended November 30, 2003, respectively, to the combined results of operations, reflecting amortization of purchased intangible assets and deferred stock based-compensation, that would have been recorded if the acquisition had occurred at the beginning of the periods presented. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of palmOne that would have been reported had the acquisition been completed as of the beginning of the periods presented, and should not be taken as representative of the future consolidated results of operations or financial condition of palmOne. Pro forma results for the three and six months ended November 30, 2004 and 2003 were (in thousands, except per share amounts):


	Three Months Ended November 30,					Six Months Ended November 30,
	2004		2003			2004		2003
Pro forma revenues	$	376,180	$	294,640		$	649,325	$	475,903
Pro forma net income (loss)	$	24,691	$	(13,329	)	$	44,285	$	(57,603	)
Pro forma net income (loss) per share:
Basic	$	0.51	$	(0.27	)	$	0.92	$	(1.24	)
Diluted	$	0.48	$	(0.27	)	$	0.86	$	(1.24	)
Shares used in computing per share amounts:
Basic		48,381		49,973			48,005		46,599
Diluted		51,442		49,973			51,223		46,599

10.

Goodwill

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


	Total
Balances, May 31, 2003	$	13,815
Acquisition of Handspring		241,512
Goodwill adjustments		2,036

Balances, May 31, 2004		257,363
Goodwill adjustments		(3,991	)

Balances, November 30, 2004	$	253,372

Goodwill adjustments in fiscal year 2004 of approximately $2.0 million primarily consist of adjustments to the initial estimate of liabilities directly related to the Handspring acquisition as a result of greater costs than originally estimated for employee termination benefits and costs to exit certain facilities. Goodwill adjustments during the six months ended November 30, 2004 of approximately $4.0 million are primarily the result of the release of the valuation allowance on a portion of the deferred tax assets associated with the Handspring acquisition and adjustments to the initial estimate of liabilities directly related to the Handspring acquisition as a result of lower costs than originally estimated for employee termination benefits and costs to exit certain facilities partially offset by the settlement of pre-acquisition litigation and adjustment to our estimated royalty obligations. The Company will continue to adjust goodwill as required for changes in the value of deferred tax assets associated with the Handspring acquisition.

11.	Intangible Assets

Intangible assets consist of (in thousands):


	Amortization Period	November 30, 2004							May 31, 2004
	Amortization Period	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Contracts and customer relationships	24 months	$	11,900	$	(6,446	)	$	5,454	$	11,900	$	(3,471	)	$	8,429
Customer backlog	4 months		4,200		(4,200	)		—		4,200		(4,200	)		—
Product technology	24 months		1,800		(975	)		825		1,800		(525	)		1,275
Trademarks	24 months		1,400		(758	)		642		1,400		(408	)		992
Non-compete covenants	24 months		400		(217	)		183		400		(117	)		283

		$	19,700	$	(12,596	)	$	7,104	$	19,700	$	(8,721	)	$	10,979

Amortization expense related to intangible assets was $1.9 million and $1.7 million for the three months ended November 30, 2004 and 2003, respectively and $3.9 million and $1.7 million for the six months ended November 30, 2004 and 2003, respectively. Estimated future amortization expense for the remaining six months of fiscal year 2005 and for fiscal year 2006 is $3.9 million and $3.2 million, respectively.

12.	Deferred Income Taxes

As of November 30, 2004, palmOne’s deferred tax assets were comprised of net operating loss carryforwards, deferred expenses and tax credit carryforwards of $454.3 million offset by a valuation allowance of $419.5 million. The valuation allowance reduces deferred tax assets to estimated realizable value, based on estimates and certain tax planning strategies. The carrying value of palmOne’s net deferred tax assets assumes that it is more likely than not that palmOne 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 will be 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.

The income tax provision for the six months ended November 30, 2004 represented approximately 18% of pretax income, which includes foreign, federal and state income taxes of approximately $4.0 million and acquisition accounting adjustments to goodwill of approximately $5.8 million. The impact of the acquisition accounting adjustments to goodwill in the six months ended November 30, 2004 were partially offset by the favorable conclusion to a tax audit which reduced our first quarter tax provision. The acquisition accounting adjustments to goodwill are related to the recognition of deferred tax assets, including net operating loss carryforwards, related to Handspring that are projected to be realized in the current year to offset taxable income. The tax benefit associated with the utilization of these deferred tax assets is reflected as a goodwill reduction.

13.	Commitments and Guarantees

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

In December 2001, palmOne 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, palmOne retained $35.0 million and the remainder was assumed by PalmSource. The note bears interest at 5.0% per annum, is due in December 2006 and is convertible into palmOne common stock at an effective conversion price of $64.60 per share. palmOne may force a conversion at any time, provided its common stock has traded above $99.48 per share for a defined period of time. In the event palmOne distributes significant assets, palmOne may be required to repay a portion of the note. The note agreement defines certain events of default pursuant to which the full amount of the note plus interest could become due and payable.

In connection with the Handspring acquisition, palmOne assumed two notes with remaining principal amounts of $2.5 million and $0.8 million. The notes bear interest at 6% per annum and are payable in equal monthly installments through January 2007. As of November 30, 2004, the remaining principal amounts of the notes are $1.9 million and $0.6 million, respectively.

palmOne has a patent and license agreement with a third party vendor under which palmOne is committed to pay $2.7 million in fiscal year 2005.

palmOne has an agreement with PalmSource that grants palmOne certain licenses to develop, manufacture, test, maintain and support its products. Under this agreement, palmOne has agreed to pay PalmSource license and royalty fees based upon net revenue of its products which incorporate PalmSource’s software, as well as a source code license and maintenance and support fees. The source code license fee is $6.0 million paid in three equal annual installments in June 2003, June 2004 and June 2005. Annual maintenance and support fees are approximately $0.7 million per year. The agreement includes a minimum annual royalty and license commitment of $39.0 million, $41.0 million and $42.5 million, respectively, during each of the contract years in the period ending December 3, 2006.

palmOne utilizes contract manufacturers to build its products. These contract manufacturers acquire components and build product based on demand forecast information supplied by palmOne, which typically covers a rolling 12-month period. Consistent with industry practice, palmOne acquires inventories through a combination of formal purchase orders, supplier contracts and open orders based on projected demand information. Such formal and informal purchase commitments typically cover palmOne’s forecasted component and manufacturing requirements for periods ranging from 30 to 90 days. In certain instances, these agreements allow palmOne the option to cancel, reschedule and adjust its requirements based on its business needs prior to firm orders being placed. Consequently, only a portion of palmOne’s reported purchase commitments arising from these agreements are firm, non-cancelable and unconditional commitments. As of November 30, 2004, palmOne’s commitments to third party manufacturers for inventory on-hand and component purchase commitments related to the manufacture of palmOne products are approximately $139.5 million.

In August 2003, palmOne entered into a two-year, $30.0 million revolving credit line with Silicon Valley Bank, or SVB, which was amended and restated to extend the term one more year. The credit line is secured by assets of palmOne, including but not limited to cash and cash equivalents, short-term investments, accounts receivable, inventory and property and equipment. The interest rate is equal to SVB’s prime rate (5.0% at November 30, 2004) or, at palmOne’s election subject to specific requirements, equal to LIBOR plus 1.75% (4.07% at November 30, 2004). The interest rate may vary based on fluctuations in market rates. palmOne is subject to a financial covenant requirement under this agreement to maintain cash on deposit in the United States of not less than $100.0 million. As of November 30, 2004 palmOne had used its credit line to support the issuance of letters of credit of $4.8 million.

As part of the agreements with 3Com relating to Palm’s separation from 3Com (palmOne was formerly Palm), palmOne agreed to assume liabilities arising out of the Xerox, E-Pass Technologies, and Connelly litigation matters and to indemnify 3Com for any damages it may incur related to these cases. (See Note 15 to condensed consolidated financial statements.)

As part of the agreements with PalmSource relating to the PalmSource distribution, palmOne agreed to assume liabilities arising out of the Xerox litigation and to indemnify PalmSource and PalmSource’s licensees if any claim is brought against any of them alleging infringement of the Xerox patent by covered operating system versions for any damages it may incur related to this case. (See Note 15 to condensed consolidated financial statements.)

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

palmOne’s product warranty accrual reflects management’s best estimate of probable liability under its product warranties. Management determines the warranty liability based on historical rates of usage as a percentage of shipment levels and the expected repair cost per unit, service policies and specific known issues.

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


	Six Months Ended November 30,
	2004			2003
Balance, beginning of period	$	27,839		$	17,911
Payments made		(28,543	)		(16,109	)
Balance assumed in Handspring acquisition		—			6,037
Change in liability for product sold during the period		26,630			16,887
Change in liability for pre-existing warranties		509			(131	)

Balance, end of period	$	26,435		$	24,595

14.	Restructuring Charges

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

The third quarter of fiscal year 2004 restructuring actions consisted of workforce reductions, in the United States and United Kingdom, of approximately 100 regular employees. Restructuring charges relate to the implementation of actions to streamline the Company consistent with its strategic plan. As of November 30, 2004, 99 regular employees have been terminated as a result of this restructuring. Cost reduction actions initiated in the third quarter of fiscal year 2004 are expected to be substantially complete by the third quarter of fiscal year 2005.

The first quarter of fiscal year 2004 restructuring actions consisted of workforce reductions, primarily in the United States, of approximately 45 regular employees, facilities and property and equipment that were disposed of or removed from service and canceled projects. Restructuring charges relate to the implementation of a series of actions to adjust the business consistent with palmOne’s future wireless plans. As of November 30, 2004, all of these headcount reductions have been completed. Cost reduction actions initiated in the first quarter of fiscal year 2004 were substantially completed by the end of fiscal year 2004, except for remaining contractual payments for excess facilities.

The third quarter of fiscal year 2003 restructuring actions consisted of workforce reductions, primarily in the United States, of approximately 140 regular employees, facilities and property and equipment disposed of or removed from service and canceled projects. Restructuring charges relate to the implementation of a series of actions to better align the Company’s expense structure with its revenues. As of November 30, 2004, all of these headcount reductions have been completed. Cost reduction actions initiated in the third quarter of fiscal year 2003 are substantially complete except for remaining contractual payments for excess facilities and project termination fees.

The fourth quarter of fiscal year 2001 restructuring charges related to carrying and development costs related to the land on which palmOne 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 November 30, 2004, the balance consists of lease commitments, payable over approximately seven years, offset by estimated sublease proceeds of approximately $21.1 million.

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


	Q3 2004 Action			Q1 2004 Action									Q3 2003 Action									Q4 2001 Action			Total
	Workforce Reduction Costs			Discontinued Project Costs			Excess Facilities and Equipment Costs			Workforce Reduction Costs			Discontinued Project Costs			Excess Facilities and Equipment Costs			Workforce Reduction Costs			Excess Facilities Costs			Total
Balance, May 31, 2003	$	—		$	—		$	—		$	—		$	2,367		$	1,596		$	1,374		$	29,549		$	34,886
Restructuring expense		5,172			574			1,515			1,633			—			155			(617	)		—			8,432
Cash payments		(4,175	)		(574	)		(687	)		(1,526	)		—			(1,434	)		(757	)		(10,147	)		(19,300	)
Write-offs		(289	)		—			(23	)		(107	)		—			—			—			—			(419	)

Balance, May 31, 2004		708			—			805			—			2,367			317			—			19,402			23,599
Cash payments		(538	)		—			(342	)		—			—			(239	)		—			(3,949	)		(5,068	)
Write-offs		—			—			—			—			(45	)		—			—			—			(45	)

Balance, November 30, 2004	$	170		$	—		$	463		$	—		$	2,322		$	78		$	—		$	15,453		$	18,486

Accrued restructuring as of November 30, 2004 includes accrued liabilities recognized in connection with the Handspring acquisition. (See Note 9 to condensed consolidated financial statements.)

