<PAGE>

   As filed with the Securities and Exchange Commission on December 13, 1999
                                                      Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                --------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                        Under The Securities Act of 1933

                                --------------
                                   PALM, INC.
             (Exact name of Registrant as specified in its charter)

                                --------------
<TABLE>
<S>                                <C>                                <C>
            Delaware                              3571                            94-3150688
 (State or other jurisdiction of      (Primary Standard Industrial             (I.R.S. Employer
 incorporation or organization)       Classification Code Number)           Identification Number)
</TABLE>

                              5400 Bayfront Plaza
                           Santa Clara, CA 95052-8145
                                 (408) 326-5000
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)

                                --------------

                               Carl J. Yankowski
                                   Palm, Inc.
                              5400 Bayfront Plaza
                           Santa Clara, CA 95052-8145
                                 (408) 326-5000
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                --------------
                                   Copies to:
<TABLE>
<S>                                <C>                                <C>
     Larry W. Sonsini, Esq.                 Stephen Yu, Esq.                 John L. Savva, Esq.
      Aaron J. Alter, Esq.                     Palm, Inc.                  Steven B. Stokdyk, Esq.
    Katharine A. Martin, Esq.             5400 Bayfront Plaza                Sullivan & Cromwell
Wilson Sonsini Goodrich & Rosati       Santa Clara, CA 95052-8145           1888 Century Park East
    Professional Corporation                 (408) 326-5000                       Suite 2100
       650 Page Mill Road                                                 Los Angeles, CA 90067-1725
       Palo Alto, CA 94304                                                      (310) 712-6600
         (650) 493-9300
</TABLE>
                                --------------
        Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

  If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

                                --------------

                        CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                   Amount of
       Title of Each Class of              Proposed Maximum       Registration
     Securities to be Registered      Aggregate Offering Price(1)     Fee
------------------------------------------------------------------------------
<S>                                   <C>                         <C>
Common Stock, par value $0.001 per
 share..............................        $100,000,000.00        $26,400.00
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(o) promulgated under the Securities
    Act of 1933, as amended.

                                --------------

  The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effectiveness until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell securities and we are not soliciting offers to buy these        +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

                Subject to Completion. Dated December 13, 1999.

                                        Shares

                                   Palm, Inc.
                         [PALM, INC. LOGO APPEARS HERE]

                                  Common Stock

                                  -----------

  This is an initial public offering of shares of common stock of Palm, Inc.
 All of the              shares of common stock are being sold by Palm.

  Prior to this offering, there has been no public market for the common stock.
Palm has applied to have the common stock quoted on the Nasdaq National Market
under the symbol "PALM".

  See "Risk Factors" on page 7 to read about factors you should consider before
buying shares of the common stock.

                                  -----------

  Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

                                  -----------

<TABLE>
<CAPTION>
                                                                Per Share Total
                                                                --------- -----
<S>                                                             <C>       <C>
Initial public offering price..................................
Underwriting discount..........................................
Proceeds, before expenses, to Palm.............................
</TABLE>

  To the extent that the underwriters sell more than               shares of
the common stock, the underwriters have the option to purchase up to an
additional               shares from Palm at the initial public offering price
less the underwriting discount.

                                  -----------

  The underwriters expect to deliver the shares against payment in New York,
New York on        , 2000.

Goldman, Sachs & Co.                                  Morgan Stanley Dean Witter

                              Merrill Lynch & Co.

                                                             Robertson Stephens


                                  -----------

                    Prospectus dated                , 2000.
<PAGE>





               [description of artwork to be filed by amendment]
<PAGE>

                               PROSPECTUS SUMMARY

   You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our historical consolidated financial statements and notes to
those statements included elsewhere in this prospectus.

                                      PALM


  We are the leading global provider of handheld computing devices. We develop,
design and market our Palm-branded handheld devices, which currently include
our Palm III, Palm V and Internet-enabled Palm VII product families. According
to International Data Corporation, in 1998 we had a 68% market share of the
worldwide personal companion handheld device market, which International Data
Corporation defines as small, pocket-sized devices that feature pen-based input
and synchronize with a personal computer. We believe our emphasis on
simplicity, elegance and ease of use and our focus on consumer needs have
contributed to our success to date. Our devices have also won numerous awards,
including Business Week's "Design of the Decade--Gold Award" and PC Computing's
Most Valuable Product award for "Best Pocket PC" in 1999. We intend to build on
our global market leadership in handheld computing devices through continued
innovation and focus on addressing customer needs.

  The Palm operating system and related software, which we refer to as our Palm
platform, have been the cornerstone of our success in the handheld device
market. The Palm platform combines the distinctive look, feel and ease of use
of our Palm OS operating system with HotSync synchronization technology, pen-
based input technology and personal information management applications such as
datebook and address book. Our Palm VII product also includes web-clipping
software that allows Internet content providers and users to send and receive
information via the Internet in a format optimized for handheld devices. In
addition to including the Palm platform in our Palm-branded devices, we license
the Palm platform to manufacturers of information appliances, which we define
as handheld devices that enable users to access and manage information. Most
recently, Nokia and Sony agreed to license the Palm platform for use in their
future products. We intend to establish our Palm platform as the leading
operating system in the rapidly converging markets of handheld computing
devices, information appliances, mobile phones and handheld entertainment
devices.

  We have also established a wireless Internet access service, Palm.net, which
supports the Palm VII device and generates revenue from monthly subscription
fees. Palm.net subscribers can obtain wireless access to information such as
real-time stock quotes, news headlines and airline flight schedules. In
addition, our Palm.net service enables mobile users to access an increasing
array of enterprise data and applications. We have also developed our Palm.com
website, which is emerging as an important destination site for our customers,
users and developer community. As part of our Internet strategy, we are
expanding our Internet destination sites to provide new web-clipping
applications and facilitate e-commerce.

  We believe that the continued adoption of handheld devices as well as our
strategic focus on Palm platform licensing and Internet services present us
with significant growth opportunities. We will continue our efforts to identify
and respond to customer needs as handheld computing devices become more
sophisticated, reach a broader customer base and become an increasingly
important means of Internet access on a global basis.

  As of December 1, 1999, we had sold over 5 million Palm devices worldwide. As
of December 1, 1999, more than 29,000 third-party developers had registered to
create applications based on the Palm platform. Our revenues have increased
from approximately $1 million in fiscal 1995 to $564 million in fiscal 1999. We
outsource the manufacturing of all of our devices to Manufacturers' Services
Limited and Flextronics.

                                       3
<PAGE>


                           OUR RELATIONSHIP WITH 3COM

  We are currently a wholly-owned subsidiary of 3Com Corporation. After the
completion of this offering, 3Com will own approximately     % of the
outstanding shares of our common stock, or approximately     % if the
underwriters fully exercise their option to purchase additional shares. 3Com
currently plans to complete its divestiture of Palm approximately six months
following this offering by distributing all of the shares of Palm common stock
owned by 3Com to the holders of 3Com's common stock. However, 3Com is not
obligated to complete the distribution, and the distribution may not occur by
the anticipated time or at all.

  3Com will, in its sole discretion, determine the timing, structure and all
terms of its distribution of our common stock that it owns. 3Com's distribution
is subject to receiving a private letter ruling from the Internal Revenue
Service that the distribution of its shares of Palm common stock to 3Com
stockholders will be tax-free to the stockholders and that our separation from
3Com qualifies as a reorganization for United States federal income tax
purposes.

  Prior to the completion of this offering, we will enter into agreements with
3Com related to the separation of our business operations from 3Com. These
agreements provide for, among other things:

  .  the transfer from 3Com to us of assets and the assumption by us of
     liabilities relating to our business;

  .  the allocation of intellectual property between us and 3Com; and

  .  various interim and ongoing relationships between us and 3Com.

  The agreements regarding the separation of our business operations from 3Com
are described more fully in the section entitled "Arrangements Between Palm and
3Com" included elsewhere in this prospectus. The terms of these agreements,
which are being negotiated in the context of a parent-subsidiary relationship,
may be more or less favorable to us than if they had been negotiated with
unaffiliated third parties. See "Risk Factors--Risks Related To Our Separation
From 3Com." The assets and liabilities to be transferred to us are described
more fully in our consolidated financial statements and notes to those
statements that are also included elsewhere in this prospectus.

                         CONCURRENT PRIVATE PLACEMENTS

  America Online, Inc., Motorola, Inc. and Nokia have agreed to purchase from
us, in private placements that will occur concurrently with the closing of this
offering, an aggregate number of shares of our common stock equal to up to 4.5%
of our capital stock, which percentage is based on outstanding common stock as
well as options to purchase    shares which have been granted as of        ,
2000, but not exceeding an aggregate investment of more than $225 million.

  These investors will pay a per share purchase price for this common stock
equal to the initial public offering price in this offering.

                                       4
<PAGE>

                                  THE OFFERING

<TABLE>
<S>                                          <C>
Common stock offered.......................           shares
Common stock to be outstanding immediately
 after this offering.......................           shares
Common stock to be held by 3Com immediately
 after this offering.......................           shares
Use of proceeds............................  For payment of a dividend to 3Com, payment
                                             of other amounts due to 3Com, capital
                                             expenditures, marketing expenses, working
                                             capital and potential investments in, or
                                             acquisitions of, other businesses or
                                             technologies.
Proposed Nasdaq Stock Market symbol........  PALM
</TABLE>

  This information is based on      shares outstanding as of       , 1999, all
of which are owned by 3Com. We will declare a     -for-one stock split to
increase the amount of outstanding shares of our common stock to
shares prior to this offering. Unless we specifically state otherwise, the
information in this prospectus does not take into account the issuance of up to
     shares of common stock that the underwriters have the option to purchase.
If the underwriters exercise in full their option to purchase additional
shares,      shares of common stock will be outstanding after this offering.

  The number of shares of our common stock to be outstanding immediately after
this offering listed above does not take into account approximately
shares of our common stock reserved for issuance under our stock plans, of
which options to purchase           shares have been granted as of
            , 2000 but does include an aggregate of    shares to be issued to
America Online, Motorola and Nokia concurrently with the closing of this
offering. In addition, we will assume substantially all of the 3Com options
held by our employees on the date 3Com distributes our common stock, which
options will convert into options to purchase our common stock.

  We were incorporated in California in January 1992 as Palm Computing, Inc. In
connection with this offering and our separation from 3Com, we intend to
reincorporate in Delaware and change our name to Palm, Inc. We were acquired by
3Com in June 1997 as part of 3Com's acquisition of U.S. Robotics Corporation.
We had been acquired by U.S. Robotics in September 1995. From June 1997 to the
time of this offering, we have been operated as a wholly-owned subsidiary of
3Com. Our principal executive offices are located at 5400 Bayfront Plaza, Santa
Clara, California 95052-8145, and our telephone number is (408) 326-5000. Our
websites are http://www.palm.com and http://www.palm.net. The information on
these websites is not a part of this prospectus.

  In this prospectus, "Palm," "we," "us" and "our" each refers to Palm, Inc.
and its subsidiaries, and not to the underwriters or 3Com. "3Com" refers to
3Com Corporation and its subsidiaries.

  Palm, our logo and other trademarks of Palm mentioned in this prospectus are
the property of Palm. All other trademarks or trade names referred to in this
prospectus are the property of their respective owners.

                                       5
<PAGE>

                      SUMMARY CONSOLIDATED FINANCIAL DATA

  The following tables present our summary consolidated financial data. The
data presented in these tables are from "Selected Consolidated Financial Data"
and our historical consolidated financial statements and notes to those
statements included elsewhere in this prospectus. You should read those
sections for a further explanation of the financial data summarized here.

  The historical financial information may not be indicative of our future
performance and does not reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented.

<TABLE>
<CAPTION>
                                                                           Three Months
                                          Years Ended                          Ended
                          ---------------------------------------------- -----------------
                          June 30,  May 26,  May 25,   May 31,  May 28,  Aug. 28, Aug. 27,
                            1995(1) 1996(2)    1997      1998     1999     1998     1999
                          --------  -------  --------  -------- -------- -------- --------
                                    (in thousands, except per share amounts)
<S>                       <C>       <C>      <C>       <C>      <C>      <C>      <C>
Consolidated Statements
 of Operations Data:
Revenues................  $ 1,403   $ 7,054  $114,157  $272,137 $563,525 $116,069 $176,505
Gross profit............    1,229     2,575    36,472   114,388  247,909   53,071   78,181
Operating income
 (loss).................   (2,231)   (6,777)  (13,513)    6,461   48,339   13,131   15,866
Net income (loss).......   (2,166)   (3,062)   (7,862)    4,171   29,628    8,070    9,658
Unaudited pro forma net
 income per share:......
  Basic.................                                        $                 $
  Diluted...............                                        $                 $
Shares used in computing
 unaudited pro forma net
 income per share:
  Basic.................
  Diluted...............
Supplemental unaudited
 pro forma net income
 per share:
  Basic.................                                        $                 $
  Diluted...............                                        $                 $
Shares used in computing
 supplemental unaudited
 pro forma net income
 per share:
  Basic.................
  Diluted...............
</TABLE>
<TABLE>
<CAPTION>
                                                             August 27, 1999
                                                         -----------------------
                                                                    Pro Forma
                                                          Actual  As Adjusted(3)
                                                         -------- --------------
                                                             (in thousands)
<S>                                                      <C>      <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................... $ 37,138      $
Working capital.........................................   91,074
Total assets............................................  201,346
Stockholder's net investment............................  113,295
</TABLE>
-------
Notes:
(1) Our fiscal year end was June 30 prior to our acquisition by 3Com.
(2) Fiscal 1996 includes only eleven months of operating results.
(3) Pro forma as adjusted amounts give effect to the following actions as
    though these actions had been taken as of August 27, 1999:
  . our sale of     shares of common stock in this offering at an assumed
    initial public offering price of $   per share and after deducting an
    assumed underwriting discount and estimated offering expenses payable by
    us;
  . our sale of    shares of common stock to America Online, Motorola and
    Nokia concurrently with the closing of this offering at an assumed
    offering price of $   per share;
  . retention of most of our accounts receivable and accounts payable by 3Com
    at the time of our separation;
  . payment of a dividend to 3Com equal to its tax basis in us, which was
    approximately $   million at     , 2000; and
  . repayment of an intercompany payable to 3Com, which was approximately $49
    million at August 27, 1999.

                                       6
<PAGE>

                                  RISK FACTORS

   You should carefully consider the risks described below and the other
information in this prospectus before investing in our common stock. Our
business could be seriously harmed by any of these risks. The trading price of
our common stock could decline due to any of these risks, and you may lose all
or part of your investment.

                         Risks Related to Our Business

If we fail to develop and introduce new products and services rapidly and
successfully, we will not be able to compete effectively and our business will
suffer.

  We operate in a highly competitive, quickly changing environment, and our
future success depends on our ability to develop and introduce new products and
services that our customers and end users choose to buy. If we are unsuccessful
at developing and introducing new products and services that are appealing to
end users, our business and operating results would be seriously harmed.

  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 and technological trends
accurately or are otherwise unable to complete the development of products and
services quickly, we will be unable to introduce new products and services into
the market on a timely basis, if at all. For example, our most recently
introduced handheld device product, the Palm VII device, took more than two
years to develop. In addition, because the Palm VII device requires Internet
services and applications to support it, we must also continue to develop new
services to maintain and broaden its user appeal.

  Because the sales and marketing life cycle of our handheld devices is
generally 12 to 18 months or less, we must:

  .  continue to develop updates to our Palm platform, new handheld devices
     and new Internet services, or our existing products and services will
     quickly become obsolete;

  .  manage the timing of new product introductions so that we minimize the
     impact of customers delaying purchases of existing products in
     anticipation of new product releases;

  .  manage the levels of existing and older product and component
     inventories to minimize inventory write-offs; and

  .  adjust the prices of our existing products in order to increase customer
     demand for these products.

If we do not correctly anticipate demand for our products, our operating
results will suffer.

  Historically, we have seen steady increases in demand for our products and
have generally been able to increase production to meet that demand. However,
the demand for our products depends on many factors and will be difficult to
forecast. We expect that it will become more difficult to forecast demand as we
introduce and support multiple handheld device products and as competition in
the market for our products intensifies. Significant unanticipated fluctuations
in demand could cause the following problems in our operations:

  .  If demand increases beyond what we forecast, we would have to rapidly
     increase production at our third-party manufacturers. We would depend on
     suppliers to provide additional volumes of components and those
     suppliers might not be able to increase production rapidly enough to
     meet unexpected demand. Even if we are able to procure enough
     components, our third-party manufacturers might not be able to produce
     enough of our devices as fast as we need them. The inability of either
     our manufacturers or our suppliers to increase production rapidly enough
     could cause us to fail to meet customer demand.

                                       7
<PAGE>

  .  Rapid increases in production levels to meet unanticipated demand could
     result in higher costs for manufacturing and supply of components and
     other expenses. These higher costs could lower our profit margins.
     Further, if production is increased rapidly, manufacturing yields could
     decline, which may also lower our margins.

  .  If forecasted demand does not develop, we could have excess production
     resulting in higher inventories of finished products and components,
     which would use cash and could lead to write-offs of some or all of the
     excess inventories. Lower than forecasted demand could also result in
     excess manufacturing capacity at our third-party manufacturers and
     failure to meet some minimum purchase commitments, each of which could
     result in lower margins.

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

  Our operating results are difficult to predict. Our future quarterly
operating results may fluctuate significantly and may not meet the expectations
of securities analysts or investors. If this occurs, the price of our stock
would likely decline. Factors that may cause fluctuations in our operating
results include the following:

  .  Seasonality. Historically, our revenues have usually been weaker in the
     first and third quarters of each fiscal year and have, from time to
     time, been lower than the preceding quarter. This weakness is due to the
     fact that our devices are highly consumer-oriented, and consumer buying
     is traditionally lower in these quarters. As our licensing revenues
     grow, we expect that they will contribute to the fluctuations in our
     quarterly results because the products offered by our licensees are also
     primarily consumer-oriented. In addition, we attempt to time our new
     product releases to coincide with relatively higher consumer spending in
     the second and fourth fiscal quarters, which contributes to these
     seasonal variations.

  .  Increases in Operating Expenses. As we expand our operations, we expect
     that our operating expenses, particularly our sales, marketing and
     research and development costs, will continue to increase. We also
     expect to make significant expenditures, including using a portion of
     the proceeds from this offering, to expand our Internet services through
     increased marketing activities and investments in network expansion
     related to our subscription-based Internet access service. These
     Internet services expenditures as well as a significant portion of our
     sales, marketing and research and development costs are fixed, at least
     in the short term. If revenues decrease and we are unable to reduce
     those costs rapidly, our operating results would be negatively affected.
     In addition, we will add new fixed costs to build an independent
     business and administration infrastructure after we separate from 3Com.
     Over the next several quarters we expect expenses to grow more rapidly
     than revenues, which will hurt our quarterly operating results.

  .  Product Mix. Our profit margins differ among the handheld device, Palm
     platform licensing and Internet services parts of our business. In
     addition, the product mix of our device sales affects profit margins in
     any particular quarter. As our business evolves and the mix of revenues
     from devices, licenses and services varies from quarter to quarter, our
     operating results will likely fluctuate.

  .  New Product Introductions. As we introduce new products and services,
     the timing of these introductions will affect our quarterly operating
     results. We may have difficulty predicting the timing of new product and
     service introductions and the user acceptance of these new products and
     services. If products and services are introduced earlier or later than
     anticipated, or if user acceptance is unexpectedly high or low, our
     quarterly operating results may fluctuate unexpectedly. In addition, we
     typically increase sales and marketing expenses to support new product
     introductions.

                                       8
<PAGE>

  .  Use of Purchase Orders with Customers. We rely on one-time purchase
     orders rather than long-term contracts with our distributor customers.
     Because we cannot predict with certainty incoming purchase orders,
     decreases in orders or failure to fulfill orders may cause our operating
     results to fluctuate.

We rely on third-party manufacturers to produce our handheld devices, and our
operations could be adversely affected by our inability to control their
operations.

  We outsource all of our manufacturing to Manufacturers' Services Limited and
Flextronics. We depend on these third-party manufacturers to produce sufficient
volume of our products in a timely fashion and at satisfactory quality levels.
If our third-party manufacturers fail to produce quality products on time and
in sufficient quantities, our reputation and results of operations would
suffer. We depend on Flextronics to manufacture some of our device products at
its facilities in Mexico, California and Malaysia, and the rest of our device
products are manufactured by Manufacturers' Services Limited at its Utah
facility. The cost, quality and availability of third-party manufacturing
operations are essential to the successful production and sale of our handheld
devices. Our reliance on third parties exposes us to the following risks
outside our control:

  .  unexpected increases in manufacturing costs;

  .  interruptions in shipments if one of our manufacturers is unable to
     complete production;

  .  inability to control quality of finished device products;

  .  inability to control delivery schedules;

  .  unpredictability of manufacturing yield;

  .  potential lack of adequate capacity; and

  .  potential inability to secure adequate volumes of components.

  We have only limited experience working with Manufacturers' Services Limited,
which recently purchased 3Com's Utah facility. If we are unable to manage our
relationship with Manufacturers' Services Limited successfully, our ability to
manufacture our products would be harmed and our results of operations would
suffer.

  We do not have a manufacturing agreement with Flextronics, upon whom we rely
to manufacture a significant number of our device products. We presently order
our products on a purchase order basis from Flextronics. The absence of a
manufacturing agreement means that, with little or no notice, Flextronics could
refuse to continue to manufacture all or some of the units of our devices that
we require or change the terms under which it manufactures our device products.
If Flextronics were to stop manufacturing our devices, we may be unable to
replace the lost manufacturing capacity on a timely basis and our results of
operations could be harmed. In addition, if Flextronics were to change the
terms under which they manufacture for us, our manufacturing costs could
increase and our profitability could suffer.


