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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the Fiscal Year Ended May 30, 2003

or

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from                   to                  

Commission File No. 000-29597

Palm, Inc.

(Exact name of registrant as specified in its charter)

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

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this  Form 10-K.  ¨

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

The aggregate market value of the Registrant’s Common Stock held by non-affiliates, based upon the closing price of the Common Stock on November 29, 2002, as reported by the Nasdq National Market, was approximately $494,000,000. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock, based on filings with the Securities and Exchange Commission, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of July 25, 2003, 29,301,568 shares of the Registrant’s Common Stock were outstanding.

The Registrant’s joint proxy statement/prospectus relating to the 2003 Annual Meeting of Stockholders is incorporated by reference in Part III of this Form 10-K to the extent stated herein.

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Palm, Inc.

Form 10-K

For the Fiscal Year Ended May 31, 2003

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As used in this report on Form 10-K, unless the context otherwise requires, the terms “we,” “us,” or “the Company” and “Palm” refer to Palm, Inc., a Delaware corporation.

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This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These statements include those concerning the following: our intentions, beliefs and expectations regarding handheld devices, the market for handheld devices and the handheld device industry; the Palm platform, our ability to license it and licensing opportunities for the Palm platform; the timetable, plans, tax effects and benefits of the separation of our businesses into two independent entities, the Solutions Group and PalmSource, and the acquisition of Handspring; wireless services, applications and technologies and our network services; our strategies and objectives; growth opportunities for us and our developer community; product development, design, innovation and introduction relating to new and existing products, technologies and solutions; expandability options; support and software applications developed by third party developers; the enterprise market and related opportunities; international business, international sales and international markets; customer service and technical support; the availability of manufacturing, distribution and component supply; demand forecast information, inventory and backlog; seasonal fluctuations in demand for and sale of our products and our licensees’ products; competition and our competitive advantages; industry standards and compatibility of our products; our rights in the Palm trademark portfolio; our intent to change our name to palmOne; the licensing of complementary technologies from other parties; our relationship with our employees and our workforce reductions; our properties, facilities, operating leases and our ability to secure additional space; legal proceedings; our intellectual property rights; cash dividends; expense allocations and costs relating to the PalmSource distribution and Handspring acquisition; our expenses; research and development; cost reductions and savings and our restructuring program; charges for the discontinuance of projects; interest and other income; the conversion features of outstanding notes; our revenues and ability to collect our receivables; our belief that our cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements; sales of securities under our universal shelf registration statement; our beliefs and expectations about our future success and results; our ability to forecast demand; our foreign exchange exposure; our interest rate sensitivity; our operating results; our expectations regarding our revenues and customers; our distributors, retailers and resellers; joint development arrangements; strategic acquisitions; strategic investments; strategic relationships; our beliefs about provisions in our charter documents and Delaware law and our adoption of a stockholder rights plan; proposed executive officers; investment activities, interest rates and derivative financial instruments; and our beliefs regarding the effects of recent accounting pronouncements. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties, see the “Business Environment and Risk Factors” section of this Form 10-K.

The stockholder communication document accompanying this Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These statements include those concerning the following: industry and market growth and demand expectations; the adoption of handhelds and smartphones; technology improvements; new applications and product features; the proliferation of Wi-Fi and other wireless technologies and connectivity; our methods of distribution; competing business strategies; operational problems; existing and future opportunities and the future for handheld devices; the markets for our products and services and our position and market share in these markets; our process improvement and business performance; our inventory, cost of sales and other expenses; the timetable, plans and benefits of the separation of our businesses into two independent entities, the Solutions Group and PalmSource, and the acquisition of Handspring; our beliefs regarding the operating system software licensing business; the Palm Economy and the growth of the Palm Economy; our management and its execution capabilities; our developer community; our plans for, and deployment of, Palm OS 5 and the ARM platform; returns to our shareholders; opportunities in the entry level consumer market and in new geographies; international business, international sales and international markets; and our corporate governance practices. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties, see the “Business Environment and Risk Factors” section of this Form 10-K.

Palm, Inc. undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.

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

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PART I

Item 1.    Business

Overview

Palm, Inc. is the leading global provider of handheld computing devices and operating systems for handheld devices. For purposes of this report, we refer to the devices designed and sold by Palm as Palm Branded devices, and we refer to devices running on the Palm operating system (“the Palm OS”) as Palm Powered devices. Palm Powered devices include Palm Branded devices as well as devices designed and sold by third parties licensing the Palm OS. Our fiscal year ends on the Friday nearest May 31. For presentation purposes, the periods have been presented as ending on May 31.

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

Palm has been organized into two operating segments—PalmSource and the Solutions Group. In the first quarter of fiscal year 2002, Palm announced its strategy to separate its Palm OS business (PalmSource) and its device business (the Solutions Group) into two independent companies. We believe the separation of our two businesses brings greater clarity of mission and focus to each unit and better serves PalmSource’s existing and future licensees. In December 2002, Palm received a ruling from the Internal Revenue Service that a distribution of PalmSource stock to Palm stockholders, if it occurs in accordance with the terms of the ruling, will be tax-free to the Company and its U.S. stockholders. On June 4, 2003, Palm entered into an agreement for a transaction in which Palm will distribute, on a pro rata basis to its existing stockholders, all of the shares of PalmSource common stock we own; and immediately following the PalmSource distribution, Palm will acquire Handspring, Inc. (“Handspring”), and Handspring stockholders will receive Palm common stock in exchange for their Handspring common stock. In the PalmSource distribution, the 10.0 million shares (as recapitalized via PalmSource’s one-for-five reverse stock split to take effect prior to the distribution date) of PalmSource common stock held by Palm will be distributed to existing Palm stockholders on a pro rata basis. The final exchange ratio for the PalmSource distribution will be determined based on the number of shares of Palm common stock outstanding at the distribution date. In the Handspring merger, the stockholders of Handspring will receive 0.09 of a share of Palm common stock for each share of Handspring common stock held (an aggregate of approximately 13.4 million shares of Palm common stock, based on the number of shares of Handspring common stock outstanding at June 28, 2003, Handspring’s fiscal year end). The closing of the transaction effecting the PalmSource distribution and the Handspring merger is subject to stockholder approval and other customary conditions.

Palm’s total revenue has grown from approximately $1 million in fiscal year 1995 to $871.9 million in fiscal year 2003. Substantially all of Palm’s revenues to date have been generated from sales of its handheld devices and related add-ons and accessories. As of May 31, 2003, Palm had shipped over 22.3 million Palm Branded devices and approximately 29.1 million Palm Powered devices have been sold worldwide.

Consistent with our intent to distribute all of the PalmSource stock we own, our summary is organized into two parts: Solutions Group and PalmSource.

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SOLUTIONS GROUP

Solutions Group Business Summary

The Solutions Group operating segment of Palm develops, markets and sells handheld computing devices, add-ons and accessories as well as related services and software. We target consumer, enterprise, education and government users. The Solutions Group currently offers the Tungsten and Zire families of handheld devices as well as the m130 and m515 handhelds, each of which runs on the Palm OS. Since Palm introduced its first handheld computer in 1996, it has been the leading handheld device provider in the world, having shipped over 22.3 million handheld devices worldwide as of May 31, 2003.

Solutions Group Strategy

The Solutions Group has three key objectives: grow the market, maintain its market leadership position and achieve operational excellence.

Grow the Market

A key part of our success is continuing to develop innovative products that address customer needs and desired functionality. We do this by delivering solutions tailored to specific customer segments, including entry-level, media savvy, professional and enterprise users. At the entry-level, we deliver our Zire handheld, our most affordable handheld to date, which sells at a retail price of under $100. The Zire’s mix of price, functionality and performance has expanded our available market to new users, as demonstrated by our user registration data. We believe that by making an entry-level product such as the Zire available, we are driving the early adoption of handheld devices by consumers who would not otherwise own a handheld and increasing the potential for future upgrade purchases as customers become accustomed to handheld technology and demand additional functionality in the future.

We believe wireless communications is another area that presents future growth opportunities for us. We expect that growth in the market for wireless communication devices will come primarily from devices that combine voice and data transmission capabilities, including smartphones and data centric communicators, also known as converged devices. These will include integrated wireless devices as well as two-piece wireless solutions, such as a Bluetooth enabled handheld device that can wirelessly access data through a Bluetooth enabled phone. The Solutions Group, through our Tungsten line of handheld computers, offers a wide range of solutions covering the various wireless communications technologies, such as Bluetooth for personal area networks (“PAN”), WiFi for local area networks (“LAN”) and GSM/GPRS for wide area networks (“WAN”).

We are also pursuing opportunities to grow the market through international expansion, such as in China and Brazil. International Data Corporation (“IDC”) reports that China is expected to generate a 21% compound annual growth rate in handheld unit shipments from 2002 through 2007. In April 2003, we opened a sales and marketing support office in China and launched several products in that market. In June 2003, we entered into a relationship with a third party to manufacture and sell certain Palm Branded products in Brazil.

Maintain Our Market Leadership Position

The Solutions Group continues to maintain its market leadership position both in the United States and worldwide. The Solutions Group’s devices held a 57% unit market share in United States Retail for the month of May 2003, according to the National Purchase Diary (“NPD”) Group, and a 40% unit market share worldwide for the second calendar quarter of 2003, according to IDC. Our strategy is to maintain our leadership position by delivering innovative, differentiated products which enhance the user experience and incorporate new applications. We will continue to foster strategic relationships with companies such as IBM, with which we are engaged in a strategic relationship to develop and promote mobile solutions jointly leveraging Palm devices and IBM’s enterprise software, along with both companies’ sales, marketing and service resources.

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Achieve Operational Excellence

The Solution Group’s business necessitates the development of products that ship in high volumes during rapid product cycles and therefore operational excellence plays a critical role in achieving profitability and building a sustainable competitive advantage. We have broadly focused the Solutions Group on the objective of operational excellence. This encompasses initiatives such as improving productivity, reducing product costs and operating expenses, reducing cycle times within manufacturing and product development and improving forecast accuracy. Our strategy of operational excellence is aimed at helping us return to consistent annual profitability and minimizing the working capital required to operate the business.

Solutions Group Products and Services

Our products are differentiated in terms of price, functionality and software applications that are delivered with the device. Standard software in all of our products includes an address book, date book, clock, to do list, memo pad, note pad and calculator. Other features that can be found in certain of our products include:

In Fall 2002, the Solutions Group introduced two new product sub-brands—Zire and Tungsten. The Zire family is designed for the entry-level and media savvy customers and the Tungsten line is designed for business professionals and the enterprise customer. With the introduction of these new product families, we have solutions that span the handheld market and include a wide range of wireless technologies, including Bluetooth, WiFi and GSM/GPRS. We have leading edge products that include the latest Palm OS (Palm OS 5) running on Texas Instruments Open Mobile Application Platform (OMAP) and Intel XScale ARM processors, which provide improved power and speed as compared to non-ARM processors used with older versions of the Palm OS.

The m130 is an entry-level product that features removable faceplates in many different colors, a 16-bit color display, a SD/MMC slot for expansion and Palm OS 4.

The m515 is aimed at the business professional and features Palm’s slimmest form factor, a color display, a SD/MMC slot for expansion and Palm OS 4. It also includes business software applications such as DataViz’s Documents-to-Go that allows users to create, view and edit Microsoft Word and Excel files and view PowerPoint presentations.

The Zire handheld was introduced in October 2002 and is our first product that had a retail price of under $100 at launch. The Zire is designed for first-time and entry-level users looking for a paper replacement. We designed the Zire to be profitable at the sub-$100 price point, and it has been the fastest growing handheld in our history. The Zire has won numerous awards including PC Magazine’s Best Product of 2002 and was the best selling product in United States Retail in the fourth calendar quarter of 2002, according to NPD Powerview. The Zire runs on Palm OS 4.

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The Zire 71 handheld was introduced in April 2003. It includes a new slider design that conceals an integrated camera, the ability to listen to stereo quality MP3 music and watch video clips using the Kinoma player, a joystick for navigation, a SD/MMC slot and a new 320x320 transflective Thin Film Transistor (“TFT”) color display which is the sharpest screen we have ever offered. The Zire 71 is based on Palm OS 5.

The Tungsten T handheld was introduced in October 2002 and includes a new compact form factor with a slider design that conceals the Graffiti writing area, five-way navigation, a SD/MMC slot, a 320x320 reflective TFT color display and a voice recorder. The Tungsten T was our first product based on Palm OS 5. In addition, the Tungsten T has integrated wireless capability using Bluetooth technology, which is a short-range radio technology facilitating data transfer between compatible Bluetooth devices such as mobile phones, laptops, printers, access points and other handhelds. Using a compatible Bluetooth enabled mobile phone as a modem, a user can access the Internet or email wirelessly.

The Tungsten C handheld was introduced in April 2003 and includes integrated WiFi capability, an integrated keyboard, five-way navigation, a SD/MMC slot, a new 320x320 transflective TFT color display and a Solutions Group software enhancement that allows 64MB of memory and is based on Palm OS 5. It also includes virtual private network (“VPN”) software to access behind-the-firewall data and email using Palm’s VersaMail 2.5 email client. This product was designed for the mobile professional in a wireless networked campus, in a home network or using public hotspots, which allow users broadband wireless Internet access.

The Tungsten W handheld was introduced in February 2003 and includes an integrated keyboard, five-way navigation, a SD/MMC slot, a 320x320 reflective TFT color display, integrated tri-band GSM/GPRS radio and is based on Palm OS 4. Tungsten W is a wireless, data-oriented device with messaging, SMS capability and the ability to make voice calls with up to 10 hours of talk time. Wireless service for the Tungsten W is currently offered on several networks around the world, including AT&T Wireless in the United States, Rogers AT&T Wireless in Canada, Vodaphone in Australia and SingTel in Asia. In addition, we are working with Orange France to provide wireless service in France.

We also sell add-ons and accessories, including portable keyboards, SD/MMC expansion cards for storage and content, modems and carrying cases. In addition, we provide the ability to purchase and download software applications via a link from our Palm.com website.

Solutions Group Customers

The Solutions Group sells its products to distributors, retailers, resellers and directly to end-users directly through its web site at www.palm.com. In fiscal years 2003, 2002 and 2001, Solutions Group’s customers Ingram Micro represented 18%, 20% and 19% and Tech Data represented 9%, 12% and 9% of consolidated revenues, respectively. Ingram Micro and Tech Data are distributors of the Solutions Group’s products.

Solutions Group Competition

Competition in the mobile device market is intense and characterized by rapid change and complex technology. Our devices compete with a variety of mobile devices, including pen- and keyboard-based devices, mobile phones, converged voice/data devices and sub-notebooks and personal computers. Our principal competitors include:

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We believe the principal competitive factors affecting the market for our handheld devices are functionality, features, operating system performance, styling, brand, price, availability of third party software applications, customer and developer support and access to channels of distribution. We believe that we compete more favorably than many of our current competitors with respect to some or all of these factors, which is reflected by our greater number of users, our leading market share and strong brand recognition.

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

Solutions Group Sales and Marketing

We sell to our end-users primarily through distributors, retailers and resellers. We primarily sell products to enterprise customers through corporate and value added resellers. We also sell directly to end-user customers through our Palm.com website.

In the United States, retailers represent our largest sales channel and encompass national and regional office supply stores, computer superstores, consumer electronics retailers and mass merchants. Distributors represent our second largest United States channel and generally sell to both traditional and Internet retailers and resellers, including enterprise and education resellers. In Europe and Asia, we sell our products primarily through distributors. We have over 100 international distributors, located throughout Europe, Latin America, Canada, Asia, the Middle East and South Africa. These distributors sell primarily to retailers and resellers.

We use our Palm.com store as a vehicle to sell our products and third-party products, focusing particularly on the installed base of Palm Branded devices. This is accomplished through e-marketing campaigns and product bundles. We also offer a wide array of software titles on the Software Connection website which is accessed from the Palm.com store.

We build awareness of our products and brands through mass-media advertising, targeted advertising, public relations efforts, in-store promotions and merchandising, retail advertising and our branded Internet properties. We also receive feedback from our end-users and our channel customers through market research. We use this feedback to refine our product development efforts and for marketing our products.

Solutions Group Customer Service and Support

We believe that customer service and technical support are essential to the sales process within our industry. Our customer service organization works closely with our entire customer base, including distributors, retailers, resellers, enterprises, and individual customers, to develop service programs that meet specific customer needs.

Individual customers have access to an Internet-based repository for technical information and troubleshooting techniques. They can obtain support through other means such as the Palm website, email,

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web chat and telephone support. Our customer support is provided by outsourced service providers as well as internal personnel.

Solutions Group Research and Development

Our product development efforts are focused on both improving the functionality of our existing products and developing new products. We believe the innovation and design of our products has played an important role in our success. We intend to continue to identify and respond to the needs of our existing and potential customers by introducing new products with an emphasis on innovation in the functionality, mobility, style and ease of use of our products. We utilize third parties to design, develop and manufacture certain products, (outsource design and manufacturer, or ODM, partners), after we have completed product definition.

To identify and develop technologies for future generations of Palm Branded devices, we use parallel development teams to avoid schedule dependencies from one product to the next. These parallel development teams share results to avoid duplication of effort. As a result, we have a rapid product development cycle that targets releasing new versions of products approximately every six months and introducing new generation products approximately every 12 to 18 months, depending on the complexity of the next generation product release.

Solutions Group Manufacturing and Supply Chain

We currently outsource all of our manufacturing and much of the hardware design of our devices to third party manufacturers. This outsourcing extends from prototyping to volume manufacturing and includes activities such as material procurement, final assembly, test, quality control and shipment to distribution centers. We believe that there is currently an adequate supply of components to manufacture our products. The majority of our products are assembled in China and Mexico. Distribution centers are operated on an outsourced basis in Tennessee, Ireland and Hong Kong.

Solutions Group Backlog

We order finished products from third party manufacturers based upon our forecast of worldwide customer demand and in advance of receiving orders from our customers. Our customers generally place orders on an as needed basis, and products are shipped as soon as possible after receipt of an order, usually within one to four weeks. Generally, orders may be cancelled or rescheduled by the customer without penalty.

Solutions Group Seasonality

Our Solutions Group business is generally affected by the seasonal fluctuations of traditional retail sales. Our Solutions Group revenues are generally sequentially higher in the second quarter of our fiscal year, as distributors and retailers purchase product in anticipation of the December holiday selling season. The timing of our new product launches also contributes to seasonal fluctuations in our revenue. We typically introduce new products in the Fall and in the Spring, which contributes to higher revenue in the second fiscal quarter and the fourth fiscal quarter, respectively.

Solutions Group Intellectual Property

We rely on a combination of patent, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights.

The United States Patent and Trademark Office has issued approximately 80 patents to us. We have over 250 applications pending in the United States Patent and Trademark Office, and numerous foreign counterpart applications on file. We own a number of trademarks, including the ZIRE and TUNGSTEN marks, and we have

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applications for registration of these marks pending in the United States and in just over 60 other jurisdictions. We are working to increase and protect our rights in our patent and trademark portfolios, which is important to our value, reputation and branding. While our patents are important to our business, our business is not materially dependent on any one patent.

We believe that the public perception of our brand and trademarks is instrumental to our success. In 2003 and in connection with the separation of PalmSource, Palm established a holding company, Palm Trademark Holding Company, LLC, to administer the use of trade names, trademarks, service marks and domain names that contain the word or letter string “palm”. Palm and PalmSource own Palm Trademark Holding Company, LLC for the purpose of receiving, holding, maintaining, registering, enforcing and defending intellectual property. Subject to certain restrictions, the Solutions Group has an exclusive license from Palm Trademark Holding Company, LLC to use the palmOne mark and domain name. In August 2003, Palm announced its intent to change its name to palmOne following the PalmSource distribution. If our new branding efforts are unsuccessful, our reputation and business could be harmed.

We also license technologies from third parties for integration into our products. We believe that the licensing of complementary technologies from parties with specific expertise is an effective means of expanding the features and functionality of our products.

While we rely on these methods to protect our intellectual property, we also believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements are essential to establishing and maintaining a technology leadership position. We cannot assure you that others will not develop technologies that are similar or superior to our technology.

Solutions Group Employees

As of June 30, 2003, the Solutions Group had a total of 674 employees, of which 82 were in supply chain, 204 were in engineering, 258 were in sales and marketing and 130 were in general and administrative activities. None of the Solutions Group’s employees is subject to a collective bargaining agreement. The Solutions Group considers its relationship with its employees to be good.

PALMSOURCE

PalmSource Business Summary

The PalmSource operating segment of Palm is a leading developer and licensor of platform software that enables mobile information devices. Our software platform consists of operating system software and software development tools. We have also extended our platform with applications such as personal information management software, web browsers and email. We license these products to leading mobile information device manufacturers, including Garmin, Handspring, Kyocera, Lenovo (formerly known as Legend), Palm Solutions Group, Samsung and Sony. Historically, the majority of our licensees developed personal digital assistants (“PDAs”). Palm Powered devices have held the number one PDA market share position as measured in units sold in each of the past six annual reports prepared by IDC.

A wide range of mobile information devices incorporate our solutions, including PDAs, mobile phones, location-aware devices, entertainment devices and industry-specific devices used in industries such as education, hospitality and healthcare. We are the leader in the PDA market and are now actively extending our product line into other segments as well. Our primary product offering, Palm OS, provides a flexible platform that enables the creation of powerful, innovative and easy-to-use mobile information devices. The Palm OS platform has attracted a large and loyal following, with approximately 29.1 million Palm Powered devices sold as of May 31, 2003. There are more than 275,000 third-party developers who have registered to use Palm OS developer tools to create software applications for our platform. According to PalmGear.com, an on-line provider of handheld

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applications, there are currently more than 19,000 applications available for Palm Powered devices. To extend our software platform, we provide professional services and support for our licensees and developers.

PalmSource Strategy

PalmSource’s primary objective is to extend our leadership position as a developer and licensor of a software platform that enables mobile information devices. There are six key elements to achieve this objective: extend our success in PDA’s to smartphones and other next generation mobile information devices; increase market penetration of Palm Powered devices in the enterprise; expand internationally; pursue additional opportunities in vertical industries; continue to extend our technological advantages and continue to grow and support the developer community.

Extend Our Success in PDAs to Smartphones and Other Mobile Information Devices

Palm Powered devices have held the number one PDA market share position as measured in units sold in each of the past six annual reports prepared by IDC. We intend to continue to build on our leadership position and experience in PDAs to become the leading licensor of a software platform for smartphones and other next generation mobile information devices. By working in a number of emerging product categories, we intend to increase our overall market opportunity and reduce our dependence on any given industry.

Increase Market Penetration of Palm Powered Devices in the Enterprise

We intend to facilitate greater adoption of Palm Powered devices by enterprise customers. To increase our overall presence in the enterprise, we will continue to target market-leading device manufacturers as new licensees and develop software features attractive to both end-users and the decision makers responsible for the deployment of mobile information devices throughout the enterprise. For example, the next generation of Palm OS will feature more enhanced security, integration and performance features that further enable enterprise solutions. In addition, we will continue to work with leading enterprise solutions, applications and service providers, such as IBM and Novell, to provide business-critical solutions that enable handheld computing in the enterprise.

Expand Internationally

Our licensees sell Palm Powered products in approximately 60 countries. We intend to expand our international presence by targeting countries with large populations and propensities for adopting new technologies. Accordingly, we have developed a version of Palm OS that supports simplified Chinese character sets, and we expect licensees to ship in the next few months. We intend to aggressively pursue licensees that are well positioned to capitalize on these emerging opportunities and encourage our developer community to focus on providing solutions for these regions.

Pursue Additional Opportunities in Vertical Industries

We believe that Palm OS is particularly well suited to meet the demands of licensees, technology providers and application developers in a number of vertical industries. For example, Symbol Technologies recently introduced a Palm Powered industrial device used by rental car companies to remotely process rental car returns, AlphaSmart recently introduced a Palm Powered word processor and productivity device targeted at the K-12 education market Garmin recently introduced a Palm Powered location-aware device and Tapwave is developing next generation game devices based on Palm OS. We will continue to identify new industries that will benefit from deploying specialized mobile information devices with an operating system that is both intuitive to use and powerful enough to satisfy end-user requirements without compromising the battery life or size of the device.

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Continue to Extend Our Technological Advantages

We believe that the performance and flexibility of our software architecture represent significant competitive advantages. We plan to continue to invest in our research and development strategy to further these competitive advantages. Additionally, under our licensing arrangements, we have the right to incorporate broadly applicable technology advancements that our licensees develop into future versions of our operating system. We also intend to continue to build upon the technology advances of our licensees to extend our technological advantage relative to our competitors.

Continue to Grow and Support Our Developer Community

We believe that the Palm Powered ingredient brand has become a symbol for quality, ease of use and elegant simplicity in the mobile information device industry. This brand identity has enabled us to create a large and loyal user base worldwide that represents an attractive opportunity for our global developer community. We intend to continue to invest in the tools, marketing and programs offered to our developers so that we may continue to offer the widest selection of applications to our licensees and the end-users of Palm Powered products. As we continue to evolve our platform, we intend to maintain the compatibility, tools and support necessary for a large number of applications to continue to be available to our users.

PalmSource Products and Services

Palm OS

We license to our customers a product development kit that enables our customers to build a version of Palm OS specifically for their products. The product development kit includes the operating system and supporting technology components, such as applications and tools, and reference materials, which are the foundation for Palm Powered devices manufactured by our licensees. Palm OS has been optimized for mobile information devices, for which instant access to information, low power consumption and wireless capabilities are critical. Palm OS consists of several components:

The current version of our operating system, Palm OS 5, is the first version of Palm OS running on integrated circuits using ARM Holdings PLC’s design for microprocessor architecture, which enables faster

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processing speeds and more advanced functionality than prior hardware components. We have designed Palm OS 5 to enable applications that were written for prior versions of our operating system to run on Palm OS 5. The first products using Palm OS 5 shipped in October 2002.

Applications and Other Products

We offer a number of applications and other products that our licensees can incorporate into Palm Powered products. These include:

We released Bluetooth support for Palm OS in Spring 2002. Bluetooth is an industry standard local area networking technology used to enable devices within a short range of each other to communicate and interoperate with one another. A common application for this technology with our licensees is to facilitate wireless communication between a handheld and a separate mobile phone.

PalmSource Competition

Competition in the market for platform software for mobile information devices is intense and characterized by rapid change and complex technology. We compete primarily with Microsoft and Symbian. Microsoft offers several operating systems focused on different markets including: Windows CE for sub-PC computers, Windows Mobile^™ 2003 software for Pocket PC handheld devices, Smartphone 2002 and Pocket PC 2002 Phone Edition for voice enabled handhelds or communication devices. Symbian offers an operating system that is predominantly being marketed today by Nokia and Sony-Ericsson for smartphones. Symbian has also recently signed Samsung and Matsushita as licensees. In addition, Research in Motion licenses its “reference platform” for other companies to design devices based on its software and hardware specifications. Our Palm OS platform also competes with the proprietary operating systems of other companies, including the proprietary systems of our potential licensees, as well as alternative operating systems such as Linux and Java for handheld devices.

We believe that the principal competitive factors affecting the market for platform software that runs on mobile information devices are the architecture of the operating system, technological features and capabilities of the operating system, number and quality of third-party applications available for use on the operating system, overall number of end-users, and relative ease of developing compatible applications. We believe that we compete favorably due to our large and loyal base of customers using Palm Powered products, the architecture of Palm OS that may be adapted across multiple device platforms in a way that some of our competitors’ products cannot, large number of third-party developers and software applications available for Palm OS and our brand recognition.

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PalmSource Customers

The following table sets forth our licensees who are actively shipping or developing Palm Powered products as of June 30, 2003, the type of device they have developed or are developing incorporating Palm OS and the target markets for their Palm Powered devices:

For the year ended May 31, 2003, there were no PalmSource customers which represented 10% or more of Palm’s consolidated revenues. Palm Solutions Group represented 53.5%, 62.0% and 69.6% of PalmSource revenues in fiscal years 2003, 2002 and 2001, respectively. Sony represented 15.3%, 7.5% and 1.4% of PalmSource revenues in fiscal years 2003, 2002 and 2001, respectively. Handspring represented 8.7%, 14.3% and 19.6% of PalmSource revenues in fiscal years 2003, 2002 and 2001, respectively.

PalmSource Sales and Marketing

We license and market our products and services in North America, Europe and the Asia Pacific region, primarily through our direct sales force and marketing team. Our sales activities are focused on developing relationships with potential licensees through our direct sales force, which is located in the United States, France, Hong Kong, Japan and the United Kingdom.

Our direct sales force targets customers who we believe will expand the market for Palm Powered devices. Our sales cycle typically ranges from three to 12 months depending on the size of the licensee and the complexity of the solution. In targeting potential licensees, we consider a partner’s brand identity, distribution channels and technical capabilities. We typically focus on large, well-established device manufacturers like Palm Solutions Group and Sony, and have recently begun to explore new markets with licensees such as AlphaSmart, Fossil, Garmin, HuneTech and Tapwave.

Our marketing team promotes our company, our licensees’ products and our developer’s applications through global marketing and co-marketing programs. These marketing efforts are designed to create demand for Palm Powered devices and applications, to educate the market and create awareness for the Palm OS value proposition in key market segments and to re-position and strengthen the Palm Powered ingredient brand

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worldwide. Our licensees are generally required to include the Palm Powered ingredient brand in their mass media and targeted advertising. In addition, we conduct public relations efforts and market our products at industry tradeshows and on our website. We also receive extensive feedback from the end-users of Palm Powered products and the third-party developer community through market research.

PalmSource Customer Service and Support

We provide a variety of support and professional services to our licensees and third-party developers designed to accelerate the development and proliferation of Palm Powered devices and customized third-party applications. We provide both direct development support and professional services to our licensees and professional services to third-party developers.

Our licensee support programs provide three distinct types of maintenance and support: an annual or subscription-based program that is tied to a specific master Palm OS license agreement, a silicon provider or Palm OS Ready partner support program and a custom support program. Maintenance updates are included with the first two programs, but are billed separately when associated with a custom support program. As part of the maintenance agreement, licensees generally also receive updated versions of the Palm OS software that are available as part of the Palm OS product development kit. Our licensee support also consists of issue resolution and post-development support to address issues escalated by our licensees after a product has been shipped by our licensee.

Licensees may also purchase professional services from us for assistance in the design and development of their products, custom development of applications or system software and education and training of the licensee on our platform and tools.

Third-party developers may purchase project-level support from our professional services organization, or alternatively, may purchase per-incident support from our developer services organization. We also provide online support, training and development tools for our developer community through our developer support programs.

PalmSource Research and Development

Our research and product development efforts are focused on enhancing the available features and functions of the Palm OS product development kit, including improving its capability and efficiency. These enhancements are intended to reduce time-to-market for our licensees. In addition, we work with licensees and third-party developers to increase the proliferation of Palm OS-based solutions. We supplement our research and development efforts with our licensing strategy, which specifies that our licensees contribute their broadly applicable derivative development works and give us the rights to include these works in our Palm OS platform. We believe that our success will depend, in part, on our ability to develop and introduce new versions of the Palm OS platform that continue to address the rapidly expanding needs of the mobile information device market.

PalmSource Seasonality

Our PalmSource business is generally affected by seasonality during our third fiscal quarter, as this is when PalmSource generally records royalty revenues from its licensees’ December holiday season sales. PalmSource recognizes revenue when its licensees report sales to PalmSource, which is typically one month to one quarter after the licensee sells the products. In addition, certain licensees, including Palm Solutions Group, satisfy the remaining amount of their yearly minimum commitments, if necessary, in our third fiscal quarter. Historically, these factors have resulted in a substantial increase in revenues for our third fiscal quarter as compared to other quarters in the fiscal year.

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PalmSource Intellectual Property

We rely on and benefit from a portfolio of intellectual property. We currently have 14 U.S. patents issued for our technology, and we have 141 U.S. patent applications pending. We do not have any foreign patents issued or any foreign patent applications pending. Subject to certain restrictions, we have an exclusive license from Palm Trademark Holding Company, LLC to use “palm” marks, other than palmOne and certain transition marks, in connection with our business, including various usages of Palm, PalmSource, Palm OS, the Palm logo, Palm Powered and Palm Computing. Palm Trademark Holding Company, LLC has 25 trademarks registered in the United States and 213 trademark registrations in other countries. Palm Trademark Holding Company, LLC also has 19 trademark applications pending in the United States and 258 trademark applications pending in other countries. We also have 12 trademarks registered in the United States and one trademark application pending in the United States. We, including through Palm Trademark Holding Company, LLC, are working to increase and enforce our rights in the PalmSource trademark portfolio, the protection of which is important to our reputation and branding. We also own copyrights relating to our software development applications including HotSync Manager, Palm OS and other software.

We also license technologies from third parties for integration into our products. We believe that the licensing of complementary technologies from parties with specific expertise is an effective means of expanding the features and functionality of our products.

We rely on a combination of patent, trademark, copyright and trade secret laws and restrictions on disclosure to protect our intellectual property rights. While we rely on these methods to protect our intellectual property, we also believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements are essential to establishing and maintaining a technology leadership position. We cannot assure you that others will not develop technologies that are similar or superior to our technology.

PalmSource Employees

As of June 30, 2003, PalmSource had a total of 308 employees, of which 12 were in support and service, 205 were in engineering and product development, 60 were in sales and marketing and 31 were in finance, administration and operations. PalmSource’s future performance depends, in significant part, on its ability to attract new personnel and retain existing personnel in key areas including engineering and sales. None of PalmSource’s employees is subject to a collective bargaining agreement. PalmSource considers its relationship with its employees to be good.

PALM, INC.

Financial Information about Segments

Solutions Group revenues totaled $837.6 million, $1,004.4 million and $1,533.2 million in fiscal years 2003, 2002 and 2001, respectively. Solutions Group segment loss before income taxes totaled $199.4 million, $79.9 million and $500.7 million in fiscal years 2003, 2002 and 2001, respectively. Solutions Group segment loss before income taxes includes intersegment cost of revenues, which are eliminated in consolidation and totaled $39.6 million, $42.1 million and $60.2 million in fiscal years 2003, 2002 and 2001, respectively. Total assets for the Solutions Group were $496.1 million and $905.2 million in fiscal years 2003 and 2002, respectively.

PalmSource revenues totaled $73.4 million, $69.9 million and $86.4 million in fiscal years 2003, 2002 and 2001, respectively. PalmSource segment loss before income taxes totaled $19.1 million, $26.5 million and $23.4 million in fiscal years 2003, 2002 and 2001, respectively. PalmSource segment loss before income taxes includes intersegment revenues, which are eliminated in consolidation and totaled $39.1 million, $43.4 million and $60.3 million in fiscal years 2003, 2002 and 2001, respectively. Total assets for PalmSource were $108.3 million and $117.7 million in fiscal years 2003 and 2002, respectively.

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Financial Information about Geographic Areas

Palm’s headquarters and most of its operations are located in the United States. Palm conducts its sales, marketing and customer serv