15.	Litigation

palmOne 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. palmOne believes that it has defenses to each of the cases asserted against it, including the cases set forth below. palmOne 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 palmOne’s business, results of operations or financial condition. (Although Palm, Inc. is now palmOne, Inc. and Handspring has been merged into palmOne, the pleadings in the pending litigation continue to use former company names, including Palm Computing, Inc., Palm, Inc. and Handspring, Inc.)

In April 1997, Xerox Corporation filed suit in the United States District Court for the Western District of New York. As a result of subsequent amendments, the case currently names as defendants 3Com Corporation, U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm Computing, Inc., Palm, Inc., PalmSource, Inc., and palmOne Inc. The complaint alleges willful infringement of U.S. Patent No. 5,596,656 (the “‘656 patent”), entitled “Unistrokes for Computerized Interpretation of Handwriting.” The complaint seeks unspecified damages and to permanently enjoin the defendants from infringing the patent in the future. In 2000, the District Court dismissed the case, ruling that the patent is not infringed by the Graffiti handwriting recognition system used in handheld computers using Palm’s operating systems. Xerox appealed the dismissal to the United States Court of Appeals for the Federal Circuit (“CAFC”). On October 5, 2001, the CAFC affirmed-in-part, reversed-in-part and remanded the case to the District Court for further proceedings. On December 20, 2001, the District Court granted Xerox’s motion for summary judgment that the patent is valid, enforceable and infringed. The defendants filed a Notice of Appeal on December 21, 2001. The CAFC remanded the case to the District Court for a determination on the issue of invalidity of the ‘656 patent. On May 21, 2004 the District Court granted palmOne’s motion for summary judgment due to invalidity and denied Xerox’s motion for summary judgment that the patent is not invalid. palmOne filed a Motion for Clarification of the ruling and Xerox filed a Motion for Alteration or Amendment of and Relief from Judgment. Xerox also filed a notice of appeal which has been stayed pending further rulings by the District Court. If palmOne is not successful, palmOne might be liable to PalmSource and/or its licensees if Xerox seeks to enforce its patents claims against PalmSource’s licensees and other third parties. In connection with Palm’s separation from 3Com, palmOne may be required to indemnify and hold 3Com harmless for any damages or losses that may arise out of the Xerox litigation.

On February 28, 2000, E-Pass Technologies, Inc. filed suit against 3Com, Inc. in the United States District Court for the Southern District of New York and later filed, on March 6, 2000, an amended complaint against Palm and 3Com. The 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. The case was transferred to the United States District Court for the Northern District of California. On August 21, 2003, the CAFC issued a ruling reversing summary judgment in favor of Palm and 3Com and remanded the case to the District Court for further proceedings. On February 9, 2004, E-Pass filed another lawsuit in the Northern District of California naming palmOne, 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. palmOne filed two motions for summary judgment which are pending before the Court. The cases are in the claim construction phase. In connection with Palm’s separation from 3Com, palmOne may be required to indemnify and hold 3Com harmless for any damages or losses that may arise out of the E-Pass litigation.

On March 14, 2001, NCR Corporation filed suit against Palm and Handspring, Inc. in the United States District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 4,634,845 and 4,689,478, entitled, respectively, “Portable Personal Terminal for Use in a System for Handling Transactions” and “System for Handling Transactions Including a Portable Personal Terminal.” The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. On August 28, 2003, the District Court granted both Palm’s and Handspring’s motions for summary judgment, ruling that neither parties’ products infringe the NCR patents, and denied NCR’s motion. NCR appealed the ruling to the Court of Appeals for the Federal Circuit.

On January 23, 2003, Peer-to-Peer Systems LLC filed a complaint against Palm in the United States District Court for the District of Delaware. The complaint alleges infringement, contributory infringement, and inducement of infringement of U.S. Patent No. 5,618,045, entitled “Interactive Multiple Player Game System and Method of Playing a Game Between at Least Two Players.” The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendant from infringing the patent in the future. In May 2004 the parties reached a tentative settlement that is in the process of being documented and finalized. The terms of the settlement would result in a resolution which is not material to palmOne’s financial position.

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

In October 2002, a purported consumer class action lawsuit was filed against Palm in Illinois Circuit Court, Cook County entitled Goldstein v. Palm. The case alleges consumer fraud regarding Palm’s representations that its m100, III, V, and VII handheld personal digital assistant, as sold, would provide wireless access to the Internet and email accounts, and would perform common business functions including data base management, custom form creation and viewing Microsoft Word and Excel documents, among other tasks. The case seeks unspecified actual damages and indemnification of certain costs. Following two successful motions to dismiss filed by Palm, Plaintiff filed a third amended complaint which Palm answered. The case is in the preliminary stages.

During the quarter ended November 30, 2004, the Company reached settlement in connection with the litigation filed by Data Quill Limited against Handspring, and received final court approval of settlements in connection with Connelly v. Palm and 3Com, Hemmingsen v. Palm, and Goldhirsch v. Handspring et. al, and Majarian v. Handspring et al. These matters are described in our Annual Report on Form 10-K for the year ended May 31, 2004. None of the settlements reached in these matters will have a material effect on palmOne’s business or financial statements.

16.	Related Party Transactions

Transactions with 3Com Corporation

Subsequent to the date of separation of palmOne from 3Com, palmOne paid 3Com for certain leased facilities through the first quarter of fiscal year 2004 and for transitional services required while palmOne established its independent infrastructure, with transitional services being completed in the third quarter of fiscal year 2002. palmOne’s Chairman of the Board, Eric Benhamou, is also the Chairman of the Board of 3Com.

Transactions with PalmSource

In December 2001, palmOne entered into a software license agreement with PalmSource which was amended and restated in June 2003. The agreement includes a minimum annual royalty and license commitment of $39.0 million, $41.0 million and $42.5 million, respectively during each of the contract years in the period ending December 3, 2006. Under the software license agreement, palmOne incurred expenses of $14.2 million and $11.8 million during the three months ended November 30, 2004 and 2003, respectively, and $24.5 million and $18.7 million during the six months ended November 30, 2004 and 2003, respectively. palmOne’s Chairman of the Board, Eric Benhamou, was also the Chairman of the Board of PalmSource through October 2004.

Other Transactions and Relationships

In fiscal year 2003, palmOne made a $1.0 million equity investment in and entered into a product procurement agreement with Mobile Digital Media, Inc. This equity investment is included in other assets. palmOne paid $1.6 million and $3.6 million during the three months ended November 30, 2004 and 2003, respectively, and $3.2 million and $6.2 million during the six months ended November 30, 2004 and 2003, respectively, for products purchased under a product procurement agreement. These products were purchased by palmOne for resale.

palmOne purchased software licenses and services from Kontiki, Inc. of $86,000 during each of the three months ended November 30, 2004 and 2003, respectively and $120,000 and $86,000 during the six months ended November 30, 2004 and 2003, respectively. Michael Homer, a current member of palmOne’s Board of Directors, is the Chairman of Kontiki, Inc. Bruce Dunlevie, a current member of palmOne’s Board of Directors, is a partner at Benchmark Capital, which owns more than 10% of the Kontiki stock and has a partner, Kevin Harvey, on the Board of Directors of Kontiki, Inc.

palmOne recorded revenues of $0.4 million and $5.3 million during the three months ended November 30, 2004 and 2003, respectively, and $1.1 million and $5.3 million during the six months ended November 30, 2004 and 2003, respectively, from certain subsidiaries of the France Telecom Group. Jean-Jacques Damlamian, a current member of palmOne’s Board of Directors, is the former Senior Vice President, Group Technology and Innovation at France Telecom and is currently a Special Advisor to the Chief Executive Officer of France Telecom. In addition, palmOne recorded expenses of approximately $72,000 and $9,000 during the three months ended November 30, 2004 and 2003, respectively and $523,000 and $20,000 during the six months ended November 30, 2004 and 2003, respectively, primarily for marketing development and mobile telephone services received from subsidiaries of France Telecom Group.

palmOne recorded revenues of $11.6 million and $0 during the three months ended November 30, 2004 and 2003, respectively and $27.2 million and $0 during the six months ended November 30, 2004 and 2003 respectively, from T-Mobile USA, Inc. Susan Swenson, a current member of palmOne’s Board of Directors and the chairperson of palmOne’s Audit Committee, became the Chief Operating Officer of T-Mobile USA, Inc. in February 2004.

palmOne paid $0 and $18,000 during the three months ended November 30, 2004 and 2003, respectively and $0 and $36,000 during the six months ended November 30, 2004 and 2003, respectively, to RealNetworks in connection with bundling of products, web site referrals and engineering assistance. Eric Benhamou, Chairman of palmOne’s Board of Directors, is also a member of RealNetworks’ Board of Directors.

palmOne is involved in a co-promotional sales and marketing relationship with Good Technology. Good Technology is a value-added reseller of palmOne products. John Doerr, a current member of palmOne’s Board of Directors, serves as a member of Good Technology’s Board of Directors and is a partner at Kleiner Perkins Caufield & Byers, which owns more than 10% of the Good Technology stock. Bruce Dunlevie, a current member of palmOne’s Board of Directors, also serves as a member of Good Technology’s Board of Directors and is a partner at Benchmark Capital, which owns more than 10% of the Good Technology stock.

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. The amounts reflect the classification of the operations of palmOne’s operating platform and licensing business as discontinued operations, as required under accounting principles generally accepted in the United States, as a result of the distribution of shares of PalmSource to our stockholders. 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 have been presented as ending on November 30.

This quarterly report contains forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements concerning palmOne’s expectations, beliefs and/or intentions regarding the following: demand for our products; shifts in our average selling price and product mix; the development and introduction of new products and services; wireless networks; competitors and competition in the markets in which palmOne operates; trends in revenues, royalty rates, warranty costs and other expenses, inventory, accounts receivable and other assets; the use of proceeds from the potential sale of securities under palmOne’s universal shelf registration statement; the sufficiency of palmOne’s cash, cash equivalents and credit facility to satisfy its anticipated cash requirements; strategic alliances and the benefits of such strategic alliances; the effects of changes in market interest rates; investment activities, the value of investments and the use of palmOne’s financial instruments; realization of, and actions which palmOne may implement to realize, the tax benefits associated with palmOne’s net operating loss carryforwards; palmOne’s defenses to legal proceedings and litigation matters; provisions in palmOne’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 “Business Environment and Risk Factors” section and elsewhere in this quarterly report. palmOne undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview and Executive Summary

palmOne is a global provider of handheld computing and communications devices. Our objective is to be the leader in the handheld computing and communications device market. In order to accomplish our objective, we have defined the following strategy: develop market-defining products that deliver a great user experience, capitalize on industry trends, maintain strategic contribution from handheld computers and increase adoption of smartphones. During fiscal year 2004, we spun-off PalmSource and acquired Handspring to focus our attention on and accelerate our smartphone strategy. In the second quarter of fiscal year 2005 we launched the Treo 650 to expand our smartphone product line.

Management periodically reviews certain key business metrics in order to evaluate our strategy and operational efficiency, allocate resources and maximize the financial performance of our business. These key business metrics include the following:

Revenue – Management reviews many elements to understand our revenue stream. These include supply availability, unit shipments, average selling prices and channel inventory levels. Revenue growth is impacted by increased unit shipments and variations in average selling prices. Unit shipments are determined by supply availability, end-user and channel demand, and channel inventory. We monitor average selling prices throughout the product life cycle, taking into account market demand and competition.

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, including pricing and promotion decisions, supply/demand management and control of our 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 also monitor our cash balances to maintain cash available to support our operating and capital expenditure requirements.

We believe the handheld computing and communications device market dynamics are favorable to palmOne.

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While the market for handheld computing devices is maturing, our leadership position and our ability to develop high quality products enable us to produce solid performance. The handheld computing device market also provides a brand, scale and technology development platform that can be leveraged across our entire product portfolio.

•

The emerging high-speed wireless networks which enable true “always-on” connectivity are fueling the growth of the handheld communications device market. With our computing heritage, we are able to work closely with wireless carriers to deploy advanced wireless data applications that take advantage of their wireless data networks. palmOne also has the capability to deliver increased functionality that is easy to use.

We expect to experience revenue growth in fiscal year 2005, as compared to fiscal year 2004, as a result of including our smartphone product line, that has seen sequential growth over the past four quarters, in our results for a complete year, as it was included in only a portion of our results during fiscal year 2004.

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 palmOne’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, future events are subject to change and the best estimates and judgments routinely require adjustment. The amounts of assets and liabilities reported in our balance sheets and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions which are used for, but not limited to, the accounting for rebates, price protection, product returns, allowance for doubtful accounts, warranty and technical service costs, goodwill and intangible asset impairments, restructurings, inventory and income taxes. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of our condensed consolidated financial statements.

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

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

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

We accrue for warranty costs based on historical rates of usage as a percentage of shipment levels and the expected repair cost per unit, service policies and specific known issues. For new products, we base our warranty accrual rate upon historical rates experienced with similar products. If we experience claims or significant changes in costs of services, such as third party vendor charges, materials or freight, which could be higher or lower than our historical experience, our cost of revenues could be affected.

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

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

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

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

Our deferred tax assets represent net operating loss carryforwards and temporary differences that will result in deductible amounts in future years if we have taxable income. A valuation allowance reduces deferred tax assets to estimated realizable value, based on estimates and certain tax planning strategies. The carrying value of our net deferred tax assets assumes that it is more likely than not that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the net carrying value. If these estimates and related assumptions change in the future, we may be required to adjust our valuation allowance against the deferred tax assets resulting in additional provision/(benefit) to income tax expense.

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

Results of Operations

Revenues


	Three Months Ended November 30,				Increase/ (Decrease)		Six Months Ended November 30,				Increase/ (Decrease)
	2004		2003		Increase/ (Decrease)		2004		2003		Increase/ (Decrease)
	(dollars in thousands)
Revenues	$	376,180	$	271,215	$	104,965	$	649,325	$	439,823	$	209,502

We derive our revenues from sales of our handheld computing and communications devices, accessories and related services. Revenues for the three and six months ended November 30, 2004 increased approximately 39% and 48%, respectively, from the three and six months ended November 30, 2003 and include the results of operations of the former Handspring business from the date of acquisition (October 29, 2003). During the three months ended November 30, 2004, net shipments of devices were 1,579,000 units at an average selling price of $229 compared to 1,414,000 units at an average selling price of $172 during the three months ended November 30, 2003. The net shipments of devices were up approximately 12% and the average selling price was up approximately 33% in the three months ended November 30, 2004 relative to the comparable quarter in fiscal year 2004. Of the 39% increase in revenues, unit shipments contributed approximately 10 percentage points and the increase in average selling prices contributed approximately 33 percentage points, which were partially offset by a decrease in our wireless Internet services and accessories of approximately 4 percentage points. The increase in average selling price reflects a full quarter of smartphone shipments and a shift in our product mix towards higher priced devices coupled with a more favorable pricing environment during the second quarter of fiscal year 2005 relative to the comparable quarter in fiscal year 2004. We closed our wireless Internet access service in September 2004 in part due to broader availability of competing data network service plans from large wireless carriers. Accordingly, revenues decreased by approximately $6.8 million from the three months ended November 30, 2003. Accessory sales decreased by approximately $6.8 million, or 33% from the three months ended November 30, 2003 primarily as the result of the Company rationalizing its accessory portfolio and focusing on more profitable accessory products. Our provision for product returns decreased as a percentage of revenue between the three months ended November 30, 2004 and 2003 to approximately 7.2% of revenues from approximately 9.6% of revenues, respectively. This decrease is primarily due to a reduction in our rate of returns relative to historical return rates, partially derived from a shift to smartphones which have yielded lower return rates than handheld computing devices. Our measure of carrier owned smartphone inventory increased significantly from the previous quarter. Our smartphones are primarily custom made for each carrier who as a result have limited price protection and product return privileges. We believe this increase is primarily due to pre-holiday buying by carriers as well as product transitions.

Of the 39% increase in worldwide revenues for the three months ended November 30, 2004 over the three months ended November 30, 2003, approximately 34 percentage points resulted from an increase in United States revenues and approximately 5 percentage points resulted from an increase in international revenues. International revenues were approximately 34% of worldwide revenues for the three months ended November 30, 2004 compared with approximately 42% for the three months ended November 30, 2003. The greater increase in United States revenues in comparison to international revenues is primarily due to broader carrier channel coverage

in the United States than internationally. Average selling prices for our devices increased in the United States and in international markets by about 43% and about 22%, respectively, from the three months ended November 30, 2003 to the three months ended November 30, 2004. The increases in United States and international average selling prices are primarily the result of the inclusion of sales of smartphones during the full quarter as compared to the same quarter a year ago which included results of smartphone sales from the October 29, 2003 Handspring acquisition. Net shipments of devices increased approximately 21% in the United States and decreased approximately 2% internationally. The increase in the United States is primarily due to the inclusion of the Treo 600 smartphone in the three months ended November 30, 2004. The decrease in net shipments of devices internationally was due to a decrease in the number of handheld computing device units shipped partially offset by an increase in the number of smartphone units shipped during the three months ended November 30, 2004 as compared to the same period a year ago. In addition, we experienced a 61% and 11% decline in accessories revenue internationally and in the United States, respectively, in the three months ended November 30, 2004 as compared to the same period a year ago. This is primarily the result of the Company rationalizing its accessory portfolio and focusing on more profitable accessory products.

During the six months ended November 30, 2004, net shipments of devices were 2,559,000 units at an average selling price of $241 compared to 2,060,000 units at an average selling price of $190 during the six months ended November 30, 2003. The net shipment of devices were up approximately 24% and the average selling price was up approximately 27% in the six months ended November 30, 2004 relative to the comparable period in fiscal year 2004. Of the 48% increase in revenues, unit shipments contributed approximately 22 percentage points and the increase in average selling prices contributed approximately 29 percentage points, which were partially offset by a decrease in our wireless Internet services and accessories sales of approximately 3 percentage points. The increase in average selling price reflects smartphone shipments for the full six month period of fiscal year 2005 and a shift in our product mix towards higher priced devices as well as a favorable pricing environment during the six months ended November 30, 2004. We closed our wireless Internet access services in September 2004 in part due to broader availability of competing data network service plans from large wireless carriers. Accordingly, revenues during the six months ended November 30, 2004 decreased by approximately $10.2 million from the six months ended November 30, 2003. Accessory sales decreased by approximately $5.1 million, or 19%, from the six months ended November 30, 2003, primarily as the result of the Company rationalizing its accessory portfolio and focusing on more profitable accessory products.

Of the 48% increase in worldwide revenues for the six months ended November 30, 2004 over the six months ended November 30, 2003, approximately 41 percentage points resulted from an increase in United States revenues and approximately 7 percentage points resulted from an increase in international revenues. International revenues were approximately 32% of worldwide revenues for the six months ended November 30, 2004 compared with approximately 41% for the six months ended November 30, 2003. The greater increase in United States revenues in comparison to international revenues is primarily due to broader carrier channel coverage in the United States than internationally. Average selling prices for our devices increased in the United States by 36% and increased in international markets by about 13% from the six months ended November 30, 2003 to the six months ended November 30, 2004. The increase in United States and international average selling prices is primarily the result of the inclusion of smartphone shipments during the full six month period of fiscal year 2005 relative to the same period a year ago which included results of smartphone sales from the October 29, 2003 Handspring acquisition. Net shipments of devices increased approximately 35% in the United States and approximately 8% internationally. These increases were primarily due to the inclusion of smartphone unit sales during the six months ended November 30, 2004 offset by a decrease in traditional handheld unit sales. In addition, we experienced a 46% decline in accessories revenue internationally during the six months ended November 30, 2004 over the three months ended November 30, 2003, primarily as the result of the Company rationalizing its accessory portfolio to focus on more profitable accessory products, and a 4% increase in accessories revenue in the United States primarily due to the inclusion of smartphone accessories for the full first half of fiscal year 2005.

Total Cost of Revenues


	Three Months Ended November 30,						Increase/ (Decrease)		Six Months Ended November 30,						Increase/ (Decrease)
	2004			2003			Increase/ (Decrease)		2004			2003			Increase/ (Decrease)
	(dollars in thousands)
Cost of revenues	$	266,478		$	197,739		$	68,739	$	448,281		$	318,963		$	129,318
Applicable portion of amortization of intangible assets and deferred stock-based compensation		351			84			267		663			88			575

Total cost of revenues	$	266,829		$	197,823		$	69,006	$	448,944		$	319,051		$	129,893

Percentage of revenues		70.9	%		72.9	%				69.1	%		72.5	%

‘Total cost of revenues’ is comprised of ‘Cost of revenues’ and the ‘Applicable portion of amortization of intangible assets and deferred stock-based compensation’ as shown in the table above. ‘Cost of revenues’ principally consists of material and transformation costs to manufacture our products, 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, facilities and other central costs. ‘Cost of revenues’ as a percentage of revenues decreased by 2.1% to 70.8% for the three months ended November 30, 2004 from 72.9% for the three months ended November 30, 2003. The decrease is primarily the result of reduced technical service expenses resulting from lower call volume and more favorable pricing from our third-party provider contributing approximately 1.8 percentage points, as well as, reduced excess and obsolete charges due to lower inventory levels contributing approximately 0.9 percentage points. In addition, approximately 1.0 percentage point was the result of reduced standard costs for handheld computing devices and the inclusion of smartphones during the full quarter compared to only one month in the year ago quarter (smartphones currently carry lower standard costs than handheld computing devices as a percentage of their respective revenues). We also experienced reduced Palm OS royalty rates during the three months ended November 30, 2004 compared to the same period last year, as a result of our software license agreement with PalmSource, contributing approximately 0.7 percentage points. Partially offsetting these decreases were higher warranty costs as a percentage of revenues during the second quarter of fiscal year 2005 compared to the same period a year ago due to a full quarter warranty provision for smartphones which were acquired in October 2003, contributing approximately 2.2 percentage points (smartphones carry higher warranty costs than handheld computing devices as a percentage of their respective revenues).

‘Cost of revenues’ as a percentage of revenues decreased by 3.5% to 69.0% for the six months ended November 30, 2004 from 72.5% for the six months ended November 30, 2003. The decrease is primarily the result of reduced technical service expenses resulting from lower call volume and more favorable pricing contributing approximately 1.7 percentage points as well as reduced excess and obsolete charges due to lower inventory levels contributing approximately 1.2 percentage points. In addition, reduced product costs as a percentage of revenues decreased approximately 1.7 percentage points. This is primarily the result of reduced standard costs for handheld computing devices and the inclusion of smartphones during the full six months ended November 30, 2004 as compared to only one month ended November 30, 2003 (smartphones currently carry lower standard costs than handheld computing devices as a percentage of their respective revenues). We also experienced reduced Palm OS royalty rates during the six months ended November 30, 2004 compared to the same period last year, as a result of our software license agreement with PalmSource, contributing approximately 0.7 percentage points. Partially offsetting these decreases were higher warranty costs as a percentage of revenues during the first half of fiscal year 2005 compared to the same period a year ago due to the inclusion of smartphones, contributing approximately 1.7 percentage points (smartphones carry higher warranty costs than handheld computing devices as a percentage of their respective revenues).

The ‘Applicable portion of amortization of intangible assets and deferred stock-based compensation’ to the cost of revenues increased in absolute dollars during the three and six months ended November 30, 2004 compared to the three and six months ended November 30, 2003, primarily due to the amortization of the product technology acquired in the Handspring acquisition, which occurred October 29, 2003 and an increase in restricted stock awards during the current fiscal year.

Sales and Marketing


	Three Months Ended November 30,						Increase/ (Decrease)		Six Months Ended November 30,						Increase/ (Decrease)
	2004			2003			Increase/ (Decrease)		2004			2003			Increase/ (Decrease)
	(dollars in thousands)
Sales and marketing	$	45,048		$	43,709		$	1,339	$	82,603		$	78,287		$	4,316
Percentage of revenues		12.0	%		16.1	%				12.7	%		17.8	%

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, facilities and other central costs. The decrease in sales and marketing expenses as a percentage of revenues is primarily due to our increased revenues during the three months ended November 30, 2004 compared to the comparable quarter a year ago. Sales and marketing expenses in absolute dollars for the three months ended November 30, 2004 increased approximately 3% from the three months ended November 30, 2003. This increase is primarily due to increased spending in direct marketing and product promotional materials of approximately $2.7 million, increased advertising of approximately $1.0 million and increased employee compensation and benefits costs of approximately $1.9 million. These increases were partially offset by reduced marketing development expenses with our retail customers of approximately $2.4 million, reduced consulting and technical support costs of approximately $1.2 million primarily due to insourcing aspects of our sales and marketing effort which had previously been performed by consultants and reduced facilities allocations of approximately $0.5 million.

The decrease in sales and marketing expenses as a percentage of revenues during the six months ended November 30, 2004 is primarily due to our increased revenues during the period compared to the comparable period a year ago. Sales and marketing expenses in absolute dollars for the six months ended November 30, 2004 increased approximately 6% from the six months ended November 30, 2003. This

increase is primarily due to increased advertising costs of approximately $5.6 million and increased employee compensation and benefits costs of approximately $4.5 million during the six months ended November 30, 2004 as compared to the same period a year ago. These increases were partially offset by decreased marketing development expenses with our retail customers of approximately $3.0 million, decreased consulting and technical support costs of approximately $1.8 million due to insourcing aspects of our sales and marketing effort which had previously been performed by consultants and reduced facilities allocations of approximately $1.0 million.

Research and Development


	Three Months Ended November 30,						Increase/ (Decrease)		Six Months Ended November 30,						Increase/ (Decrease)
	2004			2003			Increase/ (Decrease)		2004			2003			Increase/ (Decrease)
	(dollars in thousands)
Research and development	$	20,407		$	14,948		$	5,459	$	38,975		$	31,776		$	7,199
Percentage of revenues		5.4	%		5.5	%				6.0	%		7.2	%

Research and development expenses consist principally of employee related costs, third party development costs, program materials, depreciation and allocated information technology, facilities and other central costs. The decrease in research and development expenses as a percentage of revenues during the three months ended November 30, 2004 is primarily due to an increase in revenues during the period compared to the three months ended November 30, 2003. Research and development expenses for the three months ended November 30, 2004 increased approximately 37% in absolute dollars from the comparable quarter a year ago. This increase in research and development is primarily due to project materials and non-recurring engineering costs related to our smartphone products of approximately $3.2 million and increased employee compensation and benefits related costs of approximately $2.6 million, partially offset by decreased consulting expenses of approximately $0.6 million.

The decrease in research and development expenses as a percentage of revenues during the six months ended November 30, 2004 is primarily due to an increase in revenues during the period compared to the six months ended November 30, 2003. Research and development expenses during the six months ended November 30, 2004 increased approximately 23% in absolute dollars from the comparable period a year ago. This increase in research and development is primarily due to project materials and non-recurring engineering costs related to our smartphone products of approximately $5.8 million and increased employee compensation and benefits costs of approximately $3.9 million, partially offset by decreased consulting expenses incurred of approximately $2.3 million.

General and Administrative


	Three Months Ended November 30,						Increase/ (Decrease)		Six Months Ended November 30,						Increase/ (Decrease)
	2004			2003			Increase/ (Decrease)		2004			2003			Increase/ (Decrease)
	(dollars in thousands)
General and administrative	$	11,312		$	9,355		$	1,957	$	21,111		$	18,049		$	3,062
Percentage of revenues		3.0	%		3.4	%				3.3	%		4.1	%

General and administrative expenses consist of employee related costs, travel expenses and allocated information technology, facilities and other central costs for finance, legal, human resources and executive functions, outside legal and accounting fees and provision for doubtful accounts. The decrease in general and administrative expenses as a percentage of revenues during the three months ended November 30, 2004 is primarily due to increased revenues during the three months ended November 30, 2004 as compared to the three months ended November 30, 2003. The increase in general and administrative expenses in absolute dollars is primarily comprised of an increase of $1.0 million of employee compensation and benefits costs. In addition, consulting and professional service fees increased by approximately $0.8 million primarily due to incremental costs related to our implementation of Sarbanes-Oxley Section 404 requirements and an increase in the charge for our provision for doubtful accounts of $0.3 million primarily due to an increase in our accounts receivable balance at November 30, 2004 in comparison to November 30, 2003.

The decrease in general and administrative expenses as a percentage of revenues during the six months ended November 30, 2004 is primarily due to increased revenues during the six months ended November 30, 2004 as compared to the six months ended November 30, 2003. The increase in general and administrative expenses in absolute dollars is primarily comprised of an increase of $2.4 million of employee compensation and benefits costs and increased travel and entertainment. In addition, consulting and professional service fees increased by approximately $0.9 million primarily due to incremental costs related to our implementation of Sarbanes-Oxley Section 404 requirements, partially offset by a decrease in the charge for our provision for doubtful accounts of $0.2 million primarily due to overall improvements of our accounts receivables.

Amortization of Intangible Assets and Deferred Stock-Based Compensation


	Three Months Ended November 30,						Increase/ (Decrease)		Six Months Ended November 30,						Increase/ (Decrease)
	2004			2003			Increase/ (Decrease)		2004			2003			Increase/ (Decrease)
	(dollars in thousands)
Amortization of intangible assets and deferred stock-based compensation	$	2,527		$	1,938		$	589	$	4,866		$	2,059		$	2,807
Percentage of revenues		0.7	%		0.7	%				0.7	%		0.5	%

The increase in amortization of intangible assets and deferred stock-based compensation in absolute dollars during the three and six months ended November 30, 2004 as compared to the same periods ended November 30, 2003 is primarily due to the acquisition of Handspring as of October 29, 2003, which resulted in the recording of certain intangible assets and deferred stock-based compensation. Approximately $2.1 million and $4.2 million of amortization were included in the three and six months ended November 30, 2004, respectively. In addition, approximately $0.4 million and $0.7 million of amortization of restricted stock awards were recorded during the three and six months ended November 30, 2004, respectively, as a result of grants made subsequent to the second quarter of fiscal year 2004. As a result of the October 29, 2003 acquisition of Handspring, approximately $1.8 million of amortization of certain intangible assets and deferred stock-based compensation was recorded during the three and six months ended November 30, 2003, respectively. During the three and six months ended November 30, 2003, $0.2 million and $0.3 million, respectively, of amortization of deferred stock-based compensation was recorded.

Restructuring Charges


	Three Months Ended November 30,						Increase/ (Decrease)			Six Months Ended November 30,						Increase/ (Decrease)
	2004			2003			Increase/ (Decrease)			2004			2003			Increase/ (Decrease)
	(dollars in thousands)
Restructuring charges	$	—		$	918		$	(918	)	$	—		$	3,588		$	(3,588	)
Percentage of revenues		—	%		0.3	%					—	%		0.8	%

Restructuring charges of $0.9 million recorded during the second quarter of fiscal year 2004 consisted of a $1.2 million charge related to the restructuring actions taken during the first quarter of fiscal year 2004 less $0.3 million of net adjustments related to the restructuring actions taken in prior fiscal years:

•

The first quarter of fiscal year 2004 restructuring actions included workforce reductions, primarily in the United States, of approximately 45 regular employees, facilities and property and equipment disposed of or removed from service during the first quarter of fiscal year 2004 and canceled projects related to the implementation of a series of actions to adjust our business consistent with our future wireless plans. As of November 30, 2004, all of these headcount reductions have been completed.

•

The third quarter of fiscal year 2003 restructuring actions included workforce reductions, primarily in the United States, of approximately 140 employees, facilities and property and equipment disposed of or removed from service during the third quarter of fiscal year 2003 and canceled programs related to a series of actions to better align our expense structure with our revenues. As of November 30, 2004, all of these headcount reductions have been completed.

Restructuring charges of $3.6 million recorded during the first half of fiscal year 2004 consisted of $3.9 million of charges related to the restructuring actions initiated during the first quarter of fiscal year 2004 offset by $0.3 million of adjustments related to the restructuring actions taken during the third quarter of fiscal year 2003.

Interest and Other Income (Expense), Net


	Three Months Ended November 30,						Increase/ (Decrease)			Six Months Ended November 30,						Increase/ (Decrease)
	2004			2003			Increase/ (Decrease)			2004			2003			Increase/ (Decrease)
	(dollars in thousands)
Interest and other income (expense), net	$	611		$	1,608		$	(997	)	$	577		$	1,451		$	(874	)
Percentage of revenues		0.2	%		0.6	%					0.1	%		0.3	%

Interest and other income (expense), on a net basis, was $0.6 million of net income for the three months ended November 30, 2004 compared to $1.6 million of net income for the three months ended November 30, 2003. Interest and other income for the second quarter of fiscal year 2005 primarily consisted of approximately $1.4 million of interest income on our cash, cash equivalent and short-term investment balances, partially offset by $0.8 million interest expense and bank and other charges. Interest and other income for the second quarter of fiscal year 2004 primarily consisted of $0.6 million of interest income on our cash, cash equivalent and short-term investment balances and $2.2 million of proceeds from reimbursement related to a legal settlement, partially offset by $1.2 million of interest expense and bank and other charges. Interest income increased primarily as a result of increased cash, cash equivalent and short-term investment balances and more favorable interest rates. Interest expense and bank and other charges decreased primarily as a result of the reduction of the outstanding balance in the Texas Instruments subordinated convertible debt and a decrease in interest expense and fees incurred for our credit facility during the three months ended November 30, 2004 as compared to the same period a year ago.

Interest and other income (expense), on a net basis, was $0.6 million of net income for the six months ended November 30, 2004 compared to $1.5 million of net income for the six months ended November 30, 2003. Interest and other income for the first half of fiscal year 2005 primarily consisted of approximately $2.3 million of interest income on our cash, cash equivalent and short-term investment balances, partially offset by $1.7 million interest expense and bank and other charges. Interest and other income for the first half of fiscal year 2004 primarily consisted of $1.3 million of interest income on our cash, cash equivalent and short-term investment balances and $2.2 million of proceeds from reimbursement related to a legal settlement, partially offset by $2.1 million of interest expense and bank and other charges. Interest income increased primarily as a result of increased cash, cash equivalent and short-term investment balances and more favorable interest rates. Interest expense and bank and other charges decreased primarily as a result of the reduction of the outstanding balance in the Texas Instruments subordinated convertible debt and a decrease in interest expense and fees incurred for our credit facility during the first half of fiscal year 2005 as compared to the same period a year ago.

Income Tax Provision


	Three Months Ended November 30,						Increase/ (Decrease)		Six Months Ended November 30,						Increase/ (Decrease)
	2004			2003			Increase/ (Decrease)		2004			2003			Increase/ (Decrease)
	(dollars in thousands)
Income tax provision	$	6,328		$	1,584		$	4,744	$	9,781		$	2,782		$	6,999
Percentage of revenues		1.7	%		0.6	%				1.5	%		0.6	%

The income tax provision for the three and six months ended November 30, 2004 represented approximately 20% and 18%, respectively, of pretax income, which includes foreign, federal and state income taxes of approximately $3.0 million and $4.0 million for the three and six months ended November 30, 2004, respectively, and acquisition accounting adjustments to goodwill of approximately $3.4 million and $5.8 million for the three and six months ended November 30, 2004, respectively. The impact of the acquisition accounting adjustments to goodwill were partially offset by the favorable conclusion to a tax audit which reduced our first quarter tax provision but which is not anticipated to recur. The acquisition accounting adjustments to goodwill are related to the recognition of deferred tax assets, including net operating loss carryforwards, related to Handspring that are projected to be realized in the current year to offset taxable income. The tax benefit associated with the utilization of these deferred tax assets is reflected as a goodwill reduction. We continue to maintain our deferred tax asset valuation allowance which is reviewed quarterly and will be preserved 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. The income tax provision for the three and six months ended November 30, 2003, primarily foreign income taxes, represented approximately 38% and (24)%, respectively, of pretax income (loss).

Loss from Discontinued Operations


	Three Months Ended November 30,						Increase/ (Decrease)		Six Months Ended November 30,						Increase/ (Decrease)
	2004			2003			Increase/ (Decrease)		2004			2003			Increase/ (Decrease)
	(dollars in thousands)
Loss from discontinued operations	$	—		$	(6,750	)	$	6,750	$	—		$	(11,634	)	$	11,634
Percentage of revenues		—	%		(2.5	)%				—	%		(2.7	)%

Loss from discontinued operations was $6.8 million and $11.6 million for the three and six months ended November 30, 2003, respectively. Included in loss from discontinued operations are the results of operations of PalmSource through the October 28, 2003 distribution date and the historical consolidated separation costs incurred to effect the PalmSource distribution. Loss from PalmSource operations was $3.5 million and $6.4 million for the three and six months ended November 30, 2003, respectively. Historical consolidated separation costs were $3.3 million and $5.2 million for the three and six months ended November 30, 2003, respectively.

Liquidity and Capital Resources

Cash and cash equivalents at November 30, 2004 were $236.1 million, compared to $203.1 million at May 31, 2004. The increase of $33.0 million in cash and cash equivalents was primarily attributable to net income of $44.3 million, non-cash charges of $13.3 million and proceeds of $13.1 million from employee stock plan activity. This was offset by $27.9 million in net purchases of short-term investments, changes in assets and liabilities of $2.6 million and cash used for the purchase of property and equipment of $7.6 million.

We anticipate our November 30, 2004 total cash, cash equivalents and short-term investments balance of $312.9 million will satisfy our operational cash flow requirements over the next 12 months. Based on our current forecast, we do not anticipate any short-term or long-term liquidity deficiencies.

Net accounts receivable were $219.4 million at November 30, 2004, an increase of $98.6 million or 82% from $120.8 million at May 31, 2004. Days sales outstanding, or DSO, of receivables increased to 52 days at November 30, 2004 from 41 days at May 31, 2004 primarily due to business seasonality.

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

palmOne has a patent and license agreement with a third party vendor under which palmOne is committed to pay $2.7 million in fiscal year 2005.

palmOne the option to cancel, reschedule and adjust its requirements based on its business needs prior to firm orders being placed. Consequently, only a portion of palmOne’s reported purchase commitments arising from these agreements are firm, non-cancelable and unconditional commitments. As of November 30, 2004, palmOne’s commitments to third party manufacturers for inventory on-hand and component purchase commitments related to the manufacture of palmOne products are approximately $139.5 million.

In August 2003, palmOne entered into a two-year, $30.0 million revolving credit line with Silicon Valley Bank, or SVB, which was amended and restated to extend the term one more year. The credit line is secured by assets of palmOne, including but not limited to cash and cash equivalents, short-term investments, accounts receivable, inventory and property and equipment. The interest rate is equal to SVB’s prime rate (5.0% at November 30, 2004) or, at palmOne’s election subject to specific requirements, equal to LIBOR plus 1.75% (4.07% at November 30, 2004). The interest rate may vary based on fluctuations in market rates. palmOne is subject to a financial covenant requirement under the credit line agreement to maintain cash on deposit in the United States of not less than $100.0 million. As of November 30, 2004 palmOne had used its credit line to support the issuance of letters of credit of $4.8 million.

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

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

Stock Option Information

Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. We consider our stock option program critical to employee retention and motivation, and all of our employees participate in the program. The program consists of two plans: one stock option plan under which options to purchase shares of common stock may be granted to employees, directors and consultants; and a second stock option plan under which options to purchase common stock may be granted to non-employee members of the Board of Directors. Option vesting periods typically range from one to four years.

See the “Report of the Compensation Committee of the Board of Directors on Executive Compensation” appearing in our proxy statement dated August 16, 2004 for further information concerning the policies and procedures of palmOne and the Compensation Committee regarding the use of stock options.

The following table provides information about stock options granted for fiscal year-to-date 2005, fiscal year 2004 and fiscal year 2003 for certain executive officers. For fiscal year-to-date 2005, the stock option data is for our Chief Executive Officer and the four individuals who are expected to be the most highly compensated individuals in fiscal year 2005 and who are currently serving as executive officers of palmOne. For fiscal years 2004 and 2003, the stock option data relates to the named executive officers in the executive compensation table of the Proxy Statement for the respective fiscal year.

Employee and Named Executive Officer Option Grants


	2005 YTD		2004		2003
Net grants during the period as a % of outstanding shares	4.6	%	0.4	%	5.9	%
Grants to top five executive officers during the period as a % of total options granted	13.8	%	12.7	%	7.6	%
Grants to top five executive officers during the period as a % of outstanding shares	0.8	%	1.1	%	0.7	%
Cumulative options held by named executive officers as a % of total options outstanding	18.9	%	20.0	%	13.5	%

During the six months ended November 30, 2004, we granted options to purchase approximately 2,869,000 shares of palmOne common stock including options to purchase approximately 578,000 shares of palmOne common stock in connection with the Company’s previously announced cancellation/regrant program, whereby options to purchase approximately 945,000 shares of palmOne common stock were voluntarily canceled by employees on March 30, 2004. Options to purchase approximately 643,000 shares of palmOne common stock were forfeited during that period primarily due to the termination of the employment of the optionholders. The net grants represented 4.7% of shares outstanding at the beginning of this fiscal year.


	Six Months Ended November 30, 2004				Year Ended May 31, 2004(1)
(shares in thousands)	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding at beginning of year	6,132		$	22.62	5,783		$	76.92
Granted	2,869		$	31.34	3,932		$	12.38
Assumed in connection with acquisitions	—			—	1,869		$	12.69
Exercised	(1,082	)	$	11.01	(1,704	)	$	10.13
Cancelled	(643	)	$	85.16	(3,748	)	$	96.38

Outstanding at end of period	7,276		$	22.25	6,132		$	22.62

Exercisable at end of period	2,090		$	21.03	2,441		$	37.10

(1)	As a result of the PalmSource distribution, the exercise prices and number of shares underlying the options were adjusted to preserve the intrinsic value.

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

As of November 30, 2004


	Excersiable			Unexerciable			Total
	Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
	(Shares in thousands)
In-the-money	1,879	$	10.21	5,039	$	22.20	6,918	$	18.95
Out-of-the-money (1)	211	$	117.01	147	$	41.76	358	$	86.28

Total options outstanding	2,090	$	21.03	5,186	$	22.75	7,276	$	22.25

(1)	Out-of-the money options are those options with an exercise price equal to or greater than the closing price of $36.93 per share, the closing sale price per share of palmOne’s common stock as of November 30, 2004 as reported on the Nasdaq National Market.

Aggregated Option Exercises During the Six Months Ended November 30, 2004 and Option Values (1)


	Shares Acquired on Exercise (#)	Dollar Gain Realized ($)	Number of Securities Underlying Unexercised Options at November 30, 2004 (#)		Value of Unexercised In-the-Money Options at November 30, 2004 ($)(2)
Name	Shares Acquired on Exercise (#)	Dollar Gain Realized ($)	Exercisable	Unexercisable	Exercisable	Unexercisable
R. Todd Bradley	30,000	828,599	219,462	334,226	3,508,352	5,058,643
Andrew J. Brown	—	—	—	—	—	—
Ed Colligan	—	—	388,578	231,523	13,854,549	1,898,373
Mary E. Doyle	28,673	644,464	12,363	79,321	336,196	1,812,754
Angel L. Mendez	33,006	794,480	34,293	78,006	479,434	1,771,386

(1)	This list represents our Chief Executive Officer and the four individuals who are expected to be the most highly compensated individuals for fiscal year 2005 and who are currently serving as executive officers of palmOne.

(2)	Based on a fair market value of $36.93 per share, the closing sale price per share of palmOne’s common stock as of November 30, 2004 as reported on the Nasdaq National Market.

Securities Authorized for Issuance under Equity Compensation Plans

The following table summarizes our equity compensation plans as of November 30, 2004:


	Equity Compensation Plan Information				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted average exercise price of outstanding options, warrants and rights (b)
Equity compensation plans approved by security holders	6,254,280	(1)	$	24.27	6,076,770	(2)(3)
Equity compensation plans not approved by security holders	—			—	—

Total	6,254,280		$	24.27	6,076,770

(1)

This number of shares does not include outstanding options to purchase 1,021,331 shares of our common stock assumed through various mergers and acquisitions. At November 30, 2004, these assumed options had a weighted average exercise price of $9.90 per share. Except for shares of our common stock underlying the options outstanding under these plans, there are no shares of palmOne common stock reserved under these plans, including shares for new grants. In the event that any such assumed option is not exercised, no further option to purchase shares of our common stock will be issued in place of such unexercised option. However, we do have the authority, if necessary, to reserve additional shares of palmOne 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 in specific circumstances, for example: the PalmSource distribution.

(2)

This number of shares includes 2,987,592 shares of our common stock reserved for future issuance under our 1999 Employee Stock Purchase Plan, as amended, (the “1999 ESPP”), 2,567,415 shares of our common stock reserved for future issuance under our 1999 Stock Plan, as amended, (the “1999 Stock Plan”) and 521,763 shares of our common stock reserved for future issuance under our 2001 Non-Employee Director Stock Option Plan.

(3)

Our 1999 Stock Plan also provides for annual increases on the first day of each fiscal year in the number of shares available for issuance under the 1999 Stock Plan equal to 5% of the outstanding shares of our common stock on such date, or a lesser amount as may be determined by our board of directors. In addition, the 1999 ESPP provides for annual increases on the first day of each fiscal year in the number of shares available for issuance under the 1999 ESPP equal to the lesser of 2% of the outstanding shares of our common stock on such date, or 739,791 shares or the amount determined by our board of directors.

Business Environment and Risk Factors

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

Risks Related to Our Business

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

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

•

changes in general economic conditions and specific market conditions;

•

changes in consumer and enterprise spending levels;

•

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

•

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

•

competition for consumer and enterprise spending by other products;

•

seasonality of demand for our products and services;

•

timely introduction and market acceptance of new products and services;

•

variations in product costs or the mix of products sold;

•

quality issues with our products;

•

changes in terms, pricing or promotional programs;

•

loss or failure of key sales channel partners;

•

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

•

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

•

failure to achieve product cost and operating expense targets;

•

excess inventory or insufficient inventory to meet demand; and

•

litigation brought against us.

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

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

The demand for our products depends on many factors, including pricing levels, and is difficult to forecast due in part to 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. In addition, we have limited experience supplying smartphones to the wireless carrier channel which makes forecasting demand for our wireless communications products more difficult. Significant unanticipated fluctuations in demand could result in costly excess production and inventories or the inability to secure sufficient, cost-effective quantities of our products or production materials. This could adversely impact our cost of revenues and financial condition.

The market for handheld computing and communications devices is volatile, and changing market conditions, or failure to adjust to changing market conditions, may adversely affect our revenues and results of operations.

We operate in the handheld computing and communications industry which includes both handheld and smartphone devices. Over the last couple of years, we have seen year-over-year declines in the volume of handheld devices sold while demand for smartphone devices has continued to develop. Although we are the leading provider of handheld products and while we intend to maintain this leadership position, we are rebalancing investment towards smartphone products in response to forecasted market demand trends. We cannot assure that declines in the volume of handheld device units will not continue or that the growth of smartphone devices will offset any decline in handheld device sales. If we are unable to adequately respond to changes in demand for handheld and smartphone devices, our revenues and results of operations could be adversely affected.

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

Some of our competitors or potential competitors possess capabilities developed over years of serving customers in their respective markets that might enable them to compete more effectively than us in certain segments. In addition, many of our competitors have

significantly greater engineering, manufacturing, sales, marketing and financial resources and capabilities than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements, including introducing a greater number and variety of products than we can. They may also devote greater resources to the development, promotion and sale of their products. They may have lower costs and be better able to withstand lower prices in order to gain market share at our expense. Finally, these competitors bring with them customer loyalties, which may limit our ability to compete despite superior product offerings.

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

•

personal computer companies, such as Acer, Apple, Dell and Hewlett-Packard and consumer electronics companies, such as Casio, Garmin, Sharp and Sony, which also develop and sell handheld computing products running on the Palm OS and/or other operating systems, such as Microsoft’s Windows Mobile operating system, Linux or proprietary operating systems;

•

mobile handset manufacturers such as Audiovox, High Tech Computer Corporation, Kyocera, LG, Motorola, Nokia, Research In Motion, Samsung, Sanyo, Sendo, Siemens, Sierra Wireless and Sony-Ericsson which also develop and sell smartphone products running on the Palm OS and/or other operating systems, such as Microsoft’s Windows Mobile Operating System, Symbian OS or proprietary operating systems; and

•

a variety of early-stage technology companies such as Danger, OQO and Tapwave.

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

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

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

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

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

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

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.

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

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

In addition, we must develop our hardware and software application products quickly to keep pace with the rapidly changing handheld computing and communications 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. In general, our handheld and wireless communications products may not be free from errors or defects after commercial shipments have begun, which could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs and warranty claims and litigation which could harm our business, results of operations and financial condition.

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

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

•

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

•

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

•

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

•

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

•

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

•

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

•

wireless carriers’ pricing requirements and subsidy programs; and

•

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

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

Wireless carriers have a lot of 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. Wireless carriers also significantly affect our ability to develop and launch products for use on their wireless networks. If we fail to address the needs of wireless carriers, identify new product and service opportunities or modify or

improve our wireless communications products in response to changes in technology, industry standards or wireless carrier requirements, our products could rapidly become less competitive or obsolete. If we fail to timely develop wireless communications products that meet carrier product planning cycles or fail to deliver sufficient quantities of products in a timely manner to wireless carriers, those carriers may choose to emphasize similar products from our competitors and thereby reduce their focus on our products which would have a negative impact on our business, results of operations and financial condition.

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

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

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

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

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

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

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

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

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

Because we sell our products primarily to wireless carriers, distributors, retailers and resellers, we are subject to many risks, including risks related to product returns, either through the exercise of contractual return rights or as a result of our strategic interest in assisting them in balancing inventories. In addition, these sales channel partners could modify their business practices, such as inventory levels, or seek to modify their contractual terms, such as returns 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 sales and inventory levels of products purchased from us. We use this information as one of the factors in our forecasting process to plan future production and sales levels, which in turn influences our public financial forecasts. We also use this information as a factor in determining the levels of some of our financial reserves. If we do not receive this information on a timely and accurate basis, our results of operations and financial condition may be adversely impacted.

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

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

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

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

We outsource most of our hardware design to third party manufacturers. 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 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, Mexico, 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 in China), economic slowdowns, labor disruptions, trade restrictions and other events that could result in quarantines, shutdowns or closures of our third party manufacturers or their suppliers. The cost, quality and availability of third party manufacturing operations are essential to the successful production and sale of our handheld and wireless communications devices. If our third party manufacturers fail to produce quality products on time and in sufficient quantities, our reputation, business and results of operations could suffer.

We do not have manufacturing agreements with all of the third party manufacturers upon which we rely to manufacture our device products. The absence of a manufacturing agreement means that, with little or no notice, these manufacturers could refuse to continue to manufacture all or some of the units of our devices that we require or change the terms under which they manufacture our device products. If these manufacturers were to stop manufacturing our devices, we may be unable to replace the lost manufacturing capacity on a timely basis and our results of operations could be harmed. If these manufacturers were to change the terms under which they manufacture for us, our manufacturing costs could increase and our cost of revenues could increase. 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, and one 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. In addition, we do not have contracts with all of our third party distribution and warehouse services providers. The absence of agreements means that, with little or no notice, these distribution and warehouse services providers could refuse to continue to provide distribution and warehouse services for all or some of our devices or change the terms under which they provide such services. Any disruption of distribution and warehouse services could have a negative impact on our revenues and results of operations.

Changes in transportation schedules due to terrorist threats or attacks, military activity, labor disruptions or carrier financial difficulties could cause transportation delays and increase our costs for both receipt of inventory and shipment of products to our customers. 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 services for our products to third party providers. 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 for certain components and elements of our technology and some of which are competitors, and our production or reputation could be seriously harmed if these suppliers were unable or unwilling to meet our demand or technical requirements on a timely and/or a cost effective basis.

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

Some components, such as 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 handheld computing and communications industry. If suppliers are unable or unwilling to meet our demand for components and if we are unable to obtain alternative sources or if the price for alternative sources is prohibitive, our ability to maintain timely and cost-effective production of our handheld and wireless communications device products will be seriously harmed. For example, through the fourth quarter of fiscal year 2004, we experienced a critical shortage of screens and related integrated circuits. Shortages affect the timing and volume of production for some of our products as well as increasing our costs due to premium prices paid for those components. Some of our suppliers may be capacity-constrained due to high industry demand for some components and relatively long lead times to expand capacity.

Our product strategy is substantially dependent on the Palm OS, which is owned by PalmSource, an independent public company that was formerly a subsidiary of palmOne.

We have a license agreement with PalmSource, which extends through December 2006. Our license of the Palm OS from PalmSource is critical to the operation of our products. While we are not contractually precluded from licensing or developing an alternative operating system, doing so could be less desirable and could be costly in terms of cash and other resources. We currently rely exclusively on PalmSource to provide the operating system for all of our handheld and wireless communications device products. Termination of this license, an adverse change in our relationship with PalmSource, PalmSource’s failure to supply a competitive platform or an unfavorable outcome in any material lawsuit involving the Palm OS could seriously harm our business. Additionally, we are contractually obligated to make minimum annual payments to PalmSource regardless of the volume of devices we sell containing the Palm OS. Our business could be seriously harmed if:

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

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PalmSource were to be acquired and the acquiring company was not as strategically aligned with us as PalmSource is;

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PalmSource does not continuously upgrade the Palm OS and otherwise maintain the competitiveness of the Palm OS platform;

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

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we were to develop devices on alternative operating system platforms, which might impact our volumes of Palm OS-based devices and also might impact the perception of PalmSource’s viability in the market, which could cause a further deterioration of our volume of Palm OS-based devices.

Our business would also be harmed if PalmSource were not able to successfully implement its business strategy or is otherwise unsuccessful as a stand-alone company. In addition, we cannot assure that PalmSource will remain an independent public company.

While our software license agreement with PalmSource includes certain protections for us if PalmSource is acquired, these protections may not be adequate to fully protect our interests, which may reduce our ability to compete in the marketplace and cause us to incur significant costs.

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

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

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

We license third-party software and hardware for use in our handheld and wireless communications device products, including the Palm OS and third-party software embedded in the Palm OS. Our ability to release and sell our products could be seriously harmed if the third-party technology is not delivered to us in a timely manner, on acceptable business terms or contains errors or defects that are not discovered and fixed prior to release of our products and we are unable to obtain alternative technology to use in our products. As a result, our product shipments could be delayed, 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.

We have limited use and control of the Palm and palmOne brands, which could adversely affect our business, results of operations and financial condition.

We believe that the Palm brand is a valuable asset. In connection with our spin-off of PalmSource, all Palm and PalmSource trade names, trademarks, service marks and domain names containing the word or letter string “palm” were assigned to the Palm Trademark Holding Company, LLC, a holding company owned by palmOne and PalmSource for the purpose of receiving, holding, maintaining, registering, enforcing and defending such intellectual property. Following our spin-off of PalmSource, we changed our branding strategy and corporate name to palmOne. While we continue to use elements of the Palm brand pursuant to a trademark license from the holding company, we have limited use of the Palm and Palm related brands. For example, if we develop a product based on an operating system other than the Palm OS, we would not be able to use the word or letter string “palm” in the branding of that product. Because our company name includes the letter string “palm”, such a product may result in the need to modify our corporate structure, change our company name or establish a new product brand, any of which would be extremely costly. In addition, if we are unable in the future to license the Palm-related trademarks, service marks, domain names and trade names from the Palm Trademark Holding Company, LLC, or if the holding company fails to enforce its intellectual property rights in them successfully, our competitive position could suffer, which could harm our business. For example, if we fail to renew our Palm OS license agreement with PalmSource or if we were to breach the trademark license agreement, the holding company could terminate our trademark license, which could result in trademark infringement and harm to our business.

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

In the course of our business, we frequently receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. For example, as our focus has shifted to wireless communication devices, we have received, and expect to continue to receive communications from holders of patents related to GSM, GPRS, CDMA and other mobile communication standards. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses to incorporate or use the proprietary technologies in our products. Third parties may claim that our customers or we are infringing or contributing to the infringement of their intellectual property rights, and we may be found to infringe or contribute to the infringement of those intellectual property rights and may be required to pay significant damages and obligated either to refrain from the further sale of our products, or to license the right to sell our products on an ongoing basis. We may be unaware of intellectual property rights of others that may cover some of our technology, products and services.

Any litigation regarding patents or other intellectual property could be costly and time consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of litigation generally increase the risks associated with intellectual property litigation. Moreover, patent litigation has increased due to the increased

numbers of cases asserted by intellectual property licensing entities as well as increasing competition and overlap of product functionality in our markets. Claims of intellectual property infringement may also require us to enter into costly royalty or license agreements or to indemnify our customers. However, we may not be able to obtain royalty or license agreements on terms acceptable to us or at all. We also may be subject to significant damages or injunctions against the development and sale of our products.

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

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

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.

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 that future studies, regardless of their scientific basis, will not suggest a link between electromagnetic fields and adverse health effects. Government agencies, international health organizations and other scientific bodies are currently conducting research into these issues. In addition, other mobile device companies have been named in individual plaintiff and class action lawsuits alleging that radio emissions from mobile phones have caused or contributed to brain tumors and the use of mobile phones pose a health risk. Although our products are certified as meeting applicable public health authority safety standards and recommendations, even a perceived risk of adverse health effects from wireless communications devices could adversely impact use of wireless communications devices and our reputation, business, results of operations and financial condition.

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

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

Under the tax sharing agreement between PalmSource and us, PalmSource would be required to indemnify us if the sale of PalmSource’s common stock caused the distribution of PalmSource’s common stock to be taxable to us. In addition, under the tax

sharing agreement, palmOne has agreed to indemnify PalmSource for certain taxes and similar obligations that PalmSource could incur under certain circumstances. PalmSource may not be able to adequately satisfy its indemnification obligation under the tax sharing agreement. Finally, although under the tax sharing agreement PalmSource is required to indemnify us for taxes of PalmSource, we may be held jointly and severally liable for taxes determined on a consolidated basis.

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

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

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

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

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

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

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

Our success depends on our ability to attract and retain highly skilled personnel, including senior management. 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. In addition, we must carefully balance the growth of our employees with our anticipated revenue growth. If our revenue growth or employee attrition levels vary significantly, our results of operations or 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.

palmOne’s practice has been to provide incentives to all of its employees through the use of broad based stock option plans, but the number of shares available for new option grants is limited and new accounting rules concerning the expensing of stock options may cause us to reevaluate our use of stock options as an employee incentive. Therefore, we may find it difficult to provide competitive stock option grants and the ability to hire, retain and motivate key personnel may suffer.

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

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

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

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.

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

We have made acquisitions in the past and will continue to evaluate other acquisition opportunities that could provide us with additional product or service offerings or with additional industry expertise, assets and capabilities. Acquisitions could result in difficulties integrating acquired operations and products, technology, 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, our business could be materially harmed. In addition, our acquisitions may not be successful in achieving our desired strategic objectives, which would also cause our business to suffer. Acquisitions can also lead to large non-cash charges that can have a material adverse effect on our results of operations as a result of write-offs for items such as acquired in-process research and development, impairment of goodwill or the recording of deferred stock-based compensation. In addition, we have made strategic venture investments in other companies that provide products and services that are complementary to ours. If these investments are unsuccessful, this could have an adverse impact on our results of operations and financial condition.

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

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

In accordance with United States generally accepted accounting principles, we accounted for the acquisition of Handspring using the purchase method of accounting. Under the purchase method of accounting, we allocated the total purchase price to Handspring’s net tangible assets and amortizable intangible assets, based on their fair values as of the effective date of the acquisition of Handspring, and recorded the excess of the purchase price over those fair values as goodwill. We will incur depreciation and amortization expense over the useful lives of certain of the net tangible and intangible assets acquired in connection with the acquisition of Handspring which will have an adverse effect on our results of operations. In addition, to the extent the value of goodwill or intangible assets with indefinite lives becomes impaired, we may be required to incur material charges relating to the impairment of those assets that may adversely affect our results of operations.

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

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

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changes in foreign currency exchange rates;

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

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changes in international relations;

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trade protection measures and import or export licensing requirements;

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potentially negative consequences from changes in tax laws;

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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;

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difficulty in managing widespread sales operations; and

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

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

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

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

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

Business interruptions could adversely affect our business.

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

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

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

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

Any change in financial accounting standards or practices that cause us to change the methodology or procedures by which we track, calculate, record and report our results of operations or financial condition or both could cause fluctuations in and adversely affect our reported results of operations and cause our historical financial information to not be reliable as an indicator of future results. For example, in December 2004, the FASB issued SFAS No. 123(R), which requires companies to apply a fair-value-based measurement method in accounting for shared-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. In addition, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123(R) will be effective for quarterly periods beginning after June 15, 2005, which is palmOne’s second quarter of fiscal year 2006. The adoption of SFAS 123(R) is expected to have a material impact on our consolidated results of operations. If investors attempt to compare our results with the results of other companies, our company and valuation may appear less attractive, which could adversely affect the market price of our common stock.

We 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. While we currently have no immediate plans to sell this property, a future sale or other disposition of the land at less than its carrying value, or a further deterioration in market values that impacts our expected recoverable value, would result in a non-cash charge which would negatively impact our results of operations.

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

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

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

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:

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quarterly variations in our operating results;

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

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speculation in the press or investment community;

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

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actions by institutional stockholders or financial analysts;

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general market conditions; and

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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 thereof shares of our preferred stock, or shares of an acquiring entity, having a value equal to twice the then-current exercise price of the right. The issuance of the rights could have the effect of delaying or preventing a change in control of us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We currently maintain an investment portfolio consisting mainly of cash equivalents 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, by capping the maturity of the security to less than two years 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 debt securities with maturities of less than 90 days, and an immediate and uniform increase in market interest rates of 100 basis points from levels at November 30, 2004 would cause an immaterial decline in the fair value of our cash equivalents. Our short term investment portfolio primarily consists of debt securities with maturities of greater than 90 days but less than five years, and an immediate and uniform increase in market interest rates of 100 basis points from levels at November 30, 2004, would cause a decline of less than 2% in the fair market value of our short-term investment portfolio. We would expect our operating results or cash flows to be similarly affected by such a change in market interest rates.

Foreign Currency Exchange Risk

We denominate our sales to certain European customers in the Euro, in Pounds Sterling 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

We have investments in public and private companies valued at approximately $1.0 million as of November 30, 2004. Investments in publicly traded companies are subject to market price volatility, and investments in privately held companies are illiquid and inherently risky, as their technologies or products are typically in the early stages of development and may never materialize. We could experience declines in the value of our investments or even lose the entire value of these investments.

Item 4. Controls and Procedures

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

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities and Use of Proceeds

The following table summarizes employee stock repurchase activity for the three months ended November 30, 2004:


	Total Number of Shares Purchased	Average Price Paid Per Share
September 1, 2004—September 30, 2004	297	$	38.86
October 1, 2004—October 31, 2004	—		—
November 1, 2004—November 30, 2004	3,574		28.97

	3,871	$	29.73

The total number of shares repurchased include those shares of palmOne 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 November 30, 2004 a total of approximately 128,000 shares may still be repurchased. palmOne does not have a publicly announced plan to repurchase any of its shares of registered equity securities.

Item 4. Submission of Matters to a Vote of Security Holders

At the Company’s Annual Meeting of stockholders on September 30, 2004, the following three proposals were adopted.

Proposal I

To elect three Class II directors to palmOne’s board of directors to hold office for a three-year term expiring in 2007.


Director	Total Votes For Each Director	Total Votes Withheld from Each Director
Gordon A. Campbell	43,032,027	452,228
Donna L. Dubinsky	37,369,265	6,114,990
Susan G. Swenson	41,405,133	2,079,122

In addition to the directors elected at the Annual meeting, Eric A. Benhamou, R. Todd Bradley, Gareth C. C. Chang, Jean-Jacques Damlamian, L. John Doerr, Bruce Dunlevie and Michael Homer, will continue to serve as directors of palmOne.

Proposal II

To approve the amendment and restatement of palmOne’s 1999 Stock Plan


Votes For	Votes Against	Votes Abstained	Non-Votes
17,974,598	10,009,272	80,047	15,420,338

Proposal III

To ratify the appointment of Deloitte & Touche LLP as palmOne’s independent public auditors for the fiscal year ending June 3, 2005.


Votes For	Votes Against	Votes Abstained	Non-Votes
43,338,379	97,284	48,592	—

Item 6. Exhibits


		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
2.1	Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999, as amended.	S-1/A	333-92657	2.1	1/28/00

2.2	Assignment and Assumption Agreement between 3Com and registrant, as amended.	10-Q	000-29597	2.2	4/10/00

2.3	Master Technology Ownership and License Agreement between 3Com and the registrant.	10-Q	000-29597	2.3	4/10/00

2.4	Master Patent Ownership and License Agreement between 3Com and the registrant.	10-Q	000-29597	2.4	4/10/00

2.5	Master Trademark Ownership and License Agreement between 3Com and the registrant.	10-Q	000-29597	2.5	4/10/00

2.6	Tax Sharing Agreement between 3Com and the registrant.	10-Q	000-29597	2.7	4/10/00

2.7	Master Confidential Disclosure Agreement between 3Com and the registrant.	10-Q	000-29597	2.10	4/10/00

2.8	Indemnification and Insurance Matters Agreement between 3Com and the registrant.	10-Q	000-29597	2.11	4/10/00

2.9	Form of Non-U.S. Plan.	S-1	333-92657	2.12	12/13/99

2.10	Agreement and Plan of Reorganization between the registrant, Peace Separation Corporation, Harmony Acquisition Corporation and Handspring, Inc., dated June 4, 2003.	8-K	000-29597	2.1	6/6/03
2.11	Amended and Restated Master Separation Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.14	8/18/03

2.12	General Assignment and Assumption Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.15	8/18/03

2.13	Amendment No. 1 to General Assignment and Assumption Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.16	8/18/03

2.14	Amended and Restated Indemnification and Insurance Matters Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.17	8/18/03

2.15	Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.18	9/25/03

2.16	Amendment No. 1 to Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.19	8/18/03

2.17	Amendment No. 2 to Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.20	9/25/03

2.18	Elaine Software License and Software and Services Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.20	8/18/03

2.19	SDIO License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.21	8/18/03

2.20	Development Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.22	8/18/03

2.21	Amended and Restated Tax Sharing Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.23	8/18/03

2.22	Amended and Restated Intercompany Loan Agreement between the registrant and PalmSource Holding Company.	S-4/A	333-106829	2.24	8/18/03


		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
2.23	Assignment and Assumption Agreement for the Amended and Restated Intercompany Loan Agreement between the registrant and PalmSource Holding Company and PalmSource, Inc.	S-4/A	333-106829	2.25	8/18/03

2.24	Master Technology Ownership and License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.26	8/18/03

2.25	Amendment No. 1 to Master Technology Ownership and License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.27	8/18/03

2.26	Master Confidential Disclosure Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.28	8/18/03

2.27	Amendment No. 1 to Master Confidential Disclosure Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.29	8/18/03

2.28	Master Patent Ownership and License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.30	8/18/03

2.29	Strategic Collaboration Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.31	8/18/03

2.30	Amendment No. 1 to Strategic Collaboration Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.32	8/18/03

2.31	Xerox Litigation Agreement between the registrant and PalmSource, Inc., as amended.	10-K/A	000-29597	2.34	9/26/03

2.32	Employee Matters Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.34	8/18/03

2.33	Letter Agreement Regarding Cash Contributions between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.35	8/18/03

2.34	Business Services Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.36	8/18/03

2.35	Amended and Restated Operating Agreement of Palm Trademark Holding Company, LLC.	S-4/A	333-106829	2.38	9/25/03

2.36	Amended and Restated Trademark License Agreement between the registrant and Palm Trademark Holding Company, LLC.	S-4/A	333-106829	2.39	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-K	000-29597	3.2	8/5/04

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-Q	000-29597	4.2	1/12/04

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	Certificate of Ownership and Merger Merging PLMO Merger Corporation into Palm, Inc.	10-Q	000-29597	4.5	4/6/04

4.6	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

10.1	Amended and Restated 1999 Stock Plan.	SC-14A	000-29597	APP A	8/10/04

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


		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
10.4	Form of 1999 Employee Stock Purchase Plan Agreements.	S-1/A	333-92657	10.4	1/28/00

10.5	Amended and Restated 1999 Director Option Plan.	S-8	333-47126	10.5	10/2/00

10.6	Form of 1999 Director Option Plan Agreements.	S-1/A	333-92657	10.6	1/28/00

10.7	Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.	S-1/A	333-92657	10.8	1/28/00

10.8**	RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement between RAM Mobile Data USA Limited Partnership (now Cingular Wireless) and the registrant.	S-1/A	333-92657	10.9	2/25/00

10.9**	Supply Agreement between Manufacturers’ Services Salt Lake City Operations, Inc. and the registrant.	S-1/A	333-92657	10.10	2/25/00

10.10	Common Stock Purchase Agreement between America Online (now AOL Time Warner) and the registrant.	S-1/A	333-92657	10.11	1/28/00

10.11	Common Stock Purchase Agreement between Motorola and the registrant.	S-1/A	333-92657	10.12	1/28/00

10.12	Common Stock Purchase Agreement Between Nokia and the registrant.	S-1/A	333-92657	10.13	1/28/00

10.13	Form of Management Retention Agreement.	S-1/A	333-92657	10.14	2/28/00

10.14**	First Amendment to Supply Agreement between Manufacturers’ Services Salt Lake City Operations, Inc. and the registrant.	10-Q	000-29597	10.19	4/11/01

10.15**	Convertible Note Purchase Agreement dated December 6, 2001.	10-Q/A	000-29597	10.26	4/17/02

10.16	Registration Rights Agreement dated as of December 6, 2001.	10-Q/A	000-29597	10.27	4/17/02

10.17	Amendment Number One to Value Added Reseller Agreement between Cingular Interactive, L.P. (formerly known as BellSouth Wireless Data, L.P., which was formerly known as RAM Mobile Data USA Limited Partnership) and the registrant.	10-Q/A	000-29597	10.37	2/26/02

10.18**	Sublease Agreement by and between Cisco Systems Inc. and the registrant.	10-K	000-29597	10.38	7/30/02

10.19	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

10.20	Form of Severance Agreement for Executive Officers.	10-Q	000-29597	10.44	10/11/02

10.21	Amended and Restated 2001 Stock Option Plan for Non-Employee Directors.	424(b)(3)	333-106829	ANN E	9/29/03

10.22	Management Retention Agreement between the registrant and Judy Bruner dated as of March 17, 2000.	10-Q	000-29597	10.48	4/14/03

10.23**	Loan and Security Agreement between the registrant and Silicon Valley Bank.	10-Q	000-29597	10.39	10/14/03

10.24	Handspring, Inc. 1998 Equity Incentive Plan, as amended.	S-8	333-110055	10.1	10/29/03

10.25	Handspring, Inc. 1999 Executive Equity Incentive Plan, as amended.	S-8	333-110055	10.2	10/29/03

10.26	Handspring, Inc. 2000 Equity Incentive Plan, as amended	S-8	333-110055	10.3	10/29/03

31.1	Rule 13a-14(a)/15d - 14(a) Certification of Chief Executive Officer					X

31.2	Rule 13a-14(a)/15d - 14(a) Certification of Chief Financial Officer					X

32.1	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer					X

**	Confidential treatment granted on portions of this exhibit.

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.


	palmOne, Inc.
	(Registrant)

Date: January 3, 2005	By:	/s/ ANDREW J. BROWN
		Andrew J. Brown
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX


		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
2.1	Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999, as amended.	S-1/A	333-92657	2.1	1/28/00

2.2	Assignment and Assumption Agreement between 3Com and registrant, as amended.	10-Q	000-29597	2.2	4/10/00

2.3	Master Technology Ownership and License Agreement between 3Com and the registrant.	10-Q	000-29597	2.3	4/10/00

2.4	Master Patent Ownership and License Agreement between 3Com and the registrant.	10-Q	000-29597	2.4	4/10/00

2.5	Master Trademark Ownership and License Agreement between 3Com and the registrant.	10-Q	000-29597	2.5	4/10/00

2.6	Tax Sharing Agreement between 3Com and the registrant.	10-Q	000-29597	2.7	4/10/00

2.7	Master Confidential Disclosure Agreement between 3Com and the registrant.	10-Q	000-29597	2.10	4/10/00

2.8	Indemnification and Insurance Matters Agreement between 3Com and the registrant.	10-Q	000-29597	2.11	4/10/00

2.9	Form of Non-U.S. Plan.	S-1	333-92657	2.12	12/13/99

2.10	Agreement and Plan of Reorganization between the registrant, Peace Separation Corporation, Harmony Acquisition Corporation and Handspring, Inc., dated June 4, 2003.	8-K	000-29597	2.1	6/6/03

2.11	Amended and Restated Master Separation Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.14	8/18/03

2.12	General Assignment and Assumption Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.15	8/18/03

2.13	Amendment No. 1 to General Assignment and Assumption Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.16	8/18/03

2.14	Amended and Restated Indemnification and Insurance Matters Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.17	8/18/03

2.15	Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.18	9/25/03

2.16	Amendment No. 1 to Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.19	8/18/03

2.17	Amendment No. 2 to Amended and Restated Software License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.20	9/25/03

2.18	Elaine Software License and Software and Services Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.20	8/18/03

2.19	SDIO License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.21	8/18/03

2.20	Development Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.22	8/18/03

2.21	Amended and Restated Tax Sharing Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.23	8/18/03

2.22	Amended and Restated Intercompany Loan Agreement between the registrant and PalmSource Holding Company.	S-4/A	333-106829	2.24	8/18/03


		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
2.23	Assignment and Assumption Agreement for the Amended and Restated Intercompany Loan Agreement between the registrant and PalmSource Holding Company and PalmSource, Inc.	S-4/A	333-106829	2.25	8/18/03

2.24	Master Technology Ownership and License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.26	8/18/03

2.25	Amendment No. 1 to Master Technology Ownership and License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.27	8/18/03

2.26	Master Confidential Disclosure Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.28	8/18/03

2.27	Amendment No. 1 to Master Confidential Disclosure Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.29	8/18/03

2.28	Master Patent Ownership and License Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.30	8/18/03

2.29	Strategic Collaboration Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.31	8/18/03

2.30	Amendment No. 1 to Strategic Collaboration Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.32	8/18/03

2.31	Xerox Litigation Agreement between the registrant and PalmSource, Inc., as amended.	10-K/A	000-29597	2.34	9/26/03

2.32	Employee Matters Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.34	8/18/03

2.33	Letter Agreement Regarding Cash Contributions between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.35	8/18/03

2.34	Business Services Agreement between the registrant and PalmSource, Inc.	S-4/A	333-106829	2.36	8/18/03

2.35	Amended and Restated Operating Agreement of Palm Trademark Holding Company, LLC.	S-4/A	333-106829	2.38	9/25/03

2.36	Amended and Restated Trademark License Agreement between the registrant and Palm Trademark Holding Company, LLC.	S-4/A	333-106829	2.39	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-K	000-29597	3.2	8/5/04

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-Q	000-29597	4.2	1/12/04

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	Certificate of Ownership and Merger Merging PLMO Merger Corporation into Palm, Inc.	10-Q	000-29597	4.5	4/6/04

4.6	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

10.1	Amended and Restated 1999 Stock Plan.	SC-14A	000-29597	APP A	8/10/04

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


		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith

10.4	Form of 1999 Employee Stock Purchase Plan Agreements.	S-1/A	333-92657	10.4	1/28/00

10.5	Amended and Restated 1999 Director Option Plan.	S-8	333-47126	10.5	10/2/00

10.6	Form of 1999 Director Option Plan Agreements.	S-1/A	333-92657	10.6	1/28/00

10.7	Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.	S-1/A	333-92657	10.8	1/28/00

10.8**	RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement between RAM Mobile Data USA Limited Partnership (now Cingular Wireless) and the registrant.	S-1/A	333-92657	10.9	2/25/00

10.9**	Supply Agreement between Manufacturers’ Services Salt Lake City Operations, Inc. and the registrant.	S-1/A	333-92657	10.10	2/25/00

10.10	Common Stock Purchase Agreement between America Online (now AOL Time Warner) and the registrant.	S-1/A	333-92657	10.11	1/28/00

10.11	Common Stock Purchase Agreement between Motorola and the registrant.	S-1/A	333-92657	10.12	1/28/00

10.12	Common Stock Purchase Agreement Between Nokia and the registrant.	S-1/A	333-92657	10.13	1/28/00

10.13	Form of Management Retention Agreement.	S-1/A	333-92657	10.14	2/28/00

10.14**	First Amendment to Supply Agreement between Manufacturers’ Services Salt Lake City Operations, Inc. and the registrant.	10-Q	000-29597	10.19	4/11/01

10.15**	Convertible Note Purchase Agreement dated December 6, 2001.	10-Q/A	000-29597	10.26	4/17/02

10.16	Registration Rights Agreement dated as of December 6, 2001.	10-Q/A	000-29597	10.27	4/17/02

10.17	Amendment Number One to Value Added Reseller Agreement between Cingular Interactive, L.P. (formerly known as BellSouth Wireless Data, L.P., which was formerly known as RAM Mobile Data USA Limited Partnership) and the registrant.	10-Q/A	000-29597	10.37	2/26/02

10.18**	Sublease Agreement by and between Cisco Systems Inc. and the registrant.	10-K	000-29597	10.38	7/30/02

10.19	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

10.20	Form of Severance Agreement for Executive Officers.	10-Q	000-29597	10.44	10/11/02

10.21	Amended and Restated 2001 Stock Option Plan for Non-Employee Directors.	424(b)(3)	333-106829	ANN E	9/29/03

10.22	Management Retention Agreement between the registrant and Judy Bruner dated as of March 17, 2000.	10-Q	000-29597	10.48	4/14/03

10.23**	Loan and Security Agreement between the registrant and Silicon Valley Bank.	10-Q	000-29597	10.39	10/14/03

10.24	Handspring, Inc. 1998 Equity Incentive Plan, as amended.	S-8	333-110055	10.1	10/29/03

10.25	Handspring, Inc. 1999 Executive Equity Incentive Plan, as amended.	S-8	333-110055	10.2	10/29/03

10.26	Handspring, Inc. 2000 Equity Incentive Plan, as amended	S-8	333-110055	10.3	10/29/03

31.1	Rule 13a-14(a)/15d - 14(a) Certification of Chief Executive Officer					X

31.2	Rule 13a-14(a)/15d - 14(a) Certification of Chief Financial Officer					X

32.1	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer					X

**	Confidential treatment granted on portions of this exhibit.