We depend on our suppliers, many of which are the sole source for our
components, and our production would be seriously harmed if these suppliers are
not able to meet our demand and alternative sources are not available.

  Our products contain components, including liquid crystal displays, touch
panels, memory chips and microprocessors, 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. In particular, some
components, such as displays, power supply integrated circuits, digital signal
processors, Motorola microprocessors and several radio frequency and discrete
components, come from sole or single source suppliers. Alternative sources are
not currently available for these single source components. If suppliers are
unable to meet our demand for sole source components and if we are unable to
obtain an alternative source or if the price for an alternative source is
prohibitive, our ability to maintain timely and cost-effective production of
our handheld computing device products

                                       9
<PAGE>

would be seriously harmed. In addition, because we rely on one-time purchase
orders with our suppliers, we cannot predict with certainty our ability to
procure components in the longer term. For example, we recently had to modify
the design of our Palm VII device as a result of our inability to obtain
adequate supplies of the radio crystals that our original design required
because of limited supply and unexpectedly high demand from cellular telephone
manufacturers. We are also aware of a current shortage in the availability of
memory chips, and we have modified the design of our Palm VII device because of
this shortage. If either the shortage in radio crystals or memory chips or any
other key component persists or worsens, we will likely not be able to deliver
sufficient quantities of our products to satisfy demand.

We do not know if the Palm platform licensing and Internet services parts of
our business will be able to generate significant revenue in the future, and we
will continue to rely on our handheld device products as the primary source of
our revenue for the foreseeable future.

  Our future growth and a significant portion of our future revenue depend on
the commercial success of our Palm handheld devices, which comprise the primary
product line that we currently offer. Palm handheld devices accounted for
approximately 99% of our revenues in the three months ended August 27, 1999. We
expanded our Palm platform licensing and Internet services parts of our
business only recently, and these parts of our business have not yet generated
a material portion of our revenues. If revenues from our device business do not
grow, our other business activities will not be able to compensate for this
shortfall.

A significant portion of our revenues currently comes from a small number of
distributors, and any decrease in revenues from these distributors could harm
our business.

  A significant portion of our revenues comes from only a small number of
distributors. Ingram Micro represented approximately 35% of our revenues in the
three months ended August 27, 1999 and 24% of our revenues in fiscal 1999. Tech
Data represented approximately 4% of our revenues in the three months ended
August 27, 1999 and 14% of our revenues in fiscal 1999. We expect that the
majority of our revenues will continue to depend on sales of our handheld
devices to a small number of distributors. Any downturn in the business of
these customers could seriously harm our revenues and results of operations.

We rely on distributors, retailers and resellers to sell our products, and
disruptions to these channels would harm our business.

  Because we sell a significant portion of our products to distributors,
retailers and resellers, we are subject to many risks, including risks related
to their inventory levels and support for our products. In particular, our
distributors, retailers and resellers maintain significant levels of our
products in their inventories. If distributors, retailers and resellers attempt
to reduce their levels of inventory or if they do not maintain sufficient
levels to meet customer demand, our sales could be negatively impacted. If we
reduce the prices of our products to these customers, we may have to compensate
them for the difference between the higher price they paid to buy their
inventory and the new lower prices. In addition, like other manufacturers, we
are exposed to the risk of product returns from distributors, either through
their exercise of contractual return rights or as a result of our strategic
interest in assisting distributors in balancing inventories.

  Our distributors, retailers and resellers also sell products offered by our
competitors. If our competitors offer our distributors, retailers and resellers
more favorable terms, those distributors, retailers and resellers may de-
emphasize or decline to carry our products. In the future, we may not be able
to retain or attract a sufficient number of qualified distributors, retailers
and resellers. Further, distributors, retailers and resellers may not
recommend, or continue to recommend, our products. If we are unable to maintain
successful relationships with distributors, retailers and resellers or to
expand our distribution channels, our business will suffer.

                                       10
<PAGE>

  We believe our distributors, retailers and resellers are experiencing
heightened competition from Internet-based suppliers that distribute directly
to end-user customers. We also sell our products directly to end-user customers
from our Palm.com website. These actions could cause conflict among our
channels of distribution, which could seriously harm our revenues and results
of operations.

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

  We compete in the handheld device, operating system software and Internet
services markets. The markets for these products and services are highly
competitive and we expect competition to increase in the future. Some of our
competitors or potential competitors have significantly greater financial,
technical and marketing resources than we do. These competitors may be able to
respond more rapidly than us to new or emerging technologies or changes in
customer requirements. They may also devote greater resources to the
development, promotion and sale of their products than we do.

  .  Our handheld computing device products compete with a variety of smart
     handheld devices, including keyboard-based devices, sub-notebook
     computers, smart phones and two-way pagers. Our principal competitors
     include Casio, Compaq, Hewlett-Packard, Psion, Sharp and Palm platform
     licensees such as TRG and Handspring, which was formed by two of our
     original founders.

  .  Our Palm platform competes primarily with operating systems such as
     Microsoft's Windows CE for palm-sized personal computers and Symbian's
     EPOC for wireless devices.

  .  Our Internet services compete with a variety of alternative technologies
     and services, such as those based on different industry standards for
     wireless Internet access, information appliances that provide Internet
     connectivity and other traditional and developing methods.

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

If we fail to effectively respond to competition from products introduced by
licensees of our Palm platform or if our licensees fail to sell products based
on the Palm platform, our results of operations may suffer as the revenues we
receive from license fees may not compensate for the loss of revenues from our
device products.

  The success of our business depends on both the sale of handheld device
products and the licensing of our Palm platform. However, licensees of our Palm
platform offer products that compete directly or indirectly with our handheld
computing devices. For example, licensees such as Nokia, Sony or QUALCOMM may
use our Palm platform in devices such as mobile phones or other similar
products that can compete indirectly with our handheld devices. In addition,
while we expect to receive licensing revenue from Handspring and TRG, our
device products compete directly for users and distributors with their devices.
If revenues from our handheld devices suffer because of competition from
licensees of our Palm platform, our results of operations would suffer and our
ability to implement our business model would be seriously challenged. In
addition, our licensees may not be successful in selling products based on the
Palm platform, which could harm our business and results of operations.

                                       11
<PAGE>

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

  Our Palm platform and our devices are complex and must meet stringent user
requirements. We must develop our software and hardware products quickly to
keep pace with the rapidly changing handheld device market. Products and
services as sophisticated as ours are likely to contain undetected errors or
defects, especially when first introduced or when new models or versions are
released. We have in the past experienced delays in releasing some models and
versions of our products until problems were corrected. Our products may not be
free from errors or defects after commercial shipments have begun, which could
result in the rejection of our products, damage to our reputation, lost
revenues, diverted development resources and increased customer service and
support costs and warranty claims. Any of these results could harm our
business.

If we fail to manage expansion effectively, our business, financial condition
and prospects could be seriously harmed.

   Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. We continue to increase the scope of our operations domestically and
internationally and have grown our shipments and headcount substantially. Our
handheld device shipments grew from approximately 461,000 units in fiscal 1997
to approximately 2 million units in fiscal 1999. At November 30, 1997, we had a
total of approximately 220 employees and at November 26, 1999, we had a total
of approximately 630 employees. In addition, we plan to continue to hire a
significant number of employees this year. This growth has placed, and our
anticipated growth in future operations will continue to place, a significant
strain on our management systems and resources.

  We expect that we will need to continue to improve our financial and
managerial controls, reporting systems and procedures. For example, we intend
to implement an enterprise-wide supply chain management system that we
anticipate will cost up to $7 million to implement. If we experience delays or
cost overruns in implementing this system or if this system is not as effective
as we anticipate, we could experience significant difficulties in managing our
supply chain. While we are currently implementing stand-alone versions of most
of the transaction processing systems historically used by 3Com, we may decide
to purchase new systems in the future that more closely match our business
needs and incur significant additional expenses in connection with those
systems. In addition, we will need to continue to expand, train and manage our
work force worldwide. Furthermore, we expect that we will be required to manage
multiple relationships with various customers and other third parties. In
particular, after our separation from 3Com, we will have to implement a new
administrative and managerial infrastructure. Our future success depends on the
implementation of this infrastructure after our separation.

The market for the delivery of Internet services through handheld devices is
new and rapidly evolving, and our business could suffer if this market does not
develop or we fail to address this market effectively.

  The market for the delivery of Internet services through handheld devices is
new and rapidly evolving. In addition, our Internet services strategy has been
developed only recently, and we must continue to adapt it to compete in the
rapidly evolving Internet services market. We only recently introduced our
Palm.net service, a subscription-based wireless access service that enables
Palm VII users to access web-clipped content on the Internet. Other competitors
have introduced or developed, or are in the process of introducing or
developing, products that facilitate the delivery of Internet services through
handheld devices. We cannot assure you that individuals currently using
competing products to access the Internet remotely, such as portable personal
computers and wireless telephones, will widely adopt handheld devices as a
means of accessing Internet services. Accordingly, it is extremely difficult to
predict which products will be successful in this market or the

                                       12
<PAGE>

future size and growth of this market. In addition, given the limited history
and rapidly evolving nature of this market, we cannot predict the price that
wireless subscribers will be willing to pay for these products and services.
These risks could affect our ability to support the Palm.net service on a large
scale and price the service at a level that produces expected returns.

Our Internet services business will suffer if our telecommunications carrier
raises its rates, discontinues doing business with us or does not deliver
acceptable service.

  The future success of our Internet services business substantially depends on
the capacity, affordability, reliability and security of our telecommunications
networks. Only a small number of telecommunications providers offer the network
services we require. We currently rely on BellSouth to provide all of our Palm
VII wireless network services pursuant to an agreement. Our agreement with
BellSouth permits each party to terminate the agreement on an annual basis. If
BellSouth failed to provide us with service at rates acceptable to us or at
all, we may not be able to provide Internet access to our users. In addition,
our Palm VII products are configured around the frequency standard used by
BellSouth. If we needed to switch to another telecommunications carrier, we
would have to redesign significant portions of our software and hardware to
permit transmission on a different frequency and service to users of existing
Palm VII products would be disrupted. If we were required to redesign these
elements, our Internet services part of our business could be adversely
affected. If BellSouth delivers unacceptable service, the quality of our
Internet services would suffer and we would likely lose users who are
dissatisfied with our service. In addition, BellSouth provides service only in
the continental United States. We intend to expand our network services to
support Internet services internationally, but doing so will require us to
enter into new relationships with telecommunications providers abroad. Many
international telecommunications providers use different standards and transmit
data on different frequencies than BellSouth, which will require us to redesign
significant portions of our software and hardware.

Our reputation and ability to generate revenues will be harmed if demand for
our Internet services exceeds our telecommunications and network capacity.

  We may from time to time experience increases in our Internet services usage
which exceed our available telecommunications capacity and the capacity of our
third-party network servers. As a result, users may be unable to register or
log on to our service, may experience a general slow-down in their Internet
access or may be disconnected from their sessions. Excessive user demand could
also result in system failures of our third-party network servers' networks.
Inaccessibility, interruptions or other limitations on the ability to access
our service due to excessive user demand, or any failure of our third-party
network servers to handle user traffic, would have a material adverse effect on
our reputation and our revenues.

We plan to expand our direct e-commerce operation, and our business and
financial condition could be harmed if this operation is not successful.

  We may not be able to achieve any or all of the necessary components of a
successful e-commerce operation. We intend to expand our Palm.com and Palm.net
websites. This expansion will require additional expenditures, including the
use of part of the proceeds of this offering. These expenditures are
anticipated to exceed revenues from these services over the next few years. We
have little experience in implementing or operating a direct e-commerce
business, and if we are not successful in operating it or in successfully
managing our current sales channels alongside our direct e-commerce channel,
our business and financial condition could be materially harmed.

Our Internet services business prospects could suffer if the Internet does not
continue to grow as a medium for interactive content and services.

  Our future success depends in part on the continued growth and reliance by
consumers and businesses on the Internet, particularly in the market for
Internet services and networking of handheld computing devices. Use and growth
of the Internet will depend in significant part on continued rapid

                                       13
<PAGE>

growth in the number of households and commercial, educational and government
institutions with access to the Internet. The use and growth of the Internet
will also depend on the number and quality of products and services designed
for use on the Internet. Because use of the Internet as a source of
information, products and services is a relatively recent phenomenon, it is
difficult to predict whether the number of users drawn to the Internet will
continue to increase and whether the market for commercial use of the Internet
will continue to develop and expand. Internet use patterns may decline as the
novelty of the medium recedes.

  The rapid rise in the number of Internet users and the growth of electronic
commerce and applications for the Internet has placed increasing strains on the
Internet's communications and transmission infrastructure. This could lead to
significant deterioration in transmission speeds and the reliability of the
Internet as a commercial medium and could reduce the use of the Internet by
businesses and individuals. The Internet may not be able to support the demands
placed upon it by this continued growth. Any failure of the Internet to support
growth due to inadequate infrastructure or for any other reason would seriously
limit its development as a viable source of commercial and interactive content
and services. This could impair the development and acceptance of our Internet
services which could in turn harm our business prospects.

If the security of our websites is compromised, our reputation and business
could suffer.

  A significant barrier to widespread use of electronic commerce sites, such as
our Palm.com site, and network services sites, such as our Palm.net site, is
concern for the security of confidential information transmitted over public
networks. Despite our efforts to protect the integrity of our Palm.com and
Palm.net sites, a party may be able to circumvent our security measures and
could misappropriate proprietary information or cause interruptions in our
operations and damage our reputation. Any such action could negatively affect
our customers' willingness to engage in online commerce with us. We may be
required to expend significant capital and other resources to protect against
these security breaches or to alleviate problems caused by these breaches.

Our business will suffer if we are not able to retain, hire and integrate
sufficient qualified personnel.

  Our future success depends partly on the continued contribution of our key
executive, technical, sales, marketing, manufacturing and administrative
personnel. It also depends on our ability to expand, integrate and retain our
management team after our separation from 3Com. Many members of our senior
management have been with the business only a short time. In particular, our
Chief Executive Officer has only been employed with us since December 1999 and
we have only limited experience under his leadership. In addition, recruiting
and retaining skilled personnel, including software and hardware engineers, is
highly competitive. If we fail to retain, hire and integrate qualified
employees and contractors, we will not be able to maintain and expand our
business.

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

  In the course of our business, we frequently receive claims of infringement
or otherwise become aware of potentially relevant patents or other intellectual
property rights held by other parties. We evaluate the validity and
applicability of these intellectual property rights, and determine in each case
whether we must negotiate licenses or cross-licenses to incorporate or use the
proprietary technologies in our products. Third parties may claim that we or
our customers or Palm platform licensees are infringing their intellectual
property rights, and we may be found to infringe those intellectual property
rights and require a license to use those rights. We may be unaware of
intellectual property rights of others that may cover some of our technology,
products and services.

                                       14
<PAGE>

Moreover, in connection with future intellectual property infringement claims,
we will not have the benefit of asserting counterclaims based on 3Com's
intellectual property portfolio, and we will not be able to offer licenses to
3Com's intellectual property rights in order to resolve claims.

  On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case is now captioned: Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm
Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The
complaint alleges willful infringement of a Xerox United States patent, issued
on January 21, 1997, relating to computerized interpretation of handwriting.
The complaint further seeks unspecified damages and injunctive relief. Xerox
has asserted that products utilizing Graffiti script recognition software made,
used, offered for sale or sold in the United States, or imported into the
United States since January 21, 1997, infringe its patent. On June 25, 1999,
the court stayed the action pending reexamination of the patent by the United
States Patent and Trademark Office. The reexamination of the patent is
currently pending. In connection with our separation from 3Com, pursuant to the
terms of the Indemnification and Insurance Matters Agreement, we will indemnify
and hold 3Com harmless for any damages or losses which may arise out of this
litigation. In particular, an adverse determination in the Xerox litigation
could subject us to substantial damages and require us to indemnify our
customers and licensees for damages that they may suffer. Moreover, if there is
an adverse determination, a license may be necessary to continue using the
Grafitti script recognition software in our Palm devices and Palm platform. A
license may not be available or on terms acceptable to us. If upon an adverse
determination we were unable to obtain a license on terms acceptable to us, we
could be required to modify our script recognition software or license
alternative script recognition software from third parties for inclusion in our
Palm devices and our Palm platform.

  Any litigation regarding patents or other intellectual property could be
costly and time-consuming, and divert our management and key personnel from our
business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements or indemnify our Palm platform licensees.
However, we may not be able to obtain royalty or license agreements on terms
acceptable to us, or at all. We also may be subject to significant damages or
injunctions against development and sale of our products.

  We often rely on licenses of intellectual property for use in our business.
We cannot assure you that these licenses will be available in the future on
favorable terms or at all. In addition, our position with respect to the
negotiation of licenses may deteriorate after our separation from 3Com.

If third parties infringe 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. We rely on a
combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
our proprietary rights. 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 registration applications may not be allowed
or competitors may challenge the validity or scope of these patent applications
or trademark registrations. In addition, our patents may not provide us a
significant competitive advantage.

  We may be required to spend significant resources to monitor and police our
intellectual property rights. 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.

                                       15
<PAGE>

  Over the last twelve months, there have been several thefts of computer
equipment from us and our employees. This computer equipment has contained
proprietary information. We have formulated a security plan to reduce the risk
of any future thefts and have cooperated with state and federal law enforcement
officials in an investigation of past incidents. We may not be successful in
preventing future thefts, or in preventing those responsible for past thefts
from using our technology to produce competing products. The unauthorized use
of Palm technology by competitors could have a material adverse effect on our
ability to sell our products in some markets.

Our business is subject to economic, political and other risks associated with
international sales and operations.

  Since we sell our products worldwide, our business is subject to risks
associated with doing business internationally. We anticipate that revenue from
international operations will represent an increasing portion of our total
revenue. In addition, two of the facilities where our devices are manufactured
are located outside the United States. Accordingly, our future results could be
harmed by a variety of factors, including:

  .  changes in foreign currency exchange rates;

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

  .  trade protection measures and import or export licensing requirements;

  .  potentially negative consequences from changes in tax laws;

  .  difficulty in managing widespread sales and manufacturing operations;
     and

  .  less effective protection of intellectual property.

We intend to pursue strategic acquisitions and our business could be materially
harmed if we fail to successfully integrate acquired businesses.

  We often evaluate acquisition opportunities that could provide us with
additional product or services offerings or additional industry expertise. Any
future acquisition could result in difficulties assimilating acquired
operations and products, diversion of capital and management's attention away
from other business issues and opportunities and amortization of acquired
intangible assets. Integration of acquired companies may result in problems
related to integration of technology and inexperienced management teams. Our
management has had limited experience in assimilating acquired organizations
and products into our operations. We may not successfully integrate any
operations, personnel or products that we may acquire in the future. If we fail
to successfully integrate acquisitions, our business could be materially
harmed.

Potential year 2000 problems associated with our products, our internal systems
or the products of our suppliers and customers could harm our business.

  Many currently installed computer systems and software were written to accept
and process only two digit entry codes for the year when storing dates.
Beginning with the year 2000, these entry codes will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. As a result,
computer systems and products may need to be upgraded to solve this problem to
avoid incorrect or lost data. Although we believe the products we are currently
offering are year 2000 ready, the first generation of our handheld device
product, which is no longer being sold, does not properly display the European
date format. We expect to release a downloadable software patch to fix this
problem. If any of our products do not operate properly in the year 2000, we
could have increased warranty costs, customer satisfaction issues, litigation
or other material costs or liabilities. We have relied on 3Com to address any
year 2000 readiness issues in the internal and external systems we currently
use. If 3Com's year 2000 readiness preparations are insufficient, we may be
required to bear the costs of upgrading or replacing any systems after our
separation from 3Com. In addition, we could experience delays in our ability to
manufacture and ship products and deliver services, disruptions in

                                       16
<PAGE>

our customer service and technical support facilities and interruptions of
customer access to our online products and services. We cannot assure you that
all year 2000 problems have been identified or corrected in time to prevent
serious harm to us. In addition, we have relied on assurances from third
parties, including our suppliers and manufacturers in the United States and
abroad and our wireless telecommunications network provider, BellSouth, that
they and the products and services they supply are year 2000 compliant. We have
not independently verified these assurances in many cases, and any failure of
these third-party products and services to be year 2000 compliant could harm
us. There is a risk that our users could initiate litigation against us for
damages arising from our products that are not year 2000 compliant. Year 2000
issues could harm our future results of operations, cash flows or financial
condition.

                   Risks Related to Our Separation from 3Com

We currently use 3Com's operational and administrative infrastructure, and our
business will suffer if we do not develop our own infrastructure quickly and
cost-effectively.

  We currently use 3Com's systems to support our operations, including systems
to manage inventory, order processing, human resources, shipping, accounting,
payroll and internal computing operations. Many of these systems are
proprietary to 3Com and are very complex. These systems have been modified, and
are in the process of being further modified, to enable us to separately track
items related to our business. These modifications, however, may result in
unexpected system failures or the loss or corruption of data.

  We are in the process of creating our own systems to replace 3Com's systems.
We may not be successful in implementing these systems and transitioning data
from 3Com's systems to ours.

  Any failure or significant downtime in 3Com's or our own information systems
could prevent us from taking customer orders, shipping products or billing
customers and could harm our business. In addition, 3Com's and our information
systems require the services of employees with extensive knowledge of these
information systems and the business environment in which we operate. In order
to successfully implement and operate our systems, we must be able to attract
and retain a significant number of highly skilled employees. If we fail to
attract and retain the highly skilled personnel required to implement,
maintain, and operate our information systems, our business could suffer.

  In addition, we currently have office space in 3Com's Santa Clara campus. We
have entered into arrangements with 3Com to lease these facilities under a
lease that is terminable with six months notice beginning in July 2001 and
expires in July 2002. After this transition period, we will need to find
alternative facilities. If we fail to find replacement facilities in a timely
fashion, our business will be harmed.

Our stock price and business may suffer if 3Com does not complete its
distribution of our common stock.

  3Com currently intends that, subject to obtaining approval by the 3Com board
of directors and a ruling from the Internal Revenue Service that the
distribution will be tax-free to 3Com stockholders and that our separation from
3Com qualifies as a reorganization, it will distribute to its stockholders all
of our common stock that it owns approximately six months after this offering,
although it is not obligated to do so. This distribution may not occur by that
time or at all. At the time of this offering, we will not know what the ruling
from the Internal Revenue Service regarding the tax treatment of the separation
and the distribution will be. If 3Com does not receive a favorable tax ruling,
it is not likely to make the distribution in the expected time frame or at all.
In addition, until this distribution occurs, the risks discussed below relating
to 3Com's control of us and the potential business conflicts of interest
between 3Com and us will continue to be relevant to our stockholders. If the
distribution is delayed or not completed at all, the liquidity of our shares in
the market will be severely constrained

                                       17
<PAGE>

unless and until 3Com elects to sell some of its significant ownership. There
are no limits on these sales and the sale or potential sale by 3Com could
adversely affect market prices. In addition, because of the limited liquidity
until the distribution occurs, relatively small trades of our stock will have a
disproportionate effect on our stock price. Also, if 3Com does not distribute
its shares, we will face significant difficulty hiring and retaining key
personnel, many of whom are attracted by the potential of operating our
business as a fully independent entity.

We will be controlled by 3Com as long as it owns a majority of our common
stock, and our other stockholders will be unable to affect the outcome of
stockholder voting during such time.

  After the completion of this offering and the private placements to America
Online, Motorola and Nokia, 3Com will own approximately     % of our
outstanding common stock, or approximately     % if the underwriters exercise
in full their option to purchase additional shares. As long as 3Com owns a
majority of our outstanding common stock, 3Com will continue to be able to
elect our entire board of directors and to remove any director, with or without
cause, without calling a special meeting. Investors in this offering will not
be able to affect the outcome of any stockholder vote prior to the planned
distribution of our stock to the 3Com stockholders. As a result, 3Com will
control all matters affecting us, including:

  .  the composition of our board of directors and, through it, any
     determination with respect to our business direction and policies,
     including the appointment and removal of officers;

  .  the allocation of business opportunities that may be suitable for us and
     3Com;

  .  any determinations with respect to mergers or other business
     combinations;

  .  our acquisition or disposition of assets;

  .  our financing;

  .  changes to the agreements providing for our separation from 3Com;

  .  the payment of dividends on our common stock; and

  .  determinations with respect to our tax returns.

  3Com is not prohibited from selling a controlling interest in us to a third
party.

Our historical financial information may not be representative of our results
as a separate company.

  The historical financial information we have included in this prospectus does
not reflect what our financial position, results of operations and cash flows
would have been had we been a separate, stand-alone entity during the periods
presented. 3Com did not account for us, and we were not operated, as a
separate, stand-alone entity for the periods presented. In addition, the
historical financial information is not necessarily indicative of what our
results of operations, financial position and cash flows will be in the future.
We have not made adjustments to our historical financial information to reflect
many significant changes that will occur in our cost structure, funding and
operations as a result of our separation from 3Com, including increased costs
associated with reduced economies of scale, increased marketing expenses
related to building a company brand identity separate from 3Com and increased
costs associated with being a publicly traded, stand-alone company.

We will not be able to rely on 3Com to fund our future capital requirements,
and we cannot assure you that financing from other sources will be available on
favorable terms or at all.

  In the past, our capital needs have been satisfied by 3Com. However,
following our separation, 3Com will no longer provide funds to finance our
working capital or other cash requirements. We

                                       18
<PAGE>

cannot assure you that financing from other sources, if needed, will be
available on favorable terms or at all.

  We believe our capital requirements will vary greatly from quarter to
quarter, depending on, among other things, capital expenditures, fluctuations
in our operating results, financing activities, acquisitions and investments
and inventory and receivables management. We believe that the proceeds from
this offering, along with our future cash flow from operations, will be
sufficient to satisfy our working capital, capital expenditure and research and
development requirements for the foreseeable future. However, we may require or
choose to obtain additional debt or equity financing in order to finance
acquisitions or other investments in our business. Future equity financings
would be dilutive to the existing holders of our common stock. Future debt
financings could involve restrictive covenants. We will likely not be able to
obtain financing with interest rates as favorable as those that 3Com could
obtain.

We may have potential business conflicts of interest with 3Com with respect to
our past and ongoing relationships that could harm our business operations.

  Conflicts of interest may arise between 3Com and us in a number of areas
relating to our past and ongoing relationships, including:

  .  labor, tax, employee benefit, indemnification and other matters arising
     from our separation from 3Com;

  .  intellectual property matters;

  .  employee retention and recruiting;

  .  sales or distributions by 3Com of all or any portion of its ownership
     interest in us;

  .  the nature, quality and pricing of transitional services 3Com has agreed
     to provide us; and

  .  business opportunities that may be attractive to both 3Com and us.

  Nothing restricts 3Com from competing with us.

  We may not be able to resolve any potential conflicts, and even if we do, the
resolution may be less favorable than if we were dealing with an unaffiliated
party. The agreements we have entered into with 3Com may be amended upon
agreement between the parties. While we are controlled by 3Com, 3Com may be
able to require us to agree to amendments to these agreements that may be less
favorable to us than the current terms of the agreements.

Our directors and executive officers may have conflicts of interest because of
their ownership of 3Com common stock.

  Many of our directors and executive officers have a substantial amount of
their personal financial portfolios in 3Com common stock and options to
purchase 3Com common stock. Their options to purchase 3Com common stock may not
convert into options to purchase our common stock if the distribution does not
occur. Ownership of 3Com common stock by our directors and officers after our
separation from 3Com could create, or appear to create, potential conflicts of
interest when directors and officers are faced with decisions that could have
different implications for 3Com and us.

If the transitional services being provided to us by 3Com are not sufficient to
meet our needs, or if we are not able to replace these services after our
agreements with 3Com expire, we will be unable to manage critical operational
functions of our business.

  3Com has agreed to provide transitional services to us, including services
related to:

  .  information technology systems;

                                       19
<PAGE>

  .  supply chain;

  .  human resources administration;

  .  product order administration;

  .  customer service;

  .  buildings and facilities;

  .  treasury; and

  .  legal, finance and accounting.

  Although 3Com is contractually obligated to provide us with these services,
these services may not be provided at the same level as when we were part of
3Com, and we may not be able to obtain the same benefits. We will also lease
and sublease office space from 3Com. These transitional service and leasing
arrangements generally have a term of less than two years following the
separation. After the expiration of these various arrangements, we may not be
able to replace the transitional services or enter into appropriate leases in a
timely manner or on terms and conditions, including cost, as favorable as those
we will receive from 3Com.

  These agreements were made in the context of a parent-subsidiary relationship
and were negotiated in the overall context of our separation from 3Com. The
prices charged to us under these agreements may be lower than the prices that
we may be required to pay third parties for similar services or the costs of
similar services if we undertake them ourselves.

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

Substantial sales of common stock may occur in connection with the
distribution, which could cause our stock price to decline.

  3Com currently intends to distribute the approximately          shares of our
common stock it owns to 3Com stockholders approximately six months after this
offering. Substantially all of these shares will be eligible for immediate
resale in the public market. We are unable to predict whether significant
amounts of common stock will be sold in the open market in anticipation of, or
following, this distribution, or by 3Com if the distribution does not occur. We
are also unable to predict whether a sufficient number of buyers will be in the
market at that time. Any sales of substantial amounts of common stock in the
public market, or the perception that such sales might occur, whether as a
result of this distribution or otherwise, could harm the market price of our
common stock.

Our securities have no prior market, and we cannot assure you that our stock
price will not decline after the offering.

  Before this offering, there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. The market price of our common stock could be
subject to significant fluctuations after this offering. Among the factors that
could affect our stock price are:

  .  quarterly variations in our operating results;

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

  .  speculation in the press or investment community;

  .  strategic actions by us or our competitors, such as acquisitions or
     restructurings;

  .  actions by institutional stockholders or by 3Com prior to its
     distribution of our stock;

                                       20
<PAGE>

  .  general market conditions; and

  .  domestic and international economic factors unrelated to our
     performance.

  The stock markets in general, and the markets for high technology stocks in
particular, have experienced extreme 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. In
particular, we cannot assure you that you will be able to resell your shares at
or above the initial public offering price, which will be determined by
negotiations between the representatives of the underwriters and us.

Provisions in our charter documents and Delaware law may delay or prevent
acquisition of us, which could decrease the value of your shares.

  Our certificate of incorporation and bylaws and Delaware law contain
provisions that could make it harder for a third party to acquire us without
the consent of our board of directors, although these provisions have little
significance while we are controlled by 3Com. These provisions include a
classified board of directors and limitations on actions by our stockholders by
written consent. 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. 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. 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.

Purchasers in this offering will experience immediate dilution in net tangible
book value per share.

  Purchasers of our common stock in this offering and the America Online,
Motorola and Nokia private placements will experience immediate dilution of
$         in net tangible book value per share.

                                       21
<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

  You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify these
forward-looking statements. This prospectus also contains forward-looking
statements attributed to third parties relating to their estimates regarding
the growth of our markets. Forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that may cause our actual
results, as well as those of the markets we serve, levels of activity,
performance, achievements and prospects to be materially different from those
expressed or implied by the forward-looking statements. These risks,
uncertainties and other factors include, among others, those identified in
"Risk Factors" and elsewhere in this prospectus.

                                       22
<PAGE>

                            OUR SEPARATION FROM 3COM

Overview

  On September 13, 1999, 3Com announced its plan to make Palm, a wholly-owned
subsidiary, into an independent, publicly-traded company focused on the
handheld device industry. Until the completion of this offering, we will
continue as a wholly-owned subsidiary of 3Com. We expect that the separation of
our business from 3Com, including the transfer of related assets, liabilities
and intellectual property rights, will be substantially completed before the
completion of this offering.

 Benefits of the Separation

  We believe that we will realize benefits from our complete separation from
3Com, including the following:

    Greater Strategic Focus. In addition to the Palm handheld computing
  business, 3Com generates significant revenue from other lines of products,
  including switches, hubs, remote access systems, routers, network
  management software, network interface cards and modems. Our focus will be
  on developing businesses and strategic opportunities for handheld devices.
  This effort will be supported by our own board of directors, management
  team and employees.

    Increased Speed and Responsiveness. As a company smaller in size than
  3Com, we expect to be able to make decisions more quickly, deploy resources
  more rapidly and efficiently and operate with more agility than we could as
  a part of a larger organization. In addition, we expect to enhance our
  responsiveness to customers and partners.

    Better Incentives for Employees and Greater Accountability. We expect the
  motivation of our employees and the focus of our management will be
  strengthened by incentive compensation programs tied to the market
  performance of our common stock. The separation will enable us to offer our
  employees compensation directly linked to the performance of the Palm
  business, which we expect to enhance our ability to attract and retain
  qualified personnel.

    More Direct Access to Capital Markets. As a separate company, we will
  have more direct access to the capital markets to issue debt or equity
  securities and to grow through acquisitions.

 Separation and Transitional Arrangements

  We and 3Com, and, in some cases, our respective subsidiaries, will enter into
agreements providing for the separation of our businesses from 3Com, including
a master separation and distribution agreement. These agreements generally
provide for, among other things:

  .  the transfer from 3Com to us of assets and the assumption by us of
     liabilities relating to our business;

  .  the allocation of intellectual property between us and 3Com; and

  .  various interim and ongoing relationships between us and 3Com.

The Distribution by 3Com of Our Common Stock

  After completion of this offering, 3Com will own approximately     % of the
outstanding shares of our common stock, or approximately     % if the
underwriters fully exercise their option to purchase additional shares. 3Com
currently plans to complete its divestiture of Palm approximately

                                       23
<PAGE>

six months after this offering by distributing all of its shares of our common
stock to the holders of 3Com's common stock. However, 3Com is not obligated to
complete the distribution, and we cannot assure you as to whether or when it
will occur.

  3Com has advised us that it would not complete the distribution if its board
of directors determines that the distribution is no longer in the best interest
of 3Com and its stockholders. 3Com has further advised us that it currently
expects that the principal factors that it would consider in determining
whether and when to complete the distribution include:

  .  the relative market prices of our common stock and 3Com's common stock;

  .  the issuance by the Internal Revenue Service of a ruling that the
     distribution will be tax-free to 3Com stockholders and that the
     transaction will qualify as a reorganization for United States federal
     income tax purposes;

  .  the absence of any court orders or regulations prohibiting or
     restricting the completion of the distribution; and

  .  other conditions affecting our business or 3Com's business.

                                       24
<PAGE>

                                USE OF PROCEEDS

  We estimate that our net proceeds from this offering will be approximately
$         , based on an assumed initial public offering price of $        per
share and after deducting an assumed underwriting discount and estimated
offering expenses payable by us. We estimate that our net proceeds from the
private placements to America Online, Motorola and Nokia will be approximately
$   , based on an assumed offering price of $   per share. We intend to use the
proceeds of this offering and the private placements for:

  .  payment of a dividend to 3Com approximately equal to its tax basis in
     Palm, which was approximately $   million at     , 2000;

  .  repayment of an intercompany payable to 3Com, which was approximately
     $49 million at August 27, 1999;

  .  increased capital expenditures to support anticipated growth in
     operations, infrastructure for our wireless and Internet services and
     hardware and software for our information systems and personnel;

  .  increased marketing expenses to establish our Palm brand;

  .  replacing the working capital retained by 3Com and funding our increased
     working capital needs associated with revenue growth; and

  .  potential investments in, or acquisitions of, other businesses or
     technologies.

                                DIVIDEND POLICY

  We currently intend to retain any future earnings to fund the development and
growth of our business. Therefore, other than the cash dividend to 3Com to be
paid with a portion of the proceeds of this offering, we do not anticipate
paying any cash dividends in the foreseeable future.

                                       25
<PAGE>

                                 CAPITALIZATION

  The following table sets forth our capitalization as of August 27, 1999. Our
capitalization is presented:

  .  on an actual basis;

  .  on a pro forma basis to give effect to the retention of most of our
     accounts receivable and accounts payable by 3Com at the time of our
     separation, as though such retention had occurred as of August 27, 1999,
     the payment of a dividend to 3Com equal to its tax basis in Palm, which
     was approximately $   million at     , 2000, and the reclassification of
     approximately $49 million at August 27, 1999 from 3Com Corporation
     equity to an intercompany payable to 3Com; and

  .  on a pro forma as adjusted basis to reflect our receipt of the estimated
     net proceeds from the sale of     shares of common stock in this
     offering and our sale of     shares in the private placements to America
     Online, Motorola and Nokia and the payment of the amounts payable to
     3Com Corporation.

  You should read the information set forth below together with "Selected
Consolidated Financial Data," our historical consolidated financial statements
and the notes to those statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
                                     August 27, 1999
                               ------------------------------
                                           Pro     Pro Forma
                                Actual    Forma   As Adjusted
                               --------  -------  -----------
                                      (in thousands)
<S>                            <C>       <C>      <C>
Payable to 3Com
 Corporation(1)(2)............ $    --   $48,902      $
                               ========  =======     =====
Stockholders' equity:
  Preferred stock............. $    --   $   --      $ --
  Common stock................      --       --
  Additional paid-in capital..      --       --
  3Com Corporation
   equity(1)(2)...............  113,413
  Accumulated other
   comprehensive income
   (loss).....................     (118)    (118)     (118)
                               --------  -------     -----
    Total stockholders'
     equity................... $113,295  $           $
                               ========  =======     =====
      Total capitalization.... $113,295  $           $
                               ========  =======     =====
</TABLE>
--------
Notes:
(1) We intend to declare a dividend payable to 3Com approximately equal to its
    tax basis in Palm. We intend to pay this dividend using a portion of the
    proceeds from this offering.
(2) Intercompany payable amounts due to 3Com are included as a component of
    3Com Corporation equity as no interest was charged on such balances and
    there was no scheduled repayment. We intend to repay our intercompany
    payable to 3Com, which was approximately $49 million as of August 27, 1999,
    using a portion of the proceeds of this offering.

                                       26
<PAGE>

                                    DILUTION

  Our net tangible book value at August 27, 1999 was approximately $100.6
million, or $      per share. Net tangible book value per share is determined
by dividing our tangible net worth, which is total tangible assets less total
liabilities, by the number of shares of common stock outstanding after giving
effect to the     -for-one stock split immediately before this offering and the
private placements. Dilution in net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the private placements and the net tangible
book value per share of our common stock immediately afterwards. After giving
effect to the following:

  .  our sale of     shares of common stock in this offering at an assumed
     initial public offering price of $   per share and after deducting an
     assumed underwriting discount and estimated offering expenses payable by
     us;

  .  our sale of     shares of common stock to America Online, Motorola and
     Nokia concurrently with the closing of this offering at an assumed
     offering price of $   per share;

  .  retention of most of our accounts receivable and accounts payable by
     3Com at the time of our separation as though such retention had occurred
     as of August 27, 1999;

  .  payment of a dividend to 3Com approximately equal to its tax basis in
     Palm, which was approximately $   million at     , 2000; and

  .  repayment of an intercompany payable to 3Com, which was approximately
     $49 million at August 27, 1999;

our pro forma as adjusted net tangible book value at August 27, 1999 would have
been approximately $   , or $   per share. This represents an immediate
increase in net tangible book value of $       per share to our existing
stockholder and an immediate dilution in net tangible book value of $       per
share to new investors purchasing shares of common stock in this offering and
the private placements. The following table illustrates this dilution per
share:

<TABLE>
<S>                                                          <C>       <C>
Assumed initial public offering price per share.............           $
  Pro forma net tangible book value per share as of August
   27, 1999................................................. $
  Increase in pro forma book value per share attributable to
   new investors (including the private placements).........
Pro forma, as adjusted, net tangible book value per share
 after this offering and the private placements.............
                                                                       -------
Dilution in pro forma net tangible book value per share to
 new investors (including the private placements)...........           $
                                                                       =======
</TABLE>

  The discussion and table above assume no exercise of options outstanding
under our 1999 Stock Plan and no issuance of shares reserved for future
issuance under our 1999 Employee Stock Purchase Plan. As of August 27, 1999,
there were options outstanding to purchase a total of           shares of
common stock at a weighted average price of $    per share. To the extent that
any of these options are exercised, there will be further dilution to new
investors.

                                       27
<PAGE>

  The following table sets forth, as of August 27, 1999 on the pro forma as
adjusted basis described above, the differences between the number of shares of
common stock purchased from us, the total price paid and average price per
share paid by our existing stockholder and by the new investors in this
offering and the private placements at an assumed initial public offering price
of $      per share, before deducting the estimated underwriting discounts and
commissions and offering expenses payable by us, and after giving effect to the
    -for-one stock split immediately before this offering and the private
placements.

<TABLE>
<CAPTION>
                                                          Total        Average
                                  Shares Purchased    Consideration     Price
                                  ----------------- ------------------   Per
                                  Number Percentage Amount  Percentage  Share
                                  ------ ---------- ------- ---------- -------
<S>                               <C>    <C>        <C>     <C>        <C>
Existing stockholder.............               %   $              %   $
New investors (including the
 private placements).............
                                  ------   -----    -------   -----    -------
  Total..........................          100.0%   $         100.0%
                                  ======   =====    =======   =====    =======
</TABLE>

  If the underwriters' option to purchase additional shares is exercised in
full, the following will occur:

  .  the number of shares of common stock held by our existing stockholder
     will decrease to approximately      % of the total number of shares of
     common stock outstanding; and

  .  the number of shares held by new public investors will be increased to
              or approximately      % of the total number of shares of our
     common stock outstanding after this offering.

                                       28
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

  The following tables present our selected consolidated financial data. The
information set forth below should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our historical consolidated financial statements and notes to those statements
included in this prospectus. Our consolidated statements of operations data set
forth below for the years ended May 25, 1997, May 31, 1998 and May 28, 1999 and
the consolidated balance sheet data as of May 31, 1998 and May 28, 1999 are
derived from our audited consolidated financial statements included in this
prospectus which have been audited by Deloitte & Touche LLP, independent
auditors, whose report is also included in this prospectus.

  The consolidated statements of operations data for the year ended June 30,
1995 and the eleven month period ended May 26, 1996 and the consolidated
balance sheet data as of June 30, 1995, May 26, 1996 and May 25, 1997 are
derived from our unaudited consolidated financial data that is not included in
this prospectus. The consolidated statements of operations data for the three
months ended August 28, 1998 and August 27, 1999 and the consolidated balance
sheet data as of August 27, 1999 are derived from unaudited consolidated
financial statements included in this prospectus and, in the opinion of
management, include all adjustments, consisting only of normal recurring
accruals, that are necessary for a fair presentation of our financial position
and results of operations for these periods. The historical financial
information may not be indicative of our future performance and does not
reflect what our financial position and results of operations would have been
had we operated as a separate, stand-alone entity during the periods presented.
<TABLE>
<CAPTION>
                                                                              Three Months
                                          Years Ended                             Ended
                          ------------------------------------------------  ------------------
                          June 30,  May 26,   May 25,   May 31,   May 28,   Aug. 28,  Aug. 27,
                          1995(1)   1996(2)     1997      1998      1999      1998      1999
                          --------  --------  --------  --------  --------  --------  --------
                                       (in thousands, except per share data)
<S>                       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Consolidated Statements
 of Operations Data:
Revenues................  $ 1,403   $ 7,054   $114,157  $272,137  $563,525  $116,069  $176,505
Cost of revenues........      174     4,479     77,685   157,749   315,616    62,998    98,324
                          -------   -------   --------  --------  --------  --------  --------
 Gross profit...........    1,229     2,575     36,472   114,388   247,909    53,071    78,181
                          -------   -------   --------  --------  --------  --------  --------
Operating expenses:
 Sales and marketing....    1,099     2,783     30,305    70,765   127,726    23,969    42,648
 Research and
  development...........    1,384     4,716     13,442    21,863    46,027     9,738    12,507
 General and
  administrative........      977     1,853      6,238    15,299    23,692     6,233     7,160
 Purchased in-process
  technology............      --        --         --         --     2,125       --        --
                          -------   -------   --------  --------  --------  --------  --------
  Total operating
   expenses.............    3,460     9,352     49,985   107,927   199,570    39,940    62,315
                          -------   -------   --------  --------  --------  --------  --------
Operating income
 (loss).................   (2,231)   (6,777)   (13,513)    6,461    48,339    13,131    15,866
Interest and other
 expense, net...........       65        81       (515)      (56)     (223)      (25)      (63)
                          -------   -------   --------  --------  --------  --------  --------
Income (loss) before
 income taxes...........   (2,166)   (6,696)   (14,028)    6,405    48,116    13,106    15,803
Income tax provision
 (credit)...............      --     (3,634)    (6,166)    2,234    18,488     5,036     6,145
                          -------   -------   --------  --------  --------  --------  --------
Net income (loss).......  $(2,166)  $(3,062)  $ (7,862) $  4,171  $ 29,628  $  8,070  $  9,658
                          =======   =======   ========  ========  ========  ========  ========
Unaudited pro forma net
 income per share:
 Basic..................                                          $                   $
                                                                  ========            ========
 Diluted................                                          $                   $
                                                                  ========            ========
Shares used in computing
 unaudited pro forma net
 income per share:
 Basic..................
                                                                  ========            ========
 Diluted................
                                                                  ========            ========
Supplemental unaudited
 pro forma net income
 per share:
 Basic..................                                          $                   $
                                                                  ========            ========
 Diluted................                                          $                   $
                                                                  ========            ========
Shares used in computing
 supplemental unaudited
 pro forma net income
 per share:
 Basic..................
                                                                  ========            ========
 Diluted................
                                                                  ========            ========
<CAPTION>
                                    June 30,  May 26,   May 25,   May 31,   May 28,   Aug. 27,
                                    1995(1)   1996(2)     1997      1998      1999      1999
                                    --------  --------  --------  --------  --------  --------
                                                        (in thousands)
<S>                       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Consolidated Balance Sheet Data:
Working capital..................   $   318   $  4,651  $ 31,375  $ 68,971  $ 52,509  $ 91,074
Total assets.....................     2,432      9,618    45,984   115,359   152,247   201,346
Stockholder's net investment.....       627      7,218    35,657    81,292    74,527   113,295
</TABLE>
-------
Notes:
(1)Our fiscal year end was June 30 prior to our acquisition by 3Com.
(2)Fiscal 1996 includes only eleven months of operating results.

                                       29
<PAGE>

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

  The following discussion of our financial condition and results of operations
should be read together with our consolidated financial statements and notes to
those statements included elsewhere in this prospectus. The following
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
contemplated by these forward-looking statements due to a number of factors,
including those discussed below and elsewhere in this prospectus.

Overview

  We were founded in 1992 and introduced our first handheld device in 1996. We
are currently a wholly-owned subsidiary of 3Com. Our business has focused
primarily on developing and selling our Palm-branded handheld devices, and as
of December 1, 1999, we had sold over 5 million Palm devices worldwide. In
1999, we expanded our strategy of licensing our Palm platform and developed our
wireless Internet access service to support Internet-enabled handheld devices.

  On September 13, 1999, 3Com announced its plan to make us an independent,
publicly-traded company focused on the handheld device industry. After the
completion of this offering, 3Com will own approximately  % of our outstanding
common stock, or approximately  % if the underwriters fully exercise their
option to purchase additional shares. 3Com currently intends to complete its
divestiture of Palm approximately six months after this offering by
distributing all of its shares of our common stock to the holders of 3Com's
common stock.

  We have entered into various agreements related to interim and ongoing
relationships with 3Com. These agreements provide for transitional services and
support in the areas of information technology systems, supply chain, human
resources administration, product order administration, customer service,
buildings and facilities, treasury, legal and finance and accounting. Specified
charges for transitional services are generally at cost plus 5%, but may
increase to cost plus 10% if the services extend beyond a one-year period. The
transition period varies depending on the agreement but is generally less than
two years. Although the fees provided for in the agreements are intended to
represent the fair market value of these services, we cannot assure you that
these fees necessarily reflect the costs of obtaining the services from
unrelated third parties or of our providing these services internally. However,
we believe that purchasing these services from 3Com provides an efficient means
of obtaining these services during the transition period.

  We must also negotiate new or revised agreements with various third parties
as a separate, stand-alone entity. We cannot assure you that the terms we will
be able to negotiate will be as favorable as those that we enjoyed as part of
3Com. In addition, as part of 3Com, we benefited from various economies of
scale including shared global administrative functions, facilities and volume
purchase discounts. We expect our costs will increase as a result of the loss
or renegotiation of these arrangements, although the amount of the cost
increase is not determinable at this time.

 Our Business

  Substantially all of our revenues to date have been generated from sales of
our handheld devices and, to a lesser extent, peripherals and accessories. We
have not derived material revenues to date from licensing our Palm platform or
from subscriptions to our wireless Internet access service. As we expand our
focus on Palm platform licensing and Internet services, we expect that an
increasing portion of our revenues in future periods will come from these
sources. International revenues represented 29% of our total revenues in fiscal
1999 and 31% of our total revenues for the three months ended August 27, 1999.

                                       30
<PAGE>

  Revenues from our handheld devices consist primarily of sales to
distributors, retailers and resellers and to end users who buy directly from us
through our Palm.com website. We recognize revenues when the product has been
shipped, risk of loss has passed to the customer and collection of the
resulting receivable is deemed probable. We provide for estimated product
returns, warranty, royalties and post-contract support obligations at the time
of sale. We provide a 12-month limited warranty on our products. We generally
grant price protection to our distributors, retailers and resellers at the time
of price reductions.

  Revenues from licenses of the Palm platform are derived from agreements with
our licensees that range from three to five years in length. Revenues from our
software license agreements are recognized on a per-unit royalty basis or as
specified in the agreement. Related maintenance and support revenues are
recognized ratably over the term of the agreement.

  Revenues from Internet services consist primarily of fees paid by subscribers
for our wireless Internet access service. We recognize subscription service
revenues over the period during which services are provided, typically one
month.

  The mix of our device products has a significant impact on gross margins. In
the past, prices of specific models of handheld devices have declined over
time. Our average selling prices across our product lines have increased
moderately due to our introduction of new and higher priced products. We cannot
be sure that we will continue to maintain our average selling prices in the
future and we expect our ability to do so will be challenged by increased
competition. If we are unable to maintain our average selling prices, our gross
margins will decline. Other factors that will affect our gross margins include
the product and services mix in any particular period, competitive pressures,
manufacturing costs, levels of volume discounts for components and sub-
assemblies and distribution costs.

  We also expect our gross margins to fluctuate due to changes in our product
and services mix as we expand our focus on licensing the Palm platform and
selling our Internet services. As the relatively low gross margin of our
Internet subscription service revenues grow as a percentage of total Palm
revenues, we expect our overall gross margins to decline. In the short term, we
expect Internet services gross margins to be negative because we have
significant fixed costs associated with providing our Internet access service.
We expect that over time the growth of our licensing revenue, which we expect
to continue to have a higher gross margin than our device and Internet service
revenues, will contribute positively to our overall gross margins.

  We expect to increase our operating expenses significantly as we invest in
the Palm platform and Internet services areas of our business. In addition, we
expect sales and marketing expenses to increase significantly as we focus on
establishing ourselves as a stand-alone entity. We also plan to increase
branding activities for our devices as well as for the Palm platform and our
Internet services. We expect research and development expenses to increase
significantly as we focus on developing the Palm platform for our licensees in
the handheld device and other markets and on building our Internet services. In
addition, for a period of time before the separation from 3Com and during the
transition period thereafter, we will increase general and administrative
expenses as we implement our own information system infrastructure and build
the corporate resources required to operate as a public company. During this
transition period, we will incur duplicative costs until we can operate solely
on our own infrastructure. As a result of these increased operating expenses,
we expect to incur net losses and negative cash flows from operations for
several quarters following this offering.

 Basis of Presentation

  Prior to June 1, 1998, our 52-53 week fiscal year ended on the Sunday nearest
to May 31. Effective June 1, 1998, we changed our fiscal year to a 52-53 week
fiscal year ending on the Friday nearest to May 31. Unless otherwise stated,
all years and dates refer to our fiscal year and fiscal periods.

                                       31
<PAGE>

  Our consolidated financial statements have been carved out from the
consolidated financial statements of 3Com using the historical results of
operations and historical bases of the assets and liabilities of the 3Com
business that Palm comprises. The consolidated financial statements also
include allocations to us of 3Com corporate expenses, including centralized
legal, accounting, treasury, real estate, information technology, distribution,
customer services, sales, marketing, engineering and other 3Com corporate
services and infrastructure costs. The expense allocations have been determined
on bases that 3Com and we considered to be reasonable reflections of the
utilization of the services provided to us or the benefit received by us.
Expenses were allocated based on relative revenues, headcount or square
footage.

  The financial information presented in this prospectus is not indicative of
our financial position, results of operations or cash flows in the future, nor
is it necessarily indicative of what our financial position, results of
operations or cash flows would have been had we been a separate, stand-alone
entity for the periods presented. The financial information presented in this
prospectus does not reflect the many significant changes that will occur in our
funding and operations as a result of our becoming a stand-alone entity and
this offering.

Results of Operations

  The following table sets forth consolidated statements of operations data
expressed as a percentage of revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                                Three Months
                                            Years Ended             Ended
                                      ----------------------- -----------------
                                      May 25, May 31, May 28, Aug. 28, Aug. 27,
                                       1997    1998    1999     1998     1999
                                      ------- ------- ------- -------- --------
<S>                                   <C>     <C>     <C>     <C>      <C>
Revenues.............................   100%    100%    100%    100%     100%
Cost of revenues.....................    68      58      56      54       56
                                        ---     ---     ---     ---      ---
Gross profit.........................    32      42      44      46       44
                                        ---     ---     ---     ---      ---
Operating expenses:
  Sales and marketing................    27      26      23      22       24
  Research and development...........    12       8       8       8        7
  General and administrative.........     5       5       4       5        4
  Purchased in-process technology....   --      --        1     --       --
                                        ---     ---     ---     ---      ---
    Total operating expenses.........    44      39      36      35       35
                                        ---     ---     ---     ---      ---
Operating income (loss)..............   (12)      3       8      11        9
Interest and other expense, net......   --      --      --      --       --
                                        ---     ---     ---     ---      ---
Income (loss) before income taxes....   (12)      3       8      11        9
Income tax provision (credit)........    (5)      1       3       4        4
                                        ---     ---     ---     ---      ---
Net income (loss)....................    (7)%     2%      5%      7%       5%
                                        ===     ===     ===     ===      ===
</TABLE>

Three Months Ended August 27, 1999 and August 28, 1998

 Revenues

  Revenues in the three months ended August 27, 1999 and August 28, 1998
consisted almost entirely of revenues from sales of our handheld device
products. Revenues were $176.5 million in the three months ended August 27,
1999, a 52% increase over revenues of $116.1 million in the three months ended
August 28, 1998. The increase in revenues resulted from increased demand for
our handheld devices, which reflects the growing market adoption of our
products. Average selling prices over this period remained relatively constant.
International revenues have become an increasing percentage of our total
revenues, increasing to 31% of total revenues in the three months

                                       32
<PAGE>

ended August 27, 1999 from 21% in the three months ended August 28, 1998. As we
continue to expand the number of international markets we serve, we expect our
international business to become an increasing percentage of our overall
business.

 Gross Margin

  Gross margin is the excess of revenues over cost of revenues expressed as a
percentage of revenues. Cost of revenues includes product manufacturing,
warranty and technical support costs and, beginning in the three months ended
August 27, 1999, costs related to our wireless Internet service resulting from
the introduction of our Palm VII product. Gross margin was 44% of revenues in
the three months ended August 27, 1999, a two percentage point decline from a
gross margin of 46% of revenues in the three months ended August 28, 1998. The
decline in gross margin in the three months ended August 27, 1999 was a result
of cost of revenues including significant fixed costs related to our wireless
Internet service, which we expect to continue to incur.

 Sales and Marketing

  Sales and marketing expenses consist primarily of employee compensation and
commissions, advertising, promotional materials, conferences, meetings and
marketing development. Sales and marketing expenses were $42.6 million in the
three months ended August 27, 1999, a 78% increase over expenses of $24.0
million in the three months ended August 28, 1998. Sales and marketing expenses
represented 24% of revenues in the three months ended August 27, 1999 compared
to 22% in the three months ended August 28, 1998. These expenses increased due
to additional spending on demand generation activities, such as point of
purchase displays for retail sales channels and advertising promotional
materials, as we prepared to launch the Palm Vx device and extend the launch of
the Palm VII device nationwide in the second quarter of fiscal 2000.

 Research and Development

  Research and development expenses consist primarily of employee compensation
and related costs associated with our product development efforts, including
third-party consulting and prototyping costs. Research and development expenses
were $12.5 million in the three months ended August 27, 1999, a 29% increase
over expenses of $9.7 million in the three months ended August 28, 1998.
Research and development expenses represented 7% of revenues in the three
months ended August 27, 1999 compared to 8% in the three months ended August
28, 1998. The increase in research and development spending from period to
period was primarily a result of increased personnel and related costs
associated with a larger research and development organization that is
designing new handheld devices as well as developing new releases of the Palm
platform. Increased spending in the later period also resulted, to a lesser
extent, from design and prototype expenses incurred in connection with new
handheld devices that are currently under development.

 General and Administrative

  General and administrative expenses consist primarily of employee
compensation, professional and contractor fees and provisions for doubtful
accounts receivable. General and administrative expenses were $7.2 million in
the three months ended August 27, 1999, an increase of 16% over expenses of
$6.2 million in the three months ended August 28, 1998. The increase in
expenses is due to increased infrastructure costs as a result of our continued
growth. As a percentage of revenues, general and administrative expenses
decreased to 4% in the three months ended August 27, 1999 from 5% in the three
months ended August 28, 1998. The decrease as a percentage of revenues was the
result of expenses, primarily personnel related, growing at a slower rate than
revenues. We expect general and administrative expenses to increase in dollar
amount and as a

                                       33
<PAGE>

percentage of revenues in future periods as we continue to build our
infrastructure to support operating as a stand-alone, publicly-held company.

 Income Tax Provision

  Our operating results historically have been included in 3Com's consolidated
United States federal and state income tax returns. The provision for income
taxes in our consolidated financial statements has been determined on a
separate return basis. Our effective tax rate in the three months ended August
27, 1999 was 39% compared to 38% in the three months ended August 28, 1998.
This rate is based on estimates of our income before taxes for federal and
state tax jurisdictions. As foreign subsidiaries are established in the future,
our mix of income before taxes in the various tax jurisdictions could cause the
effective tax rate to fluctuate. Our tax liability for periods prior to the
date of 3Com's distribution will be determined in accordance with our tax
sharing agreement with 3Com.

Years Ended May 28, 1999, May 31, 1998 and May 25, 1997

 Revenues

  Revenues from handheld devices were $563.5 million in fiscal 1999, an
increase of 107% over fiscal 1998. Revenues in fiscal 1998 were $272.1 million,
an increase of 138% over revenues of $114.2 million in fiscal 1997. The growth
in revenues in both years was primarily due to increasing unit sales as a
result of increasing demand for our handheld devices. We have increased demand
by regularly adding new differentiated products to our product line. We added
the Palm IIIx, Palm V and Palm VII devices to our product line in fiscal 1999.
We introduced the Palm III device late in fiscal 1998. We introduced the
PalmPilot Professional and PalmPilot Personal devices in late fiscal 1997.
Declining prices of existing products over the three-year period have been
offset by introducing an increasingly broad range of new products with
additional features such as increased memory, backlit screens, higher
resolution screens, sleeker styling, thinner and lighter form factor, and
wireless Internet capability. As a result, average selling prices have
increased moderately, although we do not expect this trend to continue in
future years.

 Gross Margin

  Gross margin was 44% in fiscal 1999, a two percentage point increase over
fiscal 1998. Gross margin was 42% in fiscal 1998, a 10 percentage point
increase over gross margin of 32% in fiscal 1997. The improvement in gross
margin in fiscal 1999 reflects increased sales of higher margin Palm IIIx and
Palm V products, as well as reduced manufacturing costs due to better pricing
that we were able to obtain from our component suppliers and contract
manufacturers. The improvement in gross margin in fiscal 1998 reflects product
cost improvements through engineering design changes, significant volume-
related cost reductions from component suppliers and contract manufacturers and
reduced period costs relative to fiscal 1997, which had higher than normal
period costs as a result of establishing manufacturing operations and
introducing new products.

 Sales and Marketing

  Sales and marketing expenses were $127.7 million in fiscal 1999, an 80%
increase over fiscal 1998. Sales and marketing expenses were $70.8 million in
fiscal 1998, a 134% increase over expenses of $30.3 million in fiscal 1997.
Sales and marketing expenses comprised 23% of revenues in fiscal 1999 as
compared to 26% of revenues in fiscal 1998 and 27% in fiscal 1997. Due to the
slower growth in our sales organization in fiscal 1999 and the continued rapid
growth in our revenues, sales and marketing expenses as a percentage of
revenues declined by three percentage points in fiscal 1999 compared to fiscal
1998. The absolute dollar increase in sales and marketing

                                       34
<PAGE>

expenses in fiscal 1999 resulted primarily from increased advertising,
including expenditures on our "Simply Palm" national advertising campaign, and
increased product introduction activities associated with the launches of our
Palm IIIe, Palm IIIx, Palm V and Palm VII handheld devices. These launch
activities included increased personnel-related expenses associated with
increasing the size of our marketing organization, increased trade show
activities and related travel expenses, point of sale displays, sales
collateral and marketing development. The absolute dollar increase in sales and
marketing expenses in fiscal 1998 was primarily the result of the expansion of
our sales organization into Europe, continued growth of our sales and marketing
organization in the United States and our first international product launch
for the Palm III handheld devices at the CBIT technology show in Germany in
March 1998.

 Research and Development

  Research and development expenses were $46.0 million in fiscal 1999, a 110%
increase over fiscal 1998. Research and development expenses were $21.9 million
in fiscal 1998, a 63% increase over expenses of $13.4 million in fiscal 1997.
The absolute dollar increase in research and development expenses resulted
primarily from increased personnel-related expenses associated with expanding
the size of our engineering organization and increased expenses related to
contractors, consultants, prototyping and project materials. Research and
development expenses as a percentage of revenues were 8% in fiscal 1999
compared to 8% in fiscal 1998 and 12% in fiscal 1997. The decrease in research
and development expenses as a percentage of revenues from fiscal 1997 to fiscal
1998 resulted from economies of scale. During fiscal 1999 and fiscal 1998 we
supported the development of two new families of handheld products, the Palm V
and Palm VII product families, and two new additions to the Palm III family,
the Palm IIIx and the Palm IIIe. In addition, we incurred significant
engineering costs to develop our wireless Internet access service that supports
our wireless Palm VII device. In fiscal 1999, we also added engineering staff
in order to begin development programs for two new releases of our platform
software as well as future handheld devices.

 General and Administrative

  General and administrative expenses were $23.7 million in fiscal 1999, a 55%
increase over fiscal 1998. General and administrative expenses were $15.3
million in fiscal 1998, an increase of 147% over expenses of $6.2 million in
fiscal 1997. General and administrative expenses as a percentage of revenues
were 4% in fiscal 1999 compared to 5% in fiscal 1998 and fiscal 1997. The
absolute dollar increases in general and administrative expenses resulted
primarily from increased personnel-related expenses and shared infrastructure
costs with 3Com to support the growth of our business. In addition, general and
administrative expenses were higher in fiscal 1998 compared to fiscal 1997 as a
result of an increased provision for doubtful accounts receivable.

 Purchased In-Process Technology

  We acquired Smartcode Technologie SARL on February 8, 1999 for $17.4 million
in cash, including approximately $200,000 in costs directly related to the
acquisition. Approximately $2.1 million of the purchase price represented
purchased in-process technology that had not yet reached technological
feasibility, had no alternative future use and was charged to operations in the
third quarter of fiscal 1999.

 Income Tax Provision

  Our effective tax rate was 38% in fiscal 1999 and 35% in fiscal 1998, and in
fiscal 1997 we recorded a tax credit. The primary reasons for the fluctuation
in our tax rate are less research and development credit being available in
fiscal 1999 than in fiscal 1998 and our net loss in fiscal 1997.

                                       35
<PAGE>

Quarterly Results of Operations

  The following tables present our operating results for each of the nine
fiscal quarters in the period ended August 27, 1999, in dollars and as a
percentage of revenues. The information for each of these quarters is unaudited
and has been prepared on the same basis as the audited consolidated financial
statements included in this prospectus. In the opinion of management, all
necessary adjustments, which consist only of normal and recurring accruals,
have been included to fairly present the unaudited quarterly results. This data
should be read together with our consolidated financial statements and the
notes to those statements included in this prospectus.

  The historical financial information may not be indicative of our future
performance and does not reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented.

<TABLE>
<CAPTION>
                                                        Three Months Ended
                          ---------------------------------------------------------------------------------------
                          Aug. 31,  Nov. 30,   Mar. 1,  May 31,  Aug. 28,  Nov. 27,  Feb. 26,  May 28,   Aug. 27,
                            1997      1997      1998     1998      1998      1998      1999      1999      1999
                          --------  --------   -------  -------  --------  --------  --------  --------  --------
                                                          (in thousands)
<S>                       <C>       <C>        <C>      <C>      <C>       <C>       <C>       <C>       <C>
Consolidated Statements
 of Operations Data:
Revenues................  $51,675   $69,997    $65,766  $84,699  $116,069  $147,233  $125,889  $174,334  $176,505
Cost of revenues........   29,906    42,115     37,392   48,336    62,998    84,289    67,583   100,746    98,324
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Gross profit............   21,769    27,882     28,374   36,363    53,071    62,944    58,306    73,588    78,181
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Operating expenses:
 Sales and marketing....   11,314    20,286     17,335   21,830    23,969    33,893    28,725    41,139    42,648
 Research and
  development...........    4,538     5,170      5,209    6,946     9,738    10,722    10,989    14,578    12,507
 General and
  administrative........    2,470     3,290      3,181    6,358     6,233     5,071     5,739     6,649     7,160
 Purchased in-process
  technology............      --        --         --       --        --        --      2,125       --        --
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
 Total operating
  expenses..............   18,322    28,746     25,725   35,134    39,940    49,686    47,578    62,366    62,315
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Operating income
 (loss).................    3,447      (864)     2,649    1,229    13,131    13,258    10,728    11,222    15,866
Interest and other
 expense, net...........      (35)      (44)        (5)      28       (25)      (75)      (15)     (108)      (63)
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Income (loss) before
 income taxes...........    3,412      (908)     2,644    1,257    13,106    13,183    10,713    11,114    15,803
Income tax provision
 (credit)...............    1,190      (317)       922      439     5,036     5,066     4,116     4,270     6,145
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Net income (loss).......  $ 2,222   $  (591)   $ 1,722  $   818  $  8,070  $  8,117  $  6,597  $  6,844  $  9,658
                          =======   =======    =======  =======  ========  ========  ========  ========  ========
As a Percentage of
 Revenues:
Revenues................      100%      100%       100%     100%      100%      100%      100%      100%      100%
Cost of revenues........       58        60         57       57        54        57        54        58        56
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Gross profit............       42        40         43       43        46        43        46        42        44
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Operating expenses:
 Sales and marketing....       22        29         26       26        22        23        23        24        24
 Research and
  development...........        9         7          8        8         8         7         9         8         7
 General and
  administrative........        5         5          5        7         5         4         4         4         4
 Purchased in-process
  technology............      --        --         --       --        --        --          2       --        --
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
 Total operating
  expenses..............       36        41         39       41        35        34        38        36        35
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Operating income
 (loss).................        6        (1)         4        2        11         9         8         6         9
Interest and other
 expense, net...........      --        --         --       --        --        --        --        --        --
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Income (loss) before
 income taxes...........        6        (1)         4        2        11         9         8         6         9
Income tax provision
 (credit)...............        2       --           1        1         4         3         3         2         4
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Net income (loss).......        4%       (1)%        3%       1%        7%        6%        5%        4%        5%
                          =======   =======    =======  =======  ========  ========  ========  ========  ========
</TABLE>

                                       36
<PAGE>

  We have experienced seasonal variations in our operating results.
Historically, our revenues have been weaker in the first and third fiscal
quarters and have often been lower than the preceding quarter. This seasonal
variation is due to the fact that our products are highly consumer-oriented,
and consumer buying patterns traditionally reflect reduced purchases in those
quarters. As our licensing revenues grow, we expect that they will contribute
to the fluctuations in our quarterly results because the products offered by
our licensees are also primarily consumer-oriented. In addition, we attempt to
time our new product releases to coincide with relatively higher consumer
spending in the second and fourth fiscal quarters, which contributes to these
seasonal variations.

  In the second quarter of fiscal 1998, our gross margin declined compared to
the prior and subsequent quarters primarily due to price reductions. Sales and
marketing expenses increased in this same quarter as a result of costs related
to our first third-party developer conference and start-up costs incurred for
setting up our international sales and marketing organization. In addition,
sales and marketing expenses increased after the first quarter of fiscal 1998
in preparation for the worldwide launch of the Palm III product family in the
fourth quarter of fiscal 1998. In the fourth quarter of fiscal 1998, our
general and administrative expenses were higher due to increased provisions for
doubtful accounts receivable identified during the quarter.

  In the first and third quarters of fiscal 1999, our gross margin improved due
to the mix of new products with higher gross margins consisting of the Palm
III, Palm IIIx, and Palm V devices. Research and development expenses and
general and administrative expenses decreased as a percentage of revenues in
the second quarter of fiscal 1999 compared to the prior and subsequent quarters
as a result of seasonally strong second quarter revenues and a lower provision
for doubtful accounts receivable than in the first quarter. In the third
quarter of fiscal 1999, we incurred a one-time charge of $2.1 million for
purchased in-process technology as a result of the Smartcode acquisition.

Liquidity and Capital Resources

  Historically, 3Com has managed cash on a centralized basis. Cash receipts
associated with our business have been transferred to 3Com on a periodic basis
and 3Com has provided funds to cover our disbursements. Accordingly, we have
reported no cash or cash equivalents at May 31, 1998 and May 25, 1997. At May
28, 1999, we reported cash of $478,000 acquired in the Smartcode acquisition
and at August 27, 1999, we reported cash of $37.1 million as a result of a
transfer from 3Com.

  In accordance with our separation agreement, 3Com will transfer to us the
3Com-owned assets and liabilities which relate to our business prior to the
separation date, except for most of our accounts receivable and accounts
payable. We will receive the net proceeds of the offering and the private
placements to America Online, Motorola and Nokia and will pay a dividend to
3Com approximately equal to its tax basis in us, which was approximately $
million at      , 2000. In addition, we will make a payment to 3Com of an
intercompany payable, which was approximately $49 million as of August 27,
1999. We anticipate that we will use some of the proceeds from the offering and
the private placements to America Online, Motorola and Nokia to replace the
working capital retained by 3Com and fund our increased working capital needs
associated with revenue growth.

  Cash provided from operating activities was $10.1 million for the three
months ended August 27, 1999. Cash provided by operating activities was $59.1
million in fiscal 1999, cash used in operating activities was $32.6 million in
fiscal 1998 and $34.8 million in fiscal 1997. Cash provided by operating
activities in fiscal 1999 resulted primarily from net income adjusted for non-
cash charges for depreciation and amortization and changes in working capital.
Cash used in operating activities in fiscal 1998 resulted primarily from an
increase in accounts receivable which more than offset net income, and
adjustments for non-cash charges and other working capital items. Cash used in
operating activities in fiscal 1997 resulted primarily from our net loss as
well as increases in accounts receivable and inventories.

                                       37
<PAGE>

  We had capital expenditures of $2.3 million in the three months ended August
27, 1999, $5.3 million in fiscal 1999, $8.8 million in fiscal 1998 and $2.5
million in fiscal 1997. In addition, in fiscal 1999, we expended $16.8 million,
net of cash acquired, for the acquisition of Smartcode.

  Our future capital requirements will depend on a number of factors, including
the timing and rate of the expansion of our business. We anticipate a
substantial increase in our capital expenditures to support anticipated growth
in operations, infrastructure for our wireless and Internet services plus
hardware and software for our information systems and personnel. We believe
that our cash, cash equivalents and proceeds from this offering and the private
placements to America Online, Motorola and Nokia will provide sufficient
capital to fund our operations for the foreseeable future. We cannot assure
you, however, that the underlying assumed levels of revenues and expenses will
prove to be accurate. We may need to raise additional funds through public or
private financings or other arrangements in order to:

  .  support more rapid expansion of our business than we anticipate;
  .  develop and introduce new or enhanced products or services;
  .  respond to competitive pressures;
  .  invest in or acquire businesses or technologies; or
  .  respond to unanticipated requirements or developments.

  We cannot be certain that financing will be available to us when we need it
on favorable terms or at all. If additional funds are raised through the
issuance of equity securities, dilution to existing stockholders may result. If
insufficient funds are available, we may not be able to introduce new products
and services, expand the development of our Palm platform and our Internet
services or compete effectively in any of our markets, any of which could
materially harm our business, financial condition and results of operations.

Quantitative and Qualitative Disclosures About Market Risk

 Market Risk Disclosures

  The following discussion about market risk involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We are exposed to market risk related to changes in
interest rates and foreign currency exchange rates. We do not use derivative
financial instruments for speculative or trading purposes.

 Interest Rate Sensitivity

  As of August 27, 1999, we had cash and cash equivalents of $37.1 million
which consisted of highly liquid money market instruments with maturities less
than 90 days. Because of the short maturities of these instruments, a sudden
change in market interest rates would not have a material impact on the fair
value of the portfolio. We would not expect our operating results or cash flows
to be affected to any significant degree by the effect of a sudden change in
market interest rates on our portfolio.

 Foreign Currency Exchange Risk

  Historically, our exposure to exchange rate risk has been managed on an
enterprise-wide basis as part of 3Com's risk management strategy. This strategy
has utilized foreign exchange forward and option contracts to hedge certain
balance sheet exposures and intercompany balances against future movements in
foreign exchange rates. Gains and losses on the forward and option contracts
are largely offset by gains and losses on the underlying exposure and
consequently a sudden or significant change in foreign exchange rates would not
have a material impact on future net income or cash flows. We are currently
evaluating our exchange rate risk management strategy. We do not currently and
do not intend in the future to utilize derivative financial instruments for
trading purposes.

                                       38
<PAGE>

 Equity Security Price Risk

  We do not own any equity investments. Therefore, we do not currently have any
direct equity price risk.

Effects of Recent Accounting Pronouncements

  In June 1998 and June 1999, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting Standards, or SFAS, 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133." These statements require companies
to record derivatives on the balance sheet as assets or liabilities, measured
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 will be effective for our
fiscal year ending May 31, 2002. We believe that adoption of these statements
will not have a significant impact on our financial results.

  In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Statement of Position No. 98-1
requires that entities capitalize costs related to internal-use software once
certain criteria have been met. We adopted Statement of Position 98-1 in our
first quarter of fiscal 2000. The adoption of this statement did not have a
significant impact on our financial results.

Year 2000 Compliance

  Many computer systems and software programs were written to accept and
process only two digit entry codes for the year when storing dates. Beginning
with the year 2000 these entry codes will need to accept four digit entries to
distinguish 21st century dates from the 20th century dates. As a result,
computer systems and software programs may need to be updated to solve this
problem and avoid incorrect or lost data.

  We face risks associated with the year 2000 issue. Our operations could be
adversely affected if systems do not correctly recognize date information when
the year changes to 2000. We face risks primarily in the following areas:

  .  systems used by us and 3Com to run our business including information
     systems, equipment and facilities;

  .  systems used by our and 3Com's suppliers; and

  .  potential warranty or other claims from our customers.

  We have relied on 3Com to address any year 2000 readiness issues in the
internal and external systems we currently use. If 3Com's year 2000 readiness
preparations are insufficient, we may be required to bear the costs of
upgrading or replacing any systems after our separation from 3Com. We continue
to evaluate and mitigate our exposure in these areas where appropriate. We
intend for some of our disclosures and announcements concerning our products
and year 2000 programs, including those in this prospectus, to constitute "Year
2000 Readiness Disclosures" as defined in the recently enacted Year 2000
Information and Readiness Disclosure Act. We cannot be certain that year 2000
issues will not have a material adverse impact on us.

 State of Readiness and Risks

  We have identified four key exposure internal areas with respect to the year
2000 issue, namely: key transaction processing applications, equipment and
facilities, products and key suppliers.

  Key transaction processing applications. Key transaction processing
applications include those used to run our business, finance, order processing
and distribution operations. 3Com has

                                       39
<PAGE>

completed its evaluation of these applications for year 2000 readiness and has
been upgrading or replacing systems, where necessary. If we or 3Com identify
significant new non-compliance issues, or if we encounter unexpected
difficulties in areas previously considered to be year 2000 ready, our ability
to conduct our business or record transactions could be disrupted, which could
adversely affect our results of operations or financial condition.

  Equipment and facilities. We have evaluated year 2000 readiness of our
equipment and facilities. We have contacted our key suppliers to ascertain year
2000 compliance of our critical equipment. We expect our critical equipment to
be ready for year 2000. If our year 2000 assessment is incorrect, our design,
production and shipping capabilities could be disrupted, which could adversely
affect our results of operations or financial condition.

  Products. We have conducted an extensive evaluation of our currently
available products. We believe that the products we are currently offering are
year 2000 ready. However, the first generation of our handheld device product,
which is no longer being sold, does not properly display the European date
format. We expect to release a downloadable software patch to fix this problem.
If any of our products do not operate properly in the year 2000, we could have
increased warranty costs, customer satisfaction issues, litigation or other
material costs and liabilities, which could adversely affect our results of
operations or financial condition.

  Key suppliers. We have contacted our critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are year 2000 ready. Our third-party manufacturers
advised us that their manufacturing operations are or will be year 2000
compliant by December 31, 1999. Confirmation of the continued year 2000
readiness of these key suppliers will continue throughout the remainder of
1999. If key suppliers fail to adequately address the year 2000 issue for the
products or services they provide to us, critical materials, products and
services may not be delivered in a timely manner, which could adversely affect
our results of operations or financial condition.

 Most Reasonably Likely Worst-Case Scenario

  We believe that our most reasonably likely worst-case year 2000 scenario
would relate to problems with the systems and services of third parties rather
than with our internal systems or products. We believe the risks are greatest
with infrastructure services such as electricity supply and water and sewer
service, telecommunications, transportation and distribution channels and
critical suppliers of materials and services.

  Our operations are conducted in a variety of domestic and foreign facilities.
Each location relies on local private and governmental suppliers for utilities,
telephone, and other necessary services and supplies. For example, failure in
the electricity grid or disruption to the continuous supply of power would be a
worst-case scenario that would completely shut down the affected facilities.
Widespread electrical failures could also adversely affect the delivery of
water and sewer services, and hinder the transportation of employees to and
from the workplace.

  We cannot identify all possible disruption scenarios. We are preparing
contingency plans specifying our actions if failures occur in key internal
systems and/or critical third party systems and services. The process includes
identifying and prioritizing risks, assessing the business impact of those
risks, evaluating risk mitigation alternatives, and preparing written
contingency plans for those failures with the greatest business risk to us.

  Contingency plans for critical business operations are expected to be in
place by the end of the year and these plans will be validated and modified as
needed. Contingency plans will continue to be refined through the end of 1999
as we learn more about the preparations and potential exposure of third parties
to year 2000 disruptions.

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 Costs to Address Year 2000 Issues

  Although we currently do not expect future year 2000 compliance costs to be
material, the costs could include:

  .  hardware and software upgrades or replacements primarily related to
     desktop systems and telephone equipment;

  .  consultant and contractor fees to assist in assessments and to perform
     remediation and integration testing;

  .  increased staffing in our customer service area to address the expected
     increase in support calls during the year 2000 transition; and

  .  a contingency for potential unexpected costs associated with replacing
     or repairing systems previously considered to be year 2000 ready.

  If we identify unexpected problems relating to the year 2000 issue, we may
incur additional costs in identifying and responding to the problems.

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<PAGE>

                                    BUSINESS

Introduction

  We are the leading global provider of handheld computing devices. We believe
that we have achieved our leadership position by focusing on customer needs and
emphasizing simplicity and ease of use in design and engineering. We design,
develop and market our Palm-branded handheld devices, which currently include
our Palm III, Palm V and Internet-enabled Palm VII families. According to
International Data Corporation, in 1998 we had a 68% market share of the
worldwide personal companion handheld device market.

  We believe that the success of our devices is attributable to our innovative
product designs, our Palm platform, our technology leadership and the strength
of the Palm brand. We are building on these strengths to expand our business by
licensing the Palm platform to other device and information appliance
manufacturers. In addition, we are expanding our wireless and Internet
offerings through Palm.net, our subscription-based wireless access service, and
Palm.com, our Internet destination site. As the functionalities of handheld
computing devices, information appliances, mobile phones and handheld
entertainment devices converge, we believe that we are well-positioned to
establish the Palm platform as an industry standard.

  The rapid proliferation of our devices based on our Palm platform has led to
the emergence of a community of developers who create applications for the Palm
platform as well as peripherals and accessories that increase the functionality
of Palm platform-based devices. These developers have created over 4,500
applications for Palm devices to date, enhancing the functionality and
usefulness of products based on the Palm platform. We believe the Palm platform
is attractive to our licensees because it has been widely adopted by end users
and has broad third-party development support. This adoption further drives an
increase in the size of the Palm platform user base. We refer to this
reinforcing community of users, developers and licensees as the Palm economy.

Industry Overview

  As professionals have become increasingly mobile, often spending long periods
of time away from traditional work settings, they have sought out tools to
access and manage critical personal and professional information.
Traditionally, these professionals used paper-based organizers and, later,
stand-alone electronic pocket organizers or portable computers to accomplish
these tasks. These early tools met with mixed success and often were slow,
large, expensive and difficult to use and offered limited functionality.

  The introduction of Palm's first device ushered in a new generation of
handheld devices that offered users a combination of simplicity and
functionality. Innovations in design, synchronization technology, user
interface, programmability, functionality and battery power management
transformed these devices into convenient productivity tools. These
enhancements significantly accelerated user demand. According to International
Data Corporation, annual worldwide sales of personal companions will increase
from approximately one million units in 1997 to an estimated 14 million units
in 2003. We believe that further market growth will be driven by continued
innovation, increased wireless data connectivity and the emergence of new usage
patterns driven by Internet content and enterprise data.

  We believe that continued technological innovations that address end-user
needs are an important component of industry growth. Technological advances
have led to significant reductions in size and weight, as well as improvements
in battery life, reliability and storage capacity, of handheld devices. Third
party developers, who create software applications and complementary hardware
peripherals and accessories, supplement manufacturers' innovations and allow
users to customize and enhance their devices. These feature enhancements and
performance improvements, driven by both manufacturers and third party
developers, continue to attract new users and encourage device upgrades.

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  The emergence of technologies enabling wireless access to the Internet and
enterprise data is again transforming the handheld device industry. The
Internet has become an important way for consumers and professionals to access
personal and business information, download new applications and access new
services. We believe that wireless access to Internet content and enterprise
data will make handheld computing devices increasingly valuable to users. This
value proposition is driving a variety of handheld information appliance makers
to add Internet connectivity features to products such as mobile phones.

  As handheld devices are adopted in greater numbers and handheld device
applications become increasingly integrated into other handheld information
appliances, an opportunity exists for operating system developers to extend
their platforms for use on other handheld devices. We believe that the
extension of an operating system to a diverse set of handheld information
appliances, including mobile phones, increases the utility of all devices that
use the operating system and expands the scope and potential market for both
operating system developers and device manufacturers.

Business Summary

  In 1996, we introduced our first handheld device product, based on our
innovative Palm platform, and quickly established global market leadership in
the handheld device industry. Our revenues have grown from approximately $1
million in fiscal 1995 to $564 million in fiscal 1999. Our international
business accounted for 29% of revenues in fiscal 1999. We believe that our
users associate the Palm brand with high-quality products that offer a
combination of portability, connectivity, simplicity and style. By capitalizing
on the market-leading position of our handheld devices in domestic and
international markets and on our Palm platform and emerging Internet services
and applications, we believe we can extend our leadership in this evolving
industry.

  Handheld Devices. We currently have three families of handheld devices, the
Palm III, Palm V and Palm VII product families, each of which is based on the
Palm platform. We develop our handheld devices by focusing on customer needs.
While all Palm devices are designed to offer a combination of utility,
simplicity, wearability and mobility, we have further differentiated individual
products to appeal to specific market segments. For example, to appeal to users
who place the most value on wearability, we introduced the Palm V product,
which combines the traditional functionality of our products with a sleek,
compact and light-weight form factor. In fiscal 1999, the Palm V product family
became our largest product line measured in terms of revenues. Similarly, to
appeal to mobile professionals and enterprise customers that want to provide
their employees with convenient remote access to enterprise data, we introduced
the Palm VII product, which combines connectivity and mobility. Customers
buying our devices receive a Palm handheld device, a cradle to connect the
device to a personal computer and personal information management and
synchronization software which runs on a personal computer and serves as a
conduit between the device and other personal computer applications.

  Palm Platform. The Palm platform combines the distinctive look, feel and ease
of use of our Palm OS operating system with our HotSync synchronization
technology, pen-based input technology, personal information management
applications such as address book and datebook, and, in our Palm VII product,
web-clipping software that allows content providers and users to send and
receive Internet data in a handheld device format. We also make development
tools available for our developer community, and we share select parts of the
Palm OS operating system source code in order to enable developers to optimize
the interface of their applications with the Palm platform. As a result, the
Palm OS operating system has emerged as a highly flexible, efficient operating
system.

  In addition to including the Palm platform in our Palm-branded devices, we
have expanded our strategy of licensing the platform to device and information
appliance manufacturers. In October

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<PAGE>

1999, we announced a non-exclusive agreement with Nokia, the world's leading
provider of mobile phones, to integrate the Palm platform into several of
Nokia's mobile phone products. We believe this agreement represents a
significant endorsement of the Palm platform for the worldwide wireless phone
market. Similarly, in November 1999 we entered into an agreement with Sony to
license and develop the Palm platform for use in future Sony products. We
believe that the potential of these and other new markets represents a
significant growth opportunity for us and our developer community.

  Internet Services and Applications. The Internet allows enhanced contact with
our users by allowing us to offer products and services directly to our users
and by creating an online destination where users, resellers and developers can
participate in the Palm economy. We offer users of our Palm VII device a new
way to access and navigate the Internet through our web-clipping software,
which allows users to download specific information from the Internet. To
support the wireless connectivity of our Palm VII device, we offer Palm.net
which is a monthly fee, subscription-based Internet access service. In
addition, we have developed a website that is also called Palm.net, an Internet
destination where content providers and third party developers can post web-
clipping applications for users to download. We have also developed our
Palm.com website, which is emerging as an important destination site for our
customers, users and developer community. These Internet services and
applications increase the functionality of our products, provide us with
expanded opportunities for product sales, advertising and transaction revenue
and keep us at the forefront of technology and innovation in our rapidly
changing markets.

  The Palm Economy. Our broad user base has attracted a large community of
third-party developers that create software applications and peripherals that
increase the performance and functionality of Palm devices. As of December 1,
1999, more than 29,000 developers had registered to use Palm developer tools to
create software applications for the Palm platform. In addition, we distribute
approximately 80 peripherals and accessories developed by us and third parties
ranging from wireless modems to keyboards to leather cases. This expanding Palm
economy has, in turn, encouraged licensees to integrate the Palm platform with
new handheld information appliances providing new opportunities to grow the
Palm economy. The Internet is further expanding the Palm economy by attracting
new users and by encouraging developers to create Internet-specific
applications. We believe that the Palm economy creates opportunities for all
participants by continually extending the functionality and market appeal of
both existing and next-generation Palm-branded products and products based on
the Palm platform.

Strategy

  Our objective is to increase our handheld device market leadership and
establish our Palm platform as the industry standard operating system for the
next generation of handheld computing devices, mobile information appliances,
mobile phones and handheld devices for entertainment such as games and music.
In addition, we plan to further develop our Internet services and expand our
enterprise sales. The key elements of our strategy to achieve these objectives
are to:

  Extend Market Leadership through Continued Dedication to the Palm Design
Philosophy. Our design philosophy carefully balances elegant form with simple
and useful functions. We intend to continue to increase the size of the
handheld device market by extending this philosophy to products targeted at new
market segments. We have recently accelerated our market segmentation
activities by identifying specific user needs across consumer, mobile
professional and enterprise markets and by introducing new versions of our
handheld devices that combine features tailored to address these specific
needs. For example, we introduced both an entry-level Palm IIIe product for
price-sensitive consumers and the Palm V product for consumers seeking a
slimmer, sleeker Palm device. Underlying our design philosophy is a fundamental
commitment to innovation. We have been first to market with a number of
innovative technologies that we have incorporated into our products ranging
from our first Palm device to our recently introduced Palm VII product. We
believe that continuing product and technology innovation will be important to
our overall success.

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<PAGE>

  Accelerate Adoption of Palm Products and Services in the Enterprise
Market. We believe the enterprise market represents a significant opportunity
for Palm. Most Palm devices are used in professional environments but have
historically been purchased by users on an individual basis rather than by
corporations or institutions for enterprise-wide deployment. With the recent
introduction of wireless-enabled devices, the development of enterprise
customer support programs and the addition of a direct enterprise salesforce,
we are beginning to see increased adoption of Palm devices by our enterprise
customers. For example, Cedars-Sinai Medical Center is deploying Palm VII
devices to manage patient information. To accelerate the adoption of our
devices by enterprises, we have established relationships with enterprise
software vendors such as Oracle, PeopleSoft, Remedy and SAP to develop
applications that provide access to enterprise databases using devices based on
the Palm platform. Additionally, we are developing synchronization features and
network security capabilities tailored to enterprise networks and computer
servers and working with third party developers to design enterprise-specific
software applications.

  License the Palm Platform to Establish a Standard, Open Operating System for
Information Appliances. We intend to further expand the use of the Palm
platform in a wide variety of handheld devices and information appliances. This
strategy involves licensing the Palm platform to other handheld device
manufacturers such as Sony and to manufacturers of other information appliances
that are looking to incorporate an operating system that is widely adopted by
consumers and has broad third-party developer support. We plan to continue to
pursue licensing agreements with wireless telephone companies such as Nokia and
QUALCOMM as well as providers of other mobile information appliances.

  Continue to Develop Products and Services that Leverage Wireless Connectivity
and the Internet. The introduction of the Palm VII product represents the first
step in our rollout of wireless Internet-enabled devices. Our Internet services
strategy has four complementary components. First, through strategic
relationships we plan to expand the geographic coverage of our Palm.net
wireless access service on a global basis. Second, we intend to develop
hardware and software solutions to enable previous generations of Palm products
to access Palm.net. Third, we intend to enhance the wireless functionality of
our Palm.net service to increase its utility for enterprise and carrier
applications. Finally, we believe that the proliferation of wireless devices
that link to the Internet will enable us to leverage our Internet properties.
In this regard, we believe that Palm may be particularly well-positioned to
build an Internet access portal around our Palm.net and Palm.com properties.
For example, in addition to providing access for Palm devices through Palm.net,
we plan to make content, such as Internet calendaring and information
management, available through the Palm.net site.

  Expand International Business. We intend to continue to expand our
international business. For the first three months of fiscal 2000, revenues
outside the United States accounted for 31% of our total revenues compared to
21% for the first three months of fiscal 1999. With the help of the Palm
developer community, we have introduced localized versions of Palm devices in
five languages. According to International Data Corporation, we had a 72%
market share of the personal companion market in Europe and 59% market share in
Asia in 1998. We plan to build on this success by expanding our international
product offerings, introducing additional local-language versions of the Palm
platform and broadening our distribution channels overseas.

  Support the Palm Economy. As the community of users, licensees and hardware
and software developers for Palm products has grown, we have expanded our
efforts to support the Palm economy. Support of the developer community takes a
variety of forms, ranging from offering software tools and technical support
services for third-party developers to hosting PalmSource conferences that
allow us to give direction regarding product and strategy trends. In addition,
we expect to make strategic investments in new companies or make acquisitions
that we believe will support or expand the Palm economy. We may also
selectively develop applications designed to

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<PAGE>

increase the functionality of Palm-based devices and support expansion of the
Palm economy. We expect to continue these efforts to support the Palm economy
to stimulate overall demand for products based on the Palm platform.

Products and Services

  Handheld Devices. Each of our handheld devices is designed with the Palm
philosophy of providing the user with a simple, elegant and useful productivity
tool. People use our handheld devices for many different purposes, including
managing both personal information and enterprise data and accessing e-mail and
content from the Internet. Users can also customize their devices by adding a
wide range of applications, peripherals and accessories. We have developed each
of our three current product families to address specific customer needs.

  The Palm III product family combines the small form factor, seamless desktop
synchronization, ease of use and fast data access that have been the hallmark
of our handheld devices. The Palm IIIe device is our most affordable, entry-
level product. The Palm IIIe special edition product, the newest addition to
this family, combines the traditional features of the Palm III device with a
new, translucent enclosure and is targeted at the student market. The Palm IIIx
device allows users to upgrade both memory and operating system and includes
application software such as enhanced links to Microsoft Outlook.

  The Palm V product family emphasizes wearability, combining all of the
functions of the Palm III product family with a sleek and stylish form-factor
featuring an anodized aluminum case. It also features advanced display
technology and a rechargeable battery. The Palm Vx device, introduced in the
fall of 1999, has additional pre-bundled software and more memory than the Palm
V device.

  The Palm VII, which integrates wireless communications functionality, is the
first device in our newest product family. The Palm VII device builds on the
features of our other product families by adding wireless access to Internet
content, enterprise data, e-mail, messaging and e-commerce services such as
online shopping, auctions and stock trading. The Palm VII device incorporates
our web-clipping technology, which presents Internet content and enterprise
data in a format optimized for handheld devices. We believe the wireless
connectivity of the Palm VII device makes it particularly well-suited for the
enterprise market as it allows mobile employees to access enterprise data
remotely. In order for users of the Palm VII device to access Internet content,
they currently must subscribe to our Palm.net access service.

  As part of our enterprise market strategy, we have entered into an agreement
with Oracle to bundle OracleLite with our developer kit. This bundled product
allows mobile customers in the enterprise market to use a Palm device to gain
access to enterprise databases while working remotely. Similarly, we support
efforts by companies such as PeopleSoft, Remedy and SAP to enable enterprise
users to access their database information with Palm devices. We are also
developing the Palm Ethernet Cradle for enterprise customers. This product
allows Palm device users to connect directly to an enterprise's local area
network from various locations throughout the enterprise. The Palm Ethernet
Cradle is scheduled to be available in February 2000.

  We also market and resell peripherals and accessories such as modems, leather
cases, colored flip covers and other fashion accessories for our products.

  Palm Platform. Our Palm platform, which integrates a number of components
around the Palm OS operating system, is the foundation for Palm devices as well
as for devices manufactured by our licensees. Our objective is to establish the
Palm platform as the industry standard for handheld computing devices and other
information appliances.

  The Palm platform consists of several components:

  .  the Palm OS operating system;

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  .  the Palm user interface, which enables users to interact with the Palm
     device, and application programming interfaces, which allow developers
     to write applications that run on devices based on the Palm platform;

  .  standard personal information management applications, including
     datebook, address book, to-do list, memo pad, calculator and expense
     management functions;

  .  development tools, including developer kits that enable third party
     developers to develop applications and licensee kits with hardware
     reference designs that enable licensees to design devices around the
     Palm OS operating system;

  .  HotSync data synchronization technology, which enables a handheld device
     to synchronize information with personal computers or enterprise
     databases;

  .  Graffiti script recognition technology, which enables users to input
     script data directly through our pen-based user interface; and

  .  Web-clipping software, which allows content providers to present and
     users to receive Internet or enterprise data in a format optimized for
     handheld computing devices.

  The Palm platform has been optimized for handheld devices where instant
access to information, low power consumption and wireless capabilities are
important. These attributes have important benefits for Palm, our developers
and our licensees.

  The Palm platform offers a variety of benefits to developers of handheld
devices. The Palm platform software code is designed to allow applications to
run quickly and reliably. It minimizes power, processing and memory
requirements without sacrificing performance, which in turn reduces component
costs for manufacturers. These attributes helped us to design the Palm V with
its slim form factor and will allow our licensees, such as Nokia and Sony, to
design products that allocate more processing resources to new applications
rather than to running a complex operating system. In addition, the
architecture of the Palm platform enables the addition of peripheral devices
and software libraries, which broadens the functionality of the device.

  The Palm platform provides application developers with significant design
flexibility. The combination of simpler application programming interfaces and
a modular code architecture enables developers to quickly and easily learn to
program for the Palm platform. In addition, we share select parts of our source
code to enable developers to optimize the interface of their applications with
the Palm platform.

  The modular architecture of our Palm platform also provides benefits for our
licensees. We design separations between our software layers and the underlying
basic code, or kernel, and the hardware reference design specific to our Palm
devices. This separation breaks the Palm platform into easily configurable
components, promoting innovation and broadening its appeal to manufacturers of
different information appliances. This separation allows components of the Palm
platform to be modified and replaced to allow the Palm OS operating system to
run on a variety of handheld hardware devices.

  Significant market acceptance of Palm platform-based devices is attracting an
increasing number of licensees. In October 1998, Symbol Technologies introduced
the first device based on the Palm platform incorporating bar code scanning
capabilities. Symbol has since introduced other products incorporating wireless
local area network access and rugged packaging. These products are targeted as
vertical solutions for retail, transportation, parcel and postal delivery,
manufacturing and healthcare. Other licensees of the Palm platform include
QUALCOMM, a maker of digital mobile phones, which has introduced its pdQ
digital smart phone combining the functionality of the Palm handheld device
with a mobile phone, and Handspring, a maker of handheld devices branded as
Visor which are targeted at consumers.

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  Internet Services and Applications. We have developed two groups of products
and services to address the opportunities created by the emergence of the
Internet: Palm.net and Palm.com.

  In 1999, we introduced Palm.net, a subscription-based wireless access service
that enables Palm users to access web-clipped content on the Internet. We
currently offer pre-paid access packages from $9.99 to $39.99 per month and
charge additional amounts for network usage in excess of the pre-paid package.
The Palm VII device currently comes with nine pre-installed web-clipping
applications. In addition, users receive a CD-ROM which contains an additional
14 web-clipping applications that can be installed on the device. Palm.net is
also the name of Palm's web-clipping destination site, which offers links to
more than 150 additional sites that users can download to their devices as well
as customer support, technical support, coverage maps and account information.
For example, Palm VII users can access Fidelity.com or E*Trade to get real-time
stock quotes, UPS.com to monitor package delivery, ESPN.com to check sports
scores, WSJ.com to get news or business headlines and Travelocity to check
airline flight times and delays.

  Palm.net also serves as a resource for both content publishers and third
party developers. Content publishers can post links to their own websites that
are web-clipping enabled. In addition, developers can post applications on
Palm.net for use on wireless-enabled Palm devices. As wireless and Internet
technologies advance, we intend to expand the geographical coverage of the
Palm.net network, which currently covers over 260 metropolitan areas in the
United States, and expand the content and application offerings available
through Palm.net.

  Palm.com was established as a means to increase our contact with our end
users, customers and third-party developers. Visitors to Palm.com can purchase
Palm devices, accessories and peripherals as well as download Palm software
upgrades and link to third-party software. They can also find product and
customer support information and explore links to other Palm-related websites.
Palm.com also offers important support resources for developers. Developers can
use Palm.com to register with Palm, obtain access to software development tools
and obtain technical support.

Strategic Alliances

  Beginning in 1999, we expanded our strategy of licensing the Palm platform to
manufacturers of other handheld information appliances and working with other
companies to expand the use of applications running on the Palm platform. We
recently announced the following strategic alliances:

  Nokia. In October 1999, we entered into a licensing and joint development
agreement with Nokia to create a new pen-based mobile phone platform that
integrates telephony and data applications with personal information management
applications. The agreement provides that the jointly developed mobile phone
platform will integrate the user and application interface components of the
Palm platform with know-how supplied by Nokia, with the intention that
applications currently available for the Palm platform will be supported by the
new platform. Pursuant to the agreement, Nokia has a non-exclusive royalty-
bearing license to use the jointly developed platform. Concurrent with this
offering, Nokia has agreed to purchase shares of common stock equal to the
lesser of $80 million or 1 1/2% of the Company's capital stock, which
percentage is based on     outstanding common stock as well as options to
purchase       shares which have been granted as of       ,2000.

  Sony. In November 1999, we entered into a licensing and joint development
agreement with Sony Corporation to enable Sony to create new handheld consumer
electronics products with next generation audio-visual functionality. Pursuant
to the agreement, we will develop extensions to the Palm platform that
incorporate Sony's Memory Stick application programming interface technology
for use in the new devices. The agreement also provides us with the right to
license the Memory Stick technology as incorporated in the Palm platform to
third parties.

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  Sun Microsystems. In June 1999, we jointly announced with Sun Microsystems
our intention to integrate Sun's Java technology with the Palm platform. In
addition, we jointly announced with Sun in October 1999 the availability of
Sun's consulting services to help deliver enterprise applications and
capabilities for handheld devices based on the Palm platform through the newly
formed Sun.Com Consulting practice.

  America Online. In December 1999, we entered into a non-binding memorandum of
understanding with America Online pursuant to which the parties intend to
establish a strategic relationship aimed at offering mobile consumer Internet
services for Palm platform-based handheld device users. The memorandum is non-
binding and there can be no assurance that the parties will be able to enter
into a definitive, binding agreement regarding this relationship. Additionally,
concurrent with this offering, America Online has agreed to purchase shares of
common stock equal to the lesser of $80 million or 1 1/2% of our capital stock,
which percentage is based on     outstanding common stock as well as options to
purchase        shares which have been granted as of          , 2000.

  Motorola. In December 1999, we entered into a non-binding memorandum of
understanding with Motorola pursuant to which the parties intend to conclude a
definitive license agreement in which Motorola will license the Palm OS
operating system software to develop wireless products. In addition, the
parties intend to conclude development and license agreements pursuant to which
the capabilities of the Palm OS operating system software would be expanded so
that Motorola could develop new categories of products and enter new markets.
The memorandum is non-binding and there can be no assurance that the parties
will be able to enter into a definitive, binding agreement regarding this
relationship. Additionally, concurrent with this offering, Motorola has agreed
to purchase shares of common stock equal to the lesser of $65 million or 1 1/2%
of the Company's capital stock, which percentage is based on     outstanding
common stock as well as options to purchase         shares which have been
granted as of            , 2000.

Developer Community

  The combination of our large user base and the open architecture of the Palm
platform has attracted a large and growing community of third party developers
who create software applications, peripherals and accessories for Palm devices
and Palm platform-based products. The diverse offerings from this third-party
developer community in turn broaden the user appeal of our devices and other
products based on the Palm platform. As of December 1, 1999, more than 29,000
developers had registered to create applications for the Palm platform. In
addition, over 4,500 applications are currently available in a broad range of
categories, including contact and schedule management, e-mail and Internet
communications, sales force and field automation, personal productivity,
groupware, financial management and games. Developers of several major
applications, such as IBM's Lotus Organizer, Symantec's ACT! and QUALCOMM's
Eudora Internet e-mail software, have enabled these applications to be
synchronized with our devices. We have hosted three developer conferences with
attendance growing from approximately 380 in 1997 to 2,000 in 1999 and have
begun hosting these conferences internationally in Tokyo, London and Munich.

Sales and Marketing

  We sell to our end users primarily through distributors, retailers and
resellers. In the United States, we currently sell directly to six
distributors, 14 retailers and eight regional resellers. We also use our
dedicated enterprise sales force to market Palm products directly to
enterprises which then purchase devices through one of our other sales
channels. We also sell directly to consumers through our Palm.com website.

  In the United States, distributors represent our largest sales channel. These
distributors generally sell to retailers on a national basis and include large
distributors targeting Internet retailers

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such as Buy.com. The retail channel is our second largest United States
distribution channel and encompasses office supply and consumer electronics
retailers and catalog and mail order companies. Retailers primarily sell Palm
devices to individuals, small businesses, small offices and home offices. This
channel is currently our fastest growing area of distribution.

  In Europe and the Pacific Rim, we currently sell our product exclusively
through distributors. We have approximately 111 international distributors, of
which approximately 88 are in Europe and 23 are in the Pacific Rim. In
addition, 3Com currently resells our products into the Canadian and Latin
American markets.

  We believe there is a significant opportunity to expand the Palm economy by
selling device products through third parties such as IBM and Franklin Covey
that sell customized versions of our products under their own brand. We believe
by developing specialized and customized products that are re-branded and re-
sold by these third parties, we can quickly and cost effectively enter new
geographic and specialized vertical markets, or expand our penetration into
existing markets such as the enterprise. Our strategy is to select established
enterprise companies that have significant market presence or access to new
markets that can be more efficiently developed and managed by these third
parties than by us. For example, IBM sells Palm-based products in the
enterprise market branded as the IBM WorkPad PC Companion in the United States,
Europe, Japan, Latin America and Asia. We have entered into a relationship with
Franklin Covey to provide a series of devices based on the Palm III, V and VII
products sold to both the consumer and enterprise markets based on its popular
time and life management planning concepts. We jointly developed with Supra,
the largest provider of lock boxes for the real-estate industry, an electronic
key embedded in Palm devices for accessing their lock boxes and specialized
realtor productivity software.

  We build awareness of our products and the Palm brand through mass-media
advertising, targeted advertising, public relations efforts, in-store
promotions and merchandising and through our Palm-branded Internet properties.
We also receive extensive feedback from our end users, the third-party
developer community and our channel customers through market research. We use
this feedback to continually refine our product development as well as the
position and assortment of our products in our sales channels.

Customer Service and Support

  We believe that customer service and technical support are essential parts of
the sales process in our industry. In order to provide high levels of customer
service, senior management and assigned account managers work closely with our
distributor, retailer, reseller and enterprise customers. We believe these
relationships enable us to improve customer satisfaction and develop products
to meet specific customer needs. For our enterprise customers we provide a
variety of support offerings including a training program for the enterprise
help-desk, website, e-mail and telephone troubleshooting, as well as a program
to provide refurbished units to enterprises needing replacement devices.
Individual consumers also have access to website, e-mail and telephone support.
We outsource our customer service, technical support and product repairs to
regionally-based third parties.

Product Development and Technology

  Our engineering department consists of a device design group and a separate
Palm platform team. Our product development efforts are focused on both
improving the functionality of our existing products and developing new
products. We believe the industrial 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 customers by introducing new product designs with an emphasis
on innovations in the utility, simplicity, wearability, mobility, style and
ease of use of our products and services.


                                       50
<PAGE>

  To identify and develop technologies for the next generations of Palm
devices, we use parallel development teams to avoid schedule dependency from
one product to the next. At the same time, 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 to coincide with the summer and winter selling
seasons and introducing new generation products approximately every 12 months.
In addition, our Palm platform software engineering group works both on
refining the Palm platform for our Palm-branded devices and on coordinating
development efforts with our licensees.

  We have four design centers, each of which focuses on different aspects of
our products, such as wireless connectivity, flexibility and wearability. For
example, our design center in Bellevue, Washington developed the technology
that enabled the wireless connectivity of the Palm VII product, and our design
center in Santa Clara, California was responsible for the improvements in
wearability of the Palm V product. We have additional design centers in Rolling
Meadows, Illinois and Montpellier, France.

  We believe that our success will depend, in part, on our ability to develop
and introduce new products and enhancements to our existing products. In the
past we have made, and intend to continue to make, significant investments in
research and development. Our research and development expenditures totaled
approximately $46.0 million in fiscal 1999, $21.9 million in fiscal 1998 and
$13.4 million in fiscal 1997. As of November 26, 1999, we had 250 people
engaged in research and development activities.

Manufacturing and Supply Chain

  We currently outsource all of our manufacturing operations to Manufacturers'
Services Limited and Flextronics. This outsourcing extends from prototyping to
volume manufacturing and includes activities such as material procurement,
final assembly, test, quality control and shipment to our customers.
Manufacturers' Services Limited currently assembles Palm devices for us at its
Utah facility which it recently purchased from 3Com. Flextronics currently
assembles Palm devices at its facilities in Mexico, California and Malaysia.
Our outsourced manufacturing strategy allows us to:

  .  minimize our capital expenditures;

  .  conserve the working capital that would be required to fund inventory;

  .  adjust to manufacturing volumes quickly to meet changes in demand; and

  .  operate without dedicating any space to manufacturing operations.

  We believe that additional assembly line efficiencies are realized due to our
product architecture and our commitment to process design. Although we
generally use standard components for our products and try to maintain
alternative sources of supply, some key components, such as the Motorola
microprocessors we use, are purchased from sole or single source suppliers for
which alternative sources are not currently available in the quantities and at
the prices we require. The components that make up our devices are supplied by
a number of vendors such as Epson, Samsung, Sharp and Philips, who each supply
liquid crystal display panels, AMD, Fujitsu and Toshiba, who each supply DRAM
memory chips, and Motorola, the supplier of our microprocessor.

Competition

  We compete in the handheld device, operating system and Internet services
markets. The markets for these products and services are highly competitive.
Some of our competitors or potential competitors have significantly greater
financial, technical and marketing resources than we do. These competitors may
be able to respond more rapidly than us to new or emerging technologies or

                                       51
<PAGE>

changes in customer requirements. They may also devote greater resources to the
development, promotion and sale of their products than we do.

  Our devices compete with a variety of handheld devices, including pen- and
keyboard-based devices, mobile phones and subnotebook personal computers. Our
principal competitors include Casio, Compaq, Hewlett-Packard, Psion and Sharp
as well as licensees of our Palm platform such as Handspring and TRG. We
believe the principal competitive factors impacting the market for our handheld
devices are functionality, features, operating system performance, styling,
availability, brand and price.

  Our Palm platform competes primarily with operating systems such as
Microsoft's Windows CE operating system for handheld personal computers and
Symbian's EPOC operating system for wireless communication devices. We believe
that the principal competitive factors affecting the market for operating
systems are the overall number of end users, technological features and
capabilities of the operating system, number and quality of third-party
applications available for use on the operating system, architecture of the
operating system and relative ease of developing compatible applications. In
our licensing activities, our Palm platform also competes with the proprietary
operating systems of our potential licensees.

  While it currently has no directly analogous competitors, the Palm VII device
and our wireless Internet access service compete with a variety of alternative
technologies and services. Mobile phone manufacturers and service providers
including Nokia, Motorola and Sprint have recently introduced mobile phones
which offer Internet connectivity. We expect that the trend toward integrating
Internet connectivity into a diverse set of devices will continue to accelerate
as industry standards emerge. Our subscription-model access business also
competes indirectly with other providers of Internet access, ranging from
dedicated Internet service providers such as America Online and Earthlink to
local phone companies. In addition, although we currently supply Internet
access to Palm VII subscribers through our Palm.net service, competing Internet
access solutions may be developed to enable connectivity through wireless-
enabled Palm devices outside our Palm.net service.

Intellectual Property

  Our software, hardware and operations rely on and benefit from an extensive
portfolio of intellectual property. We currently have 10 United States patents
issued for our technology and we have 52 United States patent applications
pending. We also have 27 foreign patent applications pending.

  We own a number of trademarks, including Palm, Palm III, Palm V, Palm VII,
Palm OS, Palm Computing, PalmSource, HotSync, Graffiti, Simply Palm and
Palm.net. We are currently engaged in litigation against other parties to
enforce our rights to these trademarks, the protection of which is important to
our reputation and branding. We also own copyrights to the Palm platform and
our software development applications.

  We license a number of 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.

  In addition to our Palm platform, we also license development applications to
third-party developers of compatible products, services and applications to
increase the functionality of devices based on the Palm platform. In addition,
we have licensed software that enables numerous website hosts, including ABC
News, Bank of America, Dow Jones, ESPN, E*Trade, Fidelity.com, Fodor's,
MasterCard, Merriam-Webster, MovieFone, Starbucks, TheStreet.com, UPS, USA
Today, VISA, The Weather Channel and Yahoo!, to make their websites accessible
by devices based on the Palm platform using our web-clipping technology.

                                       52
<PAGE>

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

Backlog

  We order finished products from our third-party manufacturers based upon our
forecast of worldwide customer demand and in advance of receiving orders from
our customers. Orders are generally placed by our customers on an as-needed
basis and products are usually shipped within one to four weeks after receipt
of an order. Orders generally may be canceled or rescheduled by the customer
without significant penalty. Accordingly, backlog as of any particular date is
not necessarily indicative of our future revenues.

Employees

  As of November 26, 1999, we had a total of approximately 632 employees, of
which approximately 67 were in supply chain and service and support, 250 were
in engineering, 254 were in sales and marketing and 61 were in general and
administrative activities. Our future performance depends, in significant part,
upon our ability to attract new personnel and retain existing personnel in key
areas including engineering, technical support and sales. Competition for
personnel is intense, especially in the San Francisco Bay Area where we are
headquartered, and we cannot be sure that we will be successful in attracting
or retaining personnel in the future. None of our employees is subject to a
collective bargaining agreement. We consider our relationship with our
employees to be good.

Facilities

  We occupy approximately 160,000 square feet of leased space in Santa Clara,
California. The lease of this facility is terminable with six-months notice
beginning in July 2001 and expires in July 2002. In addition to our principal
office space in Santa Clara, California, we also lease research and development
facilities in Bellevue, Washington, Rolling Meadows, Illinois and Montpellier,
France and sales and support offices internationally in Winnersh, United
Kingdom and La Defense, France. We believe that existing facilities are
adequate for our needs through calendar year 2000 and are currently in the
process of locating additional space to meet our expected requirements
thereafter. If we require additional space, we believe that we will be able to
secure such space on commercially reasonable terms without undue operational
disruption.

Legal Proceedings

  On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case is now captioned: Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm
Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The
complaint alleges willful infringement of a Xerox United States patent, issued
on January 21, 1997, relating to computerized interpretation of handwriting.
The complaint further seeks unspecified damages and injunctive relief. Xerox
has asserted that products utilizing Graffiti script recognition software made,
used, offered for sale or sold in the United States, or imported into the
United States since January 21, 1997 infringe its patent. On June 25, 1999, the
Court stayed the action pending reexamination of the patent by the United
States Patent and Trademark Office. The reexamination of the patent is
currently pending. In connection with our separation from 3Com, pursuant to the
terms of the Indemnification and Insurance Matters Agreement, we will indemnify
and hold 3Com harmless for any damages or losses which may arise out of this
litigation. In particular, an adverse determination in the Xerox litigation
could subject us to substantial damages and require us to indemnify our

                                       53
<PAGE>

customers and licensees for damages that they may suffer. Moreover, if there is
an adverse determination, a license may be necessary to continue using the
Grafitti script recognition software in our Palm devices and Palm platform. A
license may not be available or on terms acceptable to us. If upon an adverse
determination we were unable to obtain a license on terms acceptable to us, we
could be required to modify our script recognition software or license
alternative script recognition software from third parties for inclusion in our
Palm devices and our Palm platform.

  On July 22, 1999, we filed a copyright infringement action against Olivetti
and CompanionLink in the United States District Court for the Northern District
of California and obtained a preliminiary injunction against further
distribution, sale, import or export of Olivetti Office USA's "Royal daVinci"
handheld device and the daVinci OS Software Development Kit, distributed by
CompanionLink Software, Inc. The injunction is to remain in effect pending the
outcome of the lawsuit. We also initiated a copyright infringement action in
Hong Kong on July 21, 1999, against EchoLink Design Ltd., the company
responsible for developing the operating system software contained in the
daVinci products. The High Court of the Hong Kong Special Administrative Region
issued an order the same day restraining EchoLink from further copying,
distribution, sale, import or export of Palm OS operating system source code or
EchoLink's "NEXUS OS" source code, which we maintain infringes our copyrights.

                                       54
<PAGE>

                                   MANAGEMENT

Directors, Executive Officers and Key Employees

  Set forth below is information concerning our directors and executive
officers and their ages as of October 31, 1999.

<TABLE>
<CAPTION>
          Name           Age                          Position
          ----           ---                          --------
<S>                      <C> <C>
Directors and Executive
 Officers:
Carl J. Yankowski.......  51 Chief Executive Officer and Director
Eric A. Benhamou........  44 Director
James L. Barksdale......  56 Director
Gordon A. Campbell......  55 Director
Susan G. Swenson........  51 Director
Alan J. Kessler.........  42 President
Judy Bruner.............  41 Senior Vice President and Chief Financial Officer
Stephen Yu..............  34 Vice President, General Counsel and Secretary
Key Employees:
Mark Bercow.............  38 Vice President, Strategic Alliances & Platform Development
Gregory S. Rhine........  41 Vice President, Worldwide Sales
Peng K. Lim.............  36 Vice President, Worldwide Product Engineering
Daniel S. Keller........  43 Vice President, Platform Engineering
Dinesh Raghavan.........  45 Vice President, Global Supply Chain Operations
Charles Yort............  40 Vice President, Enterprise
Byron Connell...........  39 Vice President, Product Marketing
Robert Harvey...........  47 Senior Director, Palm.net Services
Douglas Haslam..........  49 Director, Human Resources
David de Valk...........  30 Director, Global Service and Support
</TABLE>

   Carl J. Yankowski has been our Chief Executive Officer and one of our
directors since December 1999. From September 1998 to December 1999, Mr.
Yankowski was Executive Vice President of Reebok International Ltd. and
President and Chief Executive Officer of the Reebok Division. From November
1993 to January 1998, Mr. Yankowski was President and Chief Operating Officer
of Sony Electronics Inc., a subsidiary of the Sony Corporation. Mr. Yankowski
holds a Bachelor of Science degree in electrical engineering from the
Massachusetts Institute of Technology as well as a Bachelor of Science degree
in management which he earned concurrently from MIT's Sloan School of
Management. Mr. Yankowski also serves as a director of Safeguard Scientifics
and Avidyne, Inc., and he is a member of the board of advisors of Boston
College Business School.

  Eric A. Benhamou has served as one of our directors since September 1999. Mr.
Benhamou has been 3Com's Chief Executive Officer since September 1990 and also
served as 3Com's President from April 1990 through August 1998. Mr. Benhamou
has been 3Com's Chairman of the Board of Directors since July 1994. Mr.
Benhamou served as 3Com's Chief Operating Officer from April 1990 through
September 1990. From October 1987 through April 1990, Mr. Benhamou held various
general management positions within 3Com. Mr. Benhamou also serves as Chairman
of the Board of Cypress Semiconductor, Inc. and as a director of Legato
Systems, Inc. Mr. Benhamou is a member of President Clinton's Information
Technology Advisory Council.

  James L. Barksdale has served as one of our directors since September 1999.
Mr. Barksdale has been a managing partner at The Barksdale Group since he
founded it in April 1999. Prior to that, he served as President, Chief
Executive Officer and a director of Netscape Communications Corporation, an
Internet browser company, from January 1995 to April 1999. Previously,

                                       55
<PAGE>

Mr. Barksdale had been President and Chief Executive Officer of AT&T Wireless
Services since September 1994. From 1992 to September 1994, Mr. Barksdale had
been employed as President and Chief Operating Officer of McCaw Cellular
Communications, Inc., and from 1979 to 1992 by Federal Express Corporation. Mr.
Barksdale also serves as a director of Robert Mondavi Corporation, Sun
Microsystems, Inc., America Online, Inc., Liberate Technologies,
Homegrocer.com, Inc. and Respond.com, Inc.

  Gordon A. Campbell has served as one of our directors since September 1999.
Mr. Campbell is the founder and, since 1993, has been President and Chairman of
the Board of Techfarm, Inc., a company formed to launch technology-based start-
up companies. Mr. Campbell was the founder of CHIPS and Technologies, Inc., a
company that designs and distributes very large scale integrated circuit
products, and served as its President and Chief Executive Officer from December
1984 until November 1993, and as its Chairman of the Board from December 1984
until November 1995. Mr. Campbell also serves as a director of Bell
Microproducts, Inc., Chairman of the Board of 3D/Fx Interactive Inc. and
Chairman of the Board of Cobalt Networks, Inc.

  Susan G. Swenson has served as one of our directors since October 1999. Ms.
Swenson is President and Chief Operating Officer of Leap Wireless
International, Inc. and Chief Executive Officer of Cricket Communications, Inc.
since July 1999. Ms. Swenson has also been a director of Leap since July 1999.
From March 1994 to July 1999, Ms. Swenson served as President and Chief
Executive Officer for Cellular One, a joint venture between AirTouch/Vodafone
and AT&T Wireless. Ms. Swenson is also a director of Wells Fargo Bank, General
Magic and Working Assets.

  Alan J. Kessler has been President of Palm since June 1999. From April 1998
to June 1999, Mr. Kessler was Senior Vice President of Global Customer Service
for 3Com. From July 1997 to April 1998, Mr. Kessler was Senior Vice President
of Worldwide Enterprise Sales and Service for 3Com. From October 1985 to July
1997, Mr. Kessler held a variety of sales and marketing management positions at
3Com, including Vice President of 3Com's North America System Sales, Vice
President and General Manager of 3Com's Internetworking Product Group and a
Director of Marketing with responsibility for key network communication product
lines. Mr. Kessler holds a Master of Business Administration degree from the
University of California, Berkeley and a Bachelor of Science degree in
business, with honors, from San Jose State University.

  Judy Bruner has served as Senior Vice President and Chief Financial Officer
of Palm since September 1999. From April 1998 to September 1999, Ms. Bruner was
Vice President and Corporate Controller at 3Com. From October 1996 to April
1998, Ms. Bruner was the Vice President, Finance for 3Com's Enterprise Systems
Business Unit. From June 1995 to October 1996, she served as 3Com's Vice
President and Corporate Treasurer. From April 1988 to June 1995 Ms. Bruner
served in a variety of 3Com financial management positions including Corporate
Treasurer. Prior to joining 3Com, Ms. Bruner most recently served as the Vice
President and Chief Financial Officer for Ridge Computers Inc., a privately
held company that designed and manufactured computer systems. She was with
Ridge Computers Inc. from December 1984 until April 1988. From July 1980 to
December 1984, Ms. Bruner held a variety of accounting and finance positions at
Hewlett-Packard Company. Ms. Bruner holds a Bachelor of Arts degree in
Economics from the University of California, Los Angeles and a Master of
Business Administration degree from Santa Clara University.

  Stephen Yu has served as Vice President, General Counsel and Secretary since
September 1999. From November 1994 to September 1999, Mr. Yu held various
positions within the 3Com legal department, most recently serving as 3Com's
Legal Director, Business Development and West Coast Product Operations. From
September 1990 to November 1994, Mr. Yu was an associate attorney with Gray
Cary Ware & Freidenrich, a law firm located in Palo Alto, California. Mr. Yu
received a Juris Doctor degree cum laude from Georgetown University Law Center
and a Bachelor of Science degree in electrical engineering from Purdue
University.

                                       56
<PAGE>

  Mark Bercow has been Palm's Vice President, Strategic Alliances and Platform
Development since July 1997. Prior to joining Palm, from January 1997 to July
1997, he was Director of Marketing for the Cable Access Products Division of
3Com. From September 1995 to September 1996, Mr. Bercow was Vice President,
Marketing and Business Development at FirstFloor Software, Inc. From September
1994 to September 1995 he was the General Manager of the David Systems
subsidiary of Chipcom Corporation and from September 1993 to September 1994, he
was Acting Vice President, Marketing at Chipcom Corporation. Prior to joining
Chipcom, Mr. Bercow was Group Manager, Marketing at Sun Microsystems, Inc. He
holds a Bachelor of Science degree in business administration from California
State University, Northridge.

  Gregory S. Rhine has served as Palm's Vice President of Worldwide Sales since
June 1999. From October 1997 to May 1999, Mr. Rhine served as Vice President
and General Manager for VeriFone, Inc., a division of Hewlett-Packard Company.
From January 1997 to September 1997, Mr. Rhine was Vice President of American
Channel Development and Sales at Apple. From May 1988 to December 1996, Mr.
Rhine held a variety of sales and management positions at Apple, including
Senior Director U.S. Distribution Sales, Director, Value Added Reseller (VAR)
sales, and Regional Sales Manager. Prior to Apple, from July 1979 to April
1988, Mr. Rhine worked for Olin Corporation in various areas of responsibility
including business development and marketing. Mr. Rhine holds a degree in
Business Administration from the University of Missouri and has completed
graduate work at West Coast University and executive management programs at The
Kellogg School of Business in Evanston, Illinois.

  Peng K. Lim has served as Vice President, Worldwide Product Engineering of
Palm since April 1999. From June 1997 to March 1999, Mr. Lim served as Vice
President, Engineering at Fujitsu Personal Systems Inc. From July 1996 to June
1997, he was Engineering Platform Director for Texas Instruments Incorporated.
Mr. Lim was Director of Engineering for Zenith Data Systems Corporation from
September 1993 to June 1996. Prior to that, Mr. Lim was Director of Engineering
at Dauphin Technology, Inc. Mr. Lim received his Bachelor of Science degree and
Master of Science degree in electrical engineering from University of Windsor
in Canada and Master of Engineering Management from Northwestern University.
Mr. Lim completed the executive management program at Stanford University.

  Daniel S. Keller has been Palm's Vice President of Platform Engineering since
August 1999. From June 1998 to July 1999, Mr. Keller was Director, Product
Engineering and from November 1997 to May 1998, he was Director, Corporate
Solutions Engineering. Prior to joining Palm, from April 1996 to September
1997, Mr. Keller was Vice President of Product Development for Power Agent,
Inc., an Internet company creating a large-scale, Internet system for bringing
buyers and sellers together. From November 1991 to March 1996 he was Director
of Development System Products at Taligent, Inc. From November 1980 to October
1991, Mr. Keller was at Apple Computer, Inc., where he held various positions
in the development of Apple's system software, graphical human interface,
development systems, and Japanese products. Prior to Apple, from June 1978 to
October 1980, he worked in operating system engineering at Hewlett-Packard
Company. Mr. Keller received his Bachelor of Science degree in Computer
Engineering with high honors from the University of California, San Diego.

  Dinesh Raghavan joined Palm in October 1998 as Vice President, Global Supply
Chain Operations. Prior to joining Palm, from May 1997 to September 1998.
Mr. Raghavan held the position of Director of Manufacturing Operations for the
European Paging Subscriber Division of Motorola, Inc. based in Dublin, Ireland.
From August 1977 to April 1997, Mr. Raghavan held various positions of
increasing responsibility in development engineering and manufacturing
management with Motorola. He holds a Bachelor of Technology degree in
electrical engineering from the Indian Institute of Technology in Kanpur, India
and a Masters in Business Administration degree from Nova University in Fort
Lauderdale, Florida.

                                       57
<PAGE>

  Charles Yort has been Vice President, Enterprise for Palm since November
1999. From September 1998 to November 1999, Mr. Yort was the Senior Director of
Palm Computing's enterprise sales team. Prior to joining Palm, from December
1996 to August 1998, Mr. Yort was the Director of Small Business Operations for
3Com. From September 1995 to November 1996, Mr. Yort was Director of Market
Development for 3Com. Prior to joining 3Com, from June 1993 to August 1995, Mr.
Yort was Marketing Manager for the PC Division of Inmac Corporation, a reseller
of computer related products. From August 1981 to June 1993, Mr. Yort worked in
various marketing, business development and engineering roles for Hewlett-
Packard Company. Mr. Yort holds a Masters in Business Administration degree
from Stanford University's Graduate School of Business, with concentrations in
Strategic Management and Finance. He earned a Bachelor of Science in
Engineering and Bachelor of Arts in Economics from Princeton University.

  Byron Connell has been Vice President, Marketing since July 1999. From
September 1998 to December 1999, Mr. Connell was Senior Director of Product
Marketing for Palm and from July 1997 to August 1998, he was Director of
Product Marketing. From December 1994 to July 1997, Mr. Connell was the Group
Manager of Product Marketing for the Home Products Division of Hewlett- Packard
Company. From February 1993 to December 1994, Mr. Connell was the Group Manager
of Customer Requirements for Apple Computer, Inc. and from July 1988 to January
1993, he worked in a variety of sales, channel, and marketing management
positions for Apple Computer, Inc. Mr. Connell holds a Bachelor of Science
degree in Business Administration from the University of Southern California
and a Master of Management degree in marketing, international business and
management policy from the J.L. Kellogg Graduate School of Management at
Northwestern University. As an international exchange student, Mr. Connell also
studied at the Rotterdam School of Management Master of Business Administration
program at Erasmus University, Netherlands.

 Robert Harvey has served as Director, Palm.net since December 1997. From
November 1983 to November 1997, Mr. Harvey held a variety of manufacturing and
operations positions at Apple Computer, Inc., including Director of Mobile
Computing Operations from May 1995 to November 1997. From October 1973 to
October 1983, Mr. Harvey worked with the Palo Alto Police Department, most
recently serving as Captain, Uniform Division. Mr. Harvey holds a Bachelor of
Science degree in Sociology from the University of Santa Clara and a Masters of
Public Administration from California State University, Hayward.

  Doug Haslam has been Director, Human Resources for Palm since January 1997.
From January to December 1996, Mr. Haslam led Human Resources for the DDS
Division of Xerox Corporation. From September 1991 to September 1995, Mr.
Haslam was Director, Human Resources for Kenetech Windpower Corporation, and
from January 1988 to September 1991, he was Principal of his own Human
Resources consulting practice. From January 1985 to January 1988, Mr. Haslam
was Director, Human Resources for EOS, Inc., and from April 1981 to January
1985, he was Human Resources Manager for EOS, Inc. He has a Bachelor of Arts
degree in Political Science from Ohio University and a Masters in Public
Administration degree from University of California, Los Angeles.

  David de Valk has been Director of Customer Service since October 1999. From
September 1998 to October 1999, Mr. de Valk served as Director, e-Business
Strategy and Architecture for 3Com Global Customer Service. From June 1997 to
September 1998, Mr. de Valk held several senior service positions in 3Com
Global Customer Service, most recently Director, Network Solutions Services.
From September 1991 to June 1997, Mr. de Valk worked in various Technical
Support positions including Manager, Applications Engineering for U.S. Robotics
Corporation. Mr. de Valk attended Eureka College.

                                       58
<PAGE>

Board Structure and Compensation

  Our board of directors is divided into three classes serving staggered three-
year terms. Mr. Yankowski's initial term will expire in 2000. Mr. Campbell's
and Ms. Swenson's initial terms will expire in 2001. Messrs. Benhamou's and
Barksdale's initial terms will expire in 2002.

  Non-employee directors will be paid an annual retainer equal to $20,000 and
be eligible for stock option grants under the Director Plan at such times and
in such amounts as are set forth in the Director Plan.

 Audit Committee

  Mr. Campbell and Ms. Swenson are members of our audit committee. Our audit
committee reviews our auditing, accounting, financial reporting and internal
control functions and makes recommendations to the board of directors for the
selection of independent accountants. In addition, the committee monitors the
quality of our accounting principles and financial reporting, our compliance
with foreign trade regulations as well as the independence of and the non-audit
services provided by our independent accountants. In discharging its duties,
the audit committee:

  .  reviews and approves the scope of the annual audit and the independent
     accountant's fees;

  .  meets independently with our internal auditing staff, our independent
     accountants and our senior management; and

  .  reviews the general scope of our accounting, financial reporting, annual
     audit and internal audit program, matters relating to internal control
     systems as well as the results of the annual audit.

Compensation Committee

  Messrs. Barksdale and Campbell are members of our compensation committee. Our
compensation committee determines, approves and reports to the board on all
elements of compensation for our elected officers including targeted total cash
compensation and long-term equity based incentives.

Stock Ownership of Directors and Executive Officers

  All of our common stock is currently owned by 3Com, and thus none of our
officers, directors or director nominees own any of our common stock. To the
extent our directors and officers own shares of 3Com common stock at the time
of the distribution, they will participate in the distribution on the same
terms as other holders of 3Com common stock.

                                       59
<PAGE>

  The following table sets forth the number of shares of 3Com common stock
beneficially owned on October 31, 1999 by each director, each of the executive
officers named in the Summary Compensation Table in the "--Executive
Compensation" section below, and all of our directors, director nominees and
executive officers as a group. Except as otherwise noted, the individual
director or executive officer or their family members had sole voting and
investment power with respect to such securities. The total number of shares of
3Com common stock outstanding as of October 31, 1999 was 341,225,466.

<TABLE>
<CAPTION>
                                                          Shares of 3Com
                                                        Beneficially Owned
                                                       -------------------- ---
   Name of Beneficial Owner                             Number   Percentage
   ------------------------                            --------- ----------
   <S>                                                 <C>       <C>        <C>
   Carl J. Yankowski..................................       --       *
   Eric A. Benhamou(1)................................ 1,788,817      *
   James L. Barksdale(2)..............................   120,000      *
   Gordon A. Campbell(3)..............................    52,875      *
   Susan G. Swenson...................................       --       *
   Alan J. Kessler(4).................................   179,716      *
   Judy Bruner(5).....................................    76,402      *
   Stephen Yu(6)......................................    10,903      *
   All directors and executive officers as a group.... 2,228,713      *
</TABLE>
--------
 *  Represents holdings of less than one percent.

(1) Includes 1,377,505 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999.

(2) Includes 60,000 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999 and 60,000 shares are held by Mr.
    Barksdale and his spouse.

(3) Includes 52,875 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999.

(4) Includes 179,716 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999.

(5) Includes 74,381 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999.

(6) Includes 10,164 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999.

                                       60
<PAGE>

Executive Compensation

  The following table sets forth compensation information for the chief
executive officer and the three other executive officers of Palm who, based on
salary and bonus compensation from 3Com and its subsidiaries, were the most
highly compensated for the year ended May 28, 1999. All information set forth
in this table reflects compensation earned by these individuals for services
with 3Com and its subsidiaries for the fiscal year ended May 28, 1999.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                       Long-Term
                                                      Compensation
                                          Annual      ------------
                                       Compensation      Awards
                                     ---------------- ------------
                                                       Securities   All Other
                                               Bonus   Underlying  Compensation
    Name and Principal Position      Salary($) ($)(1)  Options(#)     ($)(2)
    ---------------------------      --------- ------ ------------ ------------
<S>                                  <C>       <C>    <C>          <C>
Eric A. Benhamou, Chief Executive
 Officer and Director(3)...........   750,000      --   273,425       12,092
Alan J. Kessler, President.........   400,000      --    83,500       10,466
Judy Bruner, Senior Vice President
 and Chief Financial Officer.......   204,967  16,504    35,000        5,480
Stephen Yu, Vice President, General
 Counsel and Secretary.............   130,242   7,946    10,950        3,564
</TABLE>
--------
(1) The amounts shown in this column reflect payments made under 3Com's
    company-wide profit-sharing plan. 3Com distributed these amounts at six-
    month intervals to all employees worldwide, other than those who are paid
    commissions, including executive officers, with the individual payments
    determined pro rata based on salary level.
(2) All other compensation includes group term life insurance premiums,
    payments made to reimburse a spouse's travel costs to 3Com events and
    401(k) matching payments.
(3) Mr. Benhamou ceased serving as our Chief Executive Officer in December
    1999.

Grants of Stock Options

  The following table shows all grants of options to acquire shares of 3Com
common stock to the executive officers named in the Summary Compensation Table
in the fiscal year ended May 28, 1999.

<TABLE>
<CAPTION>
                                                                                   Potential Realizable
                                                                                     Value at Assumed
                                              % of Total                           Annual Rates of Stock
                             Number of      Options Granted                          Appreciation for
                             Securities         to 3Com     Exercise or               Option Term(4)
                         Underlying Options  Employees in   Base Price  Expiration ---------------------
Name                       Granted(#)(1)    Fiscal Year(2)   ($/Sh)(3)     Date      5%($)      10%($)
----                     ------------------ --------------- ----------- ---------- ---------- ----------
<S>                      <C>                <C>             <C>         <C>        <C>        <C>
Eric A. Benhamou........      175,000               *         24.0000      6/1/08  $2,641,357 $6,693,718
                               54,675               *         25.5000      9/1/08     876,813  2,222,016
                               43,750               *         38.6875    11/30/08   1,064,453  2,697,534
Alan J. Kessler.........       52,500               *         24.0000      6/1/08     792,407  2,008,116
                               17,875               *         25.5000      9/1/08     286,658    726,448
                               13,125               *         38.6875    11/30/08     319,336    809,260
Judy Bruner.............       20,000               *         28.0625     7/22/08     352,967    894,488
                                8,000               *         20.4375     4/19/09     102,824    260,577
                                4,000               *         20.4375     4/19/09      51,412    130,288
Stephen Yu..............        6,000               *         28.0625     7/22/08     105,890    268,346
                                4,000               *         20.4375     4/19/09      51,412    130,288
                                  950               *         28.5000     5/19/09      17,027     43,151
</TABLE>
--------
 *Less than one percent.

                                       61
<PAGE>

(1) All of the above options are subject to the terms of 3Com's 1983 Stock
    Option Plan or 1994 Stock Option Plan and are exercisable only as they
    vest. The options granted to each executive officer vest and become
    exercisable in equal annual increments over a four year period provided the
    optionee continues to be employed by us.

(2) Based on a total of 18,938,977 shares granted to all 3Com employees in
    fiscal 1999.

(3) All options were granted at an exercise price equal to the fair market
    value of 3Com's common stock on the date of grant.

(4) Potential realizable values are net of exercise price, but before deduction
    of taxes associated with exercise. These amounts represent certain assumed
    rates of appreciation only, based on the Securities and Exchange Commission
    rules, and do not represent our estimate of future stock prices. No gain to
    an optionee is possible without an increase in stock price, which will
    benefit all stockholders commensurately. A zero percent gain in stock price
    will result in zero dollars for the optionee. Actual realizable values, if
    any, on stock option exercises are dependent on the future performance of
    our common stock, overall market conditions and the option holders'
    continued employment through the vesting period.

Exercises of Stock Options

  The following table shows aggregate exercises of options to purchase 3Com
common stock in the fiscal year ended May 28, 1999 by the executive officers
named in the Summary Compensation Table in the "--Executive Compensation"
section above.

<TABLE>
<CAPTION>
                                                     Number of Securities          Value of Unexercised In-
                                                    Underlying Unexercised           The-Money Options at
                           Shares                Options at Fiscal Year-End(#)      Fiscal Year-End ($)(1)
                         Acquired on    Value    --------------------------------  -------------------------
          Name           Exercise(#) Realized($)  Exercisable      Unexercisable   Exercisable Unexercisable
          ----           ----------- -----------  -----------     ---------------  ----------- -------------
<S>                      <C>         <C>         <C>              <C>              <C>         <C>
Eric A. Benhamou........   200,000   $8,625,498         1,162,398          516,175 $15,530,295   $678,786
Alan J. Kessler.........    30,000      810,894            98,840          187,500         --     206,305
Judy Bruner.............    10,000      185,625            63,151           51,585     433,874    302,344
Stephen Yu..............     3,200       79,400             7,186           16,679      20,438     81,750
</TABLE>
--------
(1) Based on fair market value of $27.3125 per share as of May 28, 1999, the
    closing sale price of 3Com's common stock on that date as reported by the
    Nasdaq National Market System.

Employment Arrangements

  Mr. Yankowski serves as our Chief Executive Officer and as a director. Under
the terms of his employment, Mr. Yankowski's annual base compensation is
$600,000 and he is eligible for a target cash bonus of $600,000 per year. In
addition, subject to board approval, Mr. Yankowski will receive an employee
stock option grant equivalent in value to $48 million based on the price per
share in this offering or no more than 2% of the shares outstanding at the time
of this offering. This option will vest 25% per year over a period of four
years and is subject to the terms and conditions of the 1999 Stock Plan. In the
event that Mr. Yankowski is terminated for any reason other than cause during
the first two years of his employment, he is entitled to receive continued
salary payments and continued vesting of his stock option for a two-year period
if the termination occurs within the first six months of his employment, an 18-
month period if the termination occurs within the second six months, or a 12-
month period if the termination occurs within the second year. Pursuant to a
management retention agreement, Mr. Yankowski is entitled to severance benefits
in the event that, within 24 months following a change of control, his
employment is terminated involuntarily other than for cause, death or
disability or by Mr. Yankowski voluntarily for good reason. These severance
benefits include a severance payment of 200% of his salary and target bonus,
continued employee benefits, pro-rated bonus payment, and full acceleration of
vesting on Mr. Yankowski's stock options.

                                       62
<PAGE>

Treatment of 3Com Options

  We intend to assume substantially all of the 3Com options held by our
employees on the distribution date. As of October 31, 1999, our employees held
options to purchase 2,610,815 shares of 3Com common stock at a weighted average
exercise price per share of $28.02. The price of 3Com common stock on that date
was $29.00. These assumed options are expected to convert at the distribution
into options to purchase our common stock. The number of shares and the
exercise price of 3Com options that convert into our options are expected to be
adjusted using a conversion formula. The conversion formula is expected to be
based on the opening per share price of our common stock on the first trading
day after the distribution relative to the closing per share price of 3Com
common stock on the last trading day before the distribution. The resulting
options are expected to maintain the original vesting provisions and option
periods.

Treatment of 3Com Restricted Stock

  Under the 3Com Restricted Stock Plan, some of our key employees were granted
restricted stock awards. As of October 31, 1999, our employees held 24,000
unvested 3Com restricted shares. The unvested 3Com restricted shares held by
our employees are expected to be forfeited on the distribution. We intend to
provide our employees who forfeit 3Com restricted shares with replacement
restricted shares of our common stock granted at the time of the distribution.
The replacement restricted shares are expected to have substantially the same
vesting provisions as the forfeited 3Com restricted shares.

Incentive Plans

  1999 Stock Plan

  Our board of directors adopted the 1999 Stock Plan, referred to as the "1999
Plan," in November 1999, and our stockholder initially approved our 1999 Plan
in November 1999. Our 1999 Plan provides for the grant of incentive stock
options to our employees, and for the grant of nonstatutory stock options and
stock purchase rights to our employees, directors and consultants.

  Number of Shares of Common Stock Available under the 1999 Plan. As of     ,
1999, a total of            shares of our common stock were reserved for
issuance pursuant to the 1999 Plan. No options to acquire shares of our common
stock were issued and outstanding as of that date. Our 1999 Plan provides for
annual increases in the number of shares available for issuance on the first
day of each fiscal year, beginning with our 2001 fiscal year, equal to the
lesser of 5% of our outstanding shares of common stock on that date,
shares or a lesser amount determined by our board.

  Administration of the 1999 Plan. Our board of directors or a committee of our
board administers the 1999 Plan. In the case of options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the committee will consist of two or more "outside directors" within the
meaning of Section 162(m) of the Code. The administrator has the power to
determine the terms of the options or stock purchase rights granted, including
the exercise price, the number of shares subject to each option or stock
purchase right, the exercisability of the options and the form of consideration
payable upon exercise.

  Options. The administrator determines the exercise price of options granted
under the 1999 Plan, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code and all incentive stock options, the exercise price must at
least be equal to the fair market value of our common stock on the grant date.
The term of an incentive stock option may not exceed ten years, except that
with respect to any participant who owns 10% of the voting power of all classes
of our outstanding capital stock, the term

                                       63
<PAGE>

must not exceed five years and the exercise price must at least equal 110% of
the fair market value on the grant date. The administrator determines the term
of all other options.

  No optionee may be granted an option to purchase more than         shares in
any fiscal year, except that in connection with his or her initial service, an
optionee may be granted an additional option to purchase up to          shares.

  After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for 3 months. However, an option may never be
exercised later than the expiration of its term.

  Stock Purchase Rights. The administrator determines the exercise price of
stock purchase rights granted under our 1999 Plan. Unless the administrator
determines otherwise, the restricted stock purchase agreement will grant us a
repurchase option that we may exercise upon the voluntary or involuntary
termination of the purchaser's service with us for any reason, including death
or disability. The purchase price for shares we repurchase will generally be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The administrator determines the rate at
which our repurchase option will lapse.

  Transferability of Options and Stock Purchase Rights. Our 1999 Plan generally
doesn't allow for the transfer of options or stock purchase rights and only the
optionee may exercise an option or stock purchase right during his or her
lifetime.

  Adjustments upon Merger or Asset Sale. Our 1999 Plan provides that in the
event of our merger with or into another corporation or a sale of substantially
all of our assets, the successor corporation will assume or substitute an
equivalent award for each option or stock purchase right. If following such an
assumption or substitution, the holder of an option or stock purchase right is
terminated without cause, then the vesting and exercisability of 50% of the
then unvested shares subject to his or her option or stock purchase right shall
accelerate. If the outstanding options or stock purchase rights are not assumed
or substituted for in connection with a merger or sale of assets, the
administrator will provide notice to the optionee that he or she has the right
to exercise the option or stock purchase right as to all of the shares subject
to the option or stock purchase right, including shares which would not
otherwise be exercisable, for a period of 15 days from the date of the notice.
The option or stock purchase right will terminate upon the expiration of the
15-day period.

  Amendment and Termination of our 1999 Plan. Our 1999 Plan will automatically
terminate in 2009, unless we terminate it sooner. In addition, our board of
directors has the authority to amend, suspend or terminate the 1999 Plan,
provided it does not adversely affect any option previously granted under our
1999 Plan.

1999 Employee Stock Purchase Plan

  Concurrently with this offering, we intend to establish an Employee Stock
Purchase Plan, referred to as the "Purchase Plan."

  Number of Shares of Common Stock Available under the Purchase Plan. A total
of         shares of our common stock will be made available for sale. In
addition, our Purchase Plan provides for annual increases in the number of
shares available for issuance on the first day of each fiscal year, beginning
with our 2001 fiscal year, equal to the lesser of 2% of the outstanding shares
of our common stock on the first day of the fiscal year,         shares, or a
lesser amount as may be determined by our board of directors.

                                       64
<PAGE>

  Administration of the Purchase Plan. Our board of directors or a committee of
our board administers the Purchase Plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the
Purchase Plan and determine eligibility.

  Eligibility to Participate. All of our employees are eligible to participate
if they are customarily employed by us or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year.
However, an employee may not be granted an option to purchase stock under the
Purchase Plan if:

  .  immediately after grant the employee owns stock possessing 5% or more of
     the total combined voting power or value of all classes of our capital
     stock, or

  .  the employee's rights to purchase stock under all of our employee stock
     purchase plans accrues at a rate that exceeds $25,000 worth of stock for
     each calendar year.

  Offering Periods and Contributions. Our Purchase Plan is intended to qualify
under Section 423 of the Code and contains consecutive and overlapping 24-month
offering periods. Each offering period includes four 6-month purchase periods.
The offering periods generally start on the first trading day on or after April
1 and October 1 of each year, except for the first such offering period which
will commence on the first trading day on or after the effective date of this
offering and will end on the last trading day on or before March 31, 2002.

  Our Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 10% of their eligible compensation, which includes
a participant's base salary, and commission but excludes all other compensation
paid to the participant. A participant may purchase a maximum of     shares
during a 6-month purchase period.

  Purchase of Shares. Amounts deducted and accumulated by the participant are
used to purchase shares of our common stock at the end of each six-month
purchase period. The price is 85% of the lower of the fair market value of our
common stock at either the beginning or end of an offering period. If the fair
market value at the end of a purchase period is less than the fair market value
at the beginning of the offering period, participants will be withdrawn from
the current offering period following their purchase of shares on the purchase
date and will be automatically re-enrolled in a new offering period.
Participants may end their participation at any time during an offering period,
and will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.

  Transferability of Rights. A participant may not transfer rights granted
under the Purchase Plan other than by will, the laws of descent and
distribution or designation of a beneficiary as provided under the Purchase
Plan.

  Adjustments upon Merger or Asset Sale. In the event of our merger with or
into another corporation or a sale of all or substantially all of our assets, a
successor corporation may assume or substitute for each outstanding option. If
the successor corporation refuses to assume or substitute for the outstanding
options, the offering periods then in progress will be shortened, and a new
exercise date will be set prior to the merger or sale of assets.

  Amendment and Termination of the Purchase Plan. Our Purchase Plan will
terminate in 2009. However, our board of directors has the authority to amend
or earlier terminate our Purchase Plan, except that, subject to exceptions
described in the Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under our Purchase Plan.

1999 Director Option Plan

  Our board of directors adopted the 1999 Director Option Plan, referred to as
the "Director Plan", in November 1999, and our stockholder initially approved
the Director Plan in November 1999. The

                                       65
<PAGE>

Director Plan provides for the periodic grant of nonstatutory stock options to
our non-employee directors.

  Number of Shares Available under the Director Plan. As of     , 1999, a total
of          shares were reserved for issuance under the Director Plan. No
options to acquire shares were issued and outstanding as of this date. Our
Director Plan provides for annual increases in the number of shares of common
stock available for issuance on the first day of each fiscal year, beginning
with our 2001 fiscal year, equal to          shares or a lesser amount
determined by our board.

  Options. All grants of options to our non-employee directors under the
Director Plan are automatic. We will grant each non-employee director an option
to purchase      shares upon the later of the effective date of the Director
Plan and the date when such person first becomes a non-employee director,
except for those directors who became non-employee directors by ceasing to be
employee directors. In addition, all non-employee directors who have served for
at least 6 months receive an option to purchase         shares on the date of
each annual meeting of our stockholders at which the non-employee director is
re-elected to our board of directors.

  All options granted under our Director Plan have a term of ten years and an
exercise price equal to the fair market value of our common stock on the date
of grant. Each      share option becomes exercisable as to 33% of the shares
subject to the option on each anniversary of the date of grant, and each
    share option, becomes exercisable as to 100% of the shares subject to the
option on the first anniversary of the date of grant, provided in each case the
non-employee director remains a director on those dates.

  After termination as a non-employee director, an optionee must exercise his
or her option at the time set forth in his or her option agreement. If
termination is due to death or disability, the option will generally remain
exercisable for 12 months. In all other cases, the option will generally remain
exