Revenue Up 18% Year-Over-Year

MILPITAS, Calif., March 17, 2005 /PRNewswire-FirstCall via COMTEX/ -- palmOne, Inc. (Nasdaq: PLMO) today reported revenue of $285.3 million for the third quarter of fiscal year 2005, ended Feb. 25, up approximately 18 percent from the $242.5 million reported during the comparable quarter a year ago.

Net income was $4.4 million, or $0.09 per diluted share, measured on a Generally Accepted Accounting Principles, or GAAP, basis and reflecting certain non-recurring employee-separation costs. This compares to a loss in the year-ago period of $9.3 million, or $0.20 per share.

Net income in the third quarter of fiscal year 2005, measured on a non- GAAP basis, totaled $10.6 million, or $0.21 per diluted share, excluding the effects of amortization of intangible assets and deferred stock-based compensation and employee-separation costs. This compares to a non-GAAP net income in the third quarter of fiscal year 2004 of $0.6 million, or $0.01 per diluted share, which excluded the effects of amortization of intangible assets and deferred stock-based compensation and restructuring charges.

"We executed well and delivered strong revenue growth and gross margin during the quarter. Treo(TM) smartphone sell-through rose by almost 50 percent, and our share of the handheld-computer market expanded around the world," said Ed Colligan, palmOne president and interim chief executive officer. "Going forward, we're committed to investing in our product- development engine and software-application differentiation. We'll also work to accelerate the pace at which we bring our smartphones to new carriers and higher-speed networks."

Colligan noted the following financial highlights:

• Revenue rose approximately 18 percent, marking the seventh consecutive quarter of year-over-year growth;
• Gross margin rose to 31.0 percent in the quarter from 28.9 percent in the comparable quarter a year ago;
• Operating margin was 1.8 percent, and non-GAAP operating margin was 4.0 percent;
• Net income was $4.4 million, and non-GAAP net income totaled $10.6 million; and
• The company generated $21.5 million in cash from operations in the quarter.

During the quarter, palmOne accomplished the following:

• Expanded smartphone sales to include the Treo 650 across the Cingular Wireless network in the United States, building upon sales of Treo 600 smartphones and taking advantage of Cingular's high- speed Enhanced Data for Global Evolution, or EDGE, network, the nation's fastest data network;
• Expanded the relationship with Orange in the U.K., France and Switzerland to include the Treo 650 smartphone, building upon Orange's previous sales of Treo 600 smartphones. Orange is expected to begin selling the Treo 650 in the fourth fiscal quarter;
• Signed an agreement with Telecom Italia Mobile, or TIM, to distribute the Treo 650 smartphone in Italy. TIM is expected to begin selling the Treo 650 in the fourth fiscal quarter;
• Announced the sale of 1.5 million units of the Tungsten(TM) E handheld computer in 14 months on the market. The Tungsten E consistently has been the best-selling handheld in the United States and represented 20 percent of all U.S. handheld sales since its introduction, according to The NPD Group; and
• Shipped approximately 938,000 Zire(TM), Tungsten and Treo family devices. Cumulative shipments to date total approximately 29.9 million units.

Guidance for the Fourth Quarter of Fiscal Year 2005

The company also provided guidance for the fourth fiscal quarter of 2005, which ends June 3, 2005, as follows:

• Revenue will be between $320 million and $330 million, which represents 22 percent growth over the year-ago period, measured at the midpoint of the range. This guidance assumes that certain products originally expected to ship early in the fourth quarter will ship later in the fourth quarter or move to the first quarter of fiscal year 2006;
• Smartphones are expected to generate approximately 50 percent of anticipated net revenue;
• Gross margin is expected to be in the range of 29.5 percent to 30.5 percent;
• Operating expenses on a GAAP basis, which includes approximately $2.5 million for amortization of intangible assets and stock-based compensation, are expected to be in the $79 million to $81 million range. On a non-GAAP basis the company anticipates operating expenses to be in the range of $76 million to $78 million, which includes increased investments in our product-development engine;
• Earnings per diluted share on a GAAP basis in the range of $0.20 to $0.27 and on a non-GAAP basis in the range of $0.25 to $0.32; and
• Continued positive cash flow from operations.

Investor's Note:

The company will provide a detailed description of its financial results in a conference call and webcast with investors today at 2 p.m. PST. The dial- in number for the call is 800-291-5365 in the United States and 617-614-3922 for international callers. The passcode for both live calls is 42982984. The conference call will be available live over the Internet by logging onto http://ir.palmOne.com/ . A slide presentation also will be available simultaneously with the conference call. An audio replay and text transcript of the conference call also can be accessed at the same URL beginning today at approximately 5:30 p.m. PST.

A replay of the conference call will be available through March 24, 2005. The dial-in number for the replay will be 888-286-8010, pass code 83270323, or, internationally at 617-801-6888, with a passcode of 83270323. An archive of the audio and visual portion of the conference call will be available on palmOne's investor relations website at http://ir.palmone.com .

Cautionary Note Regarding Forward-looking Statements:

This press release contains forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements regarding palmOne's expected fourth quarter of fiscal year 2005 revenue, gross margin, operating expenses, earnings per share and cash flow from operations, product revenue mix, investments in product development and differentiation and bringing palmOne's smartphones to new carriers and higher-speed networks. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially, including, without limitation, the following: fluctuations in the demand for palmOne's existing and future products and services and growth in palmOne's industries and markets; palmOne's ability to forecast demand for its products; possible defects in products and technologies developed; palmOne's ability to introduce new products and services successfully and in a cost-effective and timely manner; palmOne's ability to timely and cost-effectively obtain components and elements of its technology from suppliers; palmOne's ability to compete with existing and new competitors; palmOne's dependence on wireless carriers and ability to meet wireless-carrier certification requirements; palmOne's ability to utilize its net operating losses. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in palmOne's most recent filings with the Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the fiscal quarter ended November 26, 2004 and its Annual Report on Form 10-K for the fiscal year ended May 28, 2004. palmOne undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release.

Non-GAAP Financial Measures:

To supplement the company's consolidated financial statements presented in accordance with GAAP, palmOne uses non-GAAP measures of certain components of financial performance, including operating income (loss), net income (loss) and per share data, which are adjusted from results based on GAAP to exclude certain expenses, gains and losses. These non-GAAP measures are provided to enhance investors' overall understanding of the company's current financial performance and the company's prospects for the future. Specifically, the company believes the non-GAAP results provide useful information to both management and investors by excluding certain expenses, gains and losses that may not be indicative of its core operating results. These non-GAAP results are among the primary indicators management uses as a basis for planning and forecasting of future periods and facilitating management's internal comparisons to the company's historical operating results and comparisons to competitors' operating results. In addition, because palmOne has historically reported certain non-GAAP results to investors, the company believes the inclusion of non-GAAP measures provides consistency in the company's financial reporting. These measures should be considered in addition to results prepared in accordance with generally accepted accounting principles, but should not be considered a substitute for, or superior to, GAAP results. These non-GAAP financial measures may also be different from non-GAAP financial measures used by other companies. Consistent with the company's practice, the non-GAAP measures included in this press release have been reconciled to the nearest GAAP measure.

About palmOne, Inc.

palmOne, Inc. -- a leader in handheld computing and communications solutions -- strives to put the power of computing in people's hands so they can access and share their most important information. The company's products include Treo(TM) smartphones, Zire(TM) and Tungsten(TM) handhelds, and software and accessories.

palmOne products are sold through select Internet, retail, reseller and wireless operator channels throughout the world, and at palmOne Retail Stores and palmOne online stores ( http://www.palmOne.com/stores ).

More information about palmOne, Inc. is available at http://www.palmOne.com .

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

palmOne, Inc. Condensed Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended Feb. 28, Feb. 28, Feb. 28, Feb. 28, 2005 2004 2005 2004 Revenues $285,265 $242,485 $934,590 $682,308 Costs and operating expenses: Cost of revenues (*) 196,773 172,169 645,054 491,132 Sales and marketing 44,391 38,582 126,994 116,869 Research and development 23,410 19,831 62,385 51,607 General and administrative 9,416 9,170 30,527 27,219 Amortization of intangible assets and deferred stock-based compensation (**) 2,186 5,414 7,052 7,473 Employee separation costs 4,000 -- 4,000 -- Restructuring charges -- 4,522 -- 8,110 Total costs and operating expenses 280,176 249,688 876,012 702,410 Operating income (loss) 5,089 (7,203) 58,578 (20,102) Interest and other income (expense), net 1,205 (486) 1,782 965 Income (loss) before income taxes 6,294 (7,689) 60,360 (19,137) Income tax provision 1,921 1,633 11,702 4,415 Income (loss) from continuing operations 4,373 (9,322) 48,658 (23,552) Loss from discontinued operations (net of taxes of $0, $0, $0 and $252, respectively ) -- -- -- (11,634) Net income (loss) $4,373 $(9,322) $48,658 $(35,186) Net income (loss) per share: Basic: Continuing operations $0.09 $(0.20) $1.01 $(0.63) Discontinued operations -- -- -- (0.31) $0.09 $(0.20) $1.01 $(0.94) Diluted: Continuing operations $0.09 $(0.20) $0.95 $(0.63) Discontinued operations -- -- -- (0.31) $0.09 $(0.20) $0.95 $(0.94) Shares used in computing per share amounts: Basic 48,751 46,073 48,254 37,373 Diluted 51,441 46,073 51,296 37,373 (*) Cost of revenues does not include that portion of amortization of intangible assets and deferred stock-based compensation related to cost of revenues. (**) Amortization of intangible assets and deferred stock-based compensation: Cost of revenues $30 $243 $693 $331 Sales and marketing 1,629 4,709 4,997 6,366 Research and development 64 68 192 132 General and administrative 463 394 1,170 644 $2,186 $5,414 $7,052 $7,473

palmOne's fiscal periods are generally 13 weeks in length and end on a Friday. For presentation purposes, the periods are presented as ending on Aug. 31, Nov. 30, Feb. 28 and May 31.

palmOne, Inc. Reconciliation of GAAP to Non-GAAP Condensed Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) Three Months Ended Three Months Ended Feb. 28, 2005 Feb. 28, 2004 Adjust- Non- Adjust- Non- GAAP ments GAAP GAAP ments GAAP Revenues $285,265 $- $285,265 $242,485 $- $242,485 Costs and operating expenses: Cost of revenues (*) 196,773 -- 196,773 172,169 -- 172,169 Sales and marketing 44,391 -- 44,391 38,582 -- 38,582 Research and development 23,410 -- 23,410 19,831 -- 19,831 General and administrative 9,416 -- 9,416 9,170 -- 9,170 Amortization of intangible assets and deferred stock-based compensation (**) 2,186 (2,186) -- 5,414 (5,414) -- Employee separation costs 4,000 (4,000) -- -- -- - Restructuring charges -- -- -- 4,522 (4,522) -- Total costs and operating expenses 280,176 (6,186) 273,990 249,688 (9,936) 239,752 Operating income (loss) 5,089 6,186 11,275 (7,203) 9,936 2,733 Interest and other income (expense), net 1,205 -- 1,205 (486) -- (486) Income (loss) before income taxes 6,294 6,186 12,480 (7,689) 9,936 2,247 Income tax provision 1,921 -- 1,921 1,633 -- 1,633 Income (loss) from continuing operations 4,373 6,186 10,559 (9,322) 9,936 614 Loss from discontinued operations -- -- -- -- -- -- Net income (loss) $4,373 $6,186 $10,559 $(9,322) $9,936 $614 Net income (loss) per share: Basic: Continuing operations $0.09 $0.13 $0.22 $ (0.20) $0.21 $0.01 Discontinued operations -- -- -- -- -- -- $0.09 $0.13 $0.22 $(0.20) $0.21 $0.01 Diluted: Continuing operations $0.09 $0.12 $0.21 $(0.20) $0.21 $0.01 Discontinued operations -- -- -- -- -- -- $0.09 $0.12 $0.21 $(0.20) $0.21 $0.01 Shares used in computing per share amounts: Basic 48,751 -- 48,751 46,073 -- 46,073 Diluted 51,441 -- 51,441 46,073 1,156 47,229 (*) Cost of revenues does not include that portion of amortization of intangible assets and deferred stock-based compensation related to cost of revenues. (**) Amortization of intangible assets and deferred stock-based compensation: Cost of revenues $30 $(30) $-- $243 $(243) $-- Sales and marketing 1,629 (1,629) -- 4,709 (4,709) -- Research and development 64 (64) -- 68 (68) -- General and administrative 463 (463) -- 394 (394) -- $2,186 $(2,186) $-- $5,414 $(5,414) $--

The above non-GAAP amounts have been adjusted to eliminate amortization of intangible assets and deferred stock-based compensation, employee separation costs and restructuring charges.

palmOne's fiscal periods are generally 13 weeks in length and end on a Friday. For presentation purposes, the periods are presented as ending on Aug. 31, Nov. 30, Feb. 28 and May 31.

palmOne, Inc. Reconciliation of GAAP to Non-GAAP Condensed Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) Nine Months Ended Nine Months Ended Feb. 28, 2005 Feb. 28, 2004 Adjust- Non- Adjust- Non- GAAP ments GAAP GAAP ments GAAP Revenues $934,590 $-- $934,590 $682,308 $-- $682,308 Costs and operating expenses: Cost of revenues (*) 645,054 -- 645,054 491,132 -- 491,132 Sales and marketing 126,994 -- 126,994 116,869 -- 116,869 Research and development 62,385 -- 62,385 51,607 -- 51,607 General and administrative 30,527 -- 30,527 27,219 -- 27,219 Amortization of intangible assets and deferred stock-based compensation (**) 7,052 (7,052) -- 7,473 (7,473) -- Employee separation costs 4,000 (4,000) -- -- -- -- Restructuring charges -- -- -- 8,110 (8,110) -- Total costs and operating expenses 876,012 (11,052) 864,960 702,410 (15,583) 686,827 Operating income (loss) 58,578 11,052 69,630 (20,102) 15,583 (4,519) Interest and other income (expense), net 1,782 -- 1,782 965 -- 965 Income (loss) before income taxes 60,360 11,052 71,412 (19,137) 15,583 (3,554) Income tax provision 11,702 -- 11,702 4,415 -- 4,415 Income (loss) from continuing operations 48,658 11,052 59,710 (23,552) 15,583 (7,969) Loss from discontinued operations (net of taxes of $0 and $252, respectively) -- -- -- (11,634) 11,634 -- Net income (loss) $48,658 $11,052 $59,710 $(35,186) $27,217 $(7,969) Net income (loss) per share: Basic: Continuing operations $1.01 $0.23 $1.24 $(0.63) $0.42 $(0.21) Discontinued operations -- -- -- (0.31) 0.31 -- $1.01 $0.23 $1.24 $(0.94) $0.73 $(0.21) Diluted: Continuing operations $0.95 $0.21 $1.16 $(0.63) $0.42 $(0.21) Discontinued operations -- -- -- (0.31) 0.31 -- $0.95 $0.21 $1.16 $(0.94) $0.73 $(0.21) Shares used in computing per share amounts: Basic 48,254 -- 48,254 37,373 -- 37,373 Diluted 51,296 -- 51,296 37,373 -- 37,373 (*) Cost of revenues does not include that portion of amortization of intangible assets and deferred stock-based compensation related to cost of revenues. (**) Amortization of intangible assets and deferred stock-based compensation: Cost of revenues $693 $(693) $-- $331 $(331) $-- Sales and marketing 4,997 (4,997) -- 6,366 (6,366) -- Research and development 192 (192) -- 132 (132) -- General and administrative 1,170 (1,170) -- 644 (644) -- $7,052 $(7,052) $-- $7,473 $(7,473) $--

The above non-GAAP amounts have been adjusted to eliminate amortization of intangible assets and deferred stock-based compensation, employee separation costs, restructuring charges and loss from discontinued operations.

palmOne's fiscal periods are generally 13 weeks in length and end on a Friday. For presentation purposes, the periods are presented as ending on Aug. 31, Nov. 30, Feb. 28 and May 31.

palmOne, Inc. Condensed Consolidated Balance Sheets (In thousands, except par value amounts) (Unaudited) February 28, 2005 May 31, 2004 ASSETS Current assets: Cash and cash equivalents (1) $106,381 $98,569 Short-term investments (1) 229,852 153,882 Accounts receivable, net of allowance for doubtful accounts of $7,615 and $8,317, respectively 158,540 120,757 Inventories 45,620 14,030 Investment for committed tenant improvements 6,306 7,197 Prepaids and other 8,976 8,067 Total current assets 555,675 402,502 Restricted investments 775 1,175 Land not in use 60,000 60,000 Property and equipment, net 16,632 19,425 Goodwill 251,879 257,363 Intangible assets, net 5,167 10,979 Deferred income taxes 35,400 34,800 Other assets 564 1,694 Total assets $926,092 $787,938 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $150,567 $112,772 Accrued restructuring 19,095 27,156 Provision for committed tenant improvements 6,306 7,197 Other accrued liabilities 156,290 112,679 Total current liabilities 332,258 259,804 Non-current liabilities: Long-term convertible debt 35,000 35,000 Other non-current liabilities 1,150 1,600 Stockholders' equity: Preferred stock, $.001 par value, 125,000 shares authorized; none outstanding -- -- Common stock, $.001 par value, 2,000,000 shares authorized; outstanding: 48,977 shares and 47,032 shares, respectively 49 47 Additional paid-in capital 1,401,985 1,383,630 Unamortized deferred stock-based compensation (3,209) (1,995) Accumulated deficit (841,980) (890,638) Accumulated other comprehensive income 839 490 Total stockholders' equity 557,684 491,534 Total liabilities and stockholders' equity $926,092 $787,938

(1) In the third quarter of fiscal year 2005, the Company began to classify its investment in auction-rate securities as short-term investments. These investments were included in cash and cash equivalents in previous periods ($104.5 million at May 31, 2004), and such amounts have been reclassified in the accompanying interim financial statements to conform to the current period classification. This change in classification had no effect on the amounts of total current assets, total assets, net income or cash flow from operations of the Company.

palmOne's fiscal periods are generally 13 weeks in length and end on a Friday. For presentation purposes, the periods are presented as ending on Aug. 31, Nov. 30, Feb. 28 and May 31.

palmOne, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Three Months Ended Feb. 28, 2005 Feb. 28, 2004 Cash flows from operating activities: Income from continuing operations $4,373 $(9,322) Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Depreciation 3,687 5,151 Amortization 2,186 5,625 Deferred income taxes (600) -- Realized gain on sale of equity investments (200) -- Changes in assets and liabilities, net of effect of business acquisition: Accounts receivable 60,887 51,535 Inventories (16,501) 9,294 Prepaids and other 1,797 6 Accounts payable (33,981) (19,977) Accrued restructuring (1,814) (3,055) Other accrued liabilities 1,710 (18,547) Net cash provided by (used in) operating activities 21,544 20,710 Cash flows from investing activities: Purchase of property and equipment (1,699) (770) Sale of equity investments 1,200 -- Purchase of short-term investments (54,875) (137,762) Sale of short-term investments 47,734 87,676 Sale of restricted investments -- 1,041 Net cash provided by (used in) investing activities (7,640) (49,815) Cash flows from financing activities: Proceeds from issuance of common stock; employee stock plans 2,756 635 Net cash provided by financing activities 2,756 635 Change in cash and cash equivalents 16,660 (28,470) Cash and cash equivalents, beginning of period (1) 89,721 150,020 Cash and cash equivalents, end of period (1) $106,381 $121,550 Other cash flow information: Cash paid for income taxes $3,400 $582 Cash paid for interest $907 $1,191

(1) In the third quarter of fiscal year 2005, the Company began to classify its investment in auction-rate securities as short-term investments. These investments were included in cash and cash equivalents in previous periods ($69.0 million at February 28, 2004 and $68.2 million at November 30, 2003), and such amounts have been reclassified in the accompanying interim financial statements to conform to the current period classification. This change in classification had no effect on the amounts of total current assets, total assets, net income or cash flow from operations of the Company.

palmOne's fiscal periods are generally 13 weeks in length and end on a Friday. For presentation purposes, the periods are presented as ending on Aug. 31, Nov. 30, Feb. 28 and May 31.

SOURCE palmOne, Inc.

Sandy O'Halloran, investor relations, +1-408-503-7405, or sandy.ohalloran@palmOne.com, or Marlene Somsak, media relations, +1-408-503-2592, or marlene.somsak@palmOne.com, both of palmOne, Inc.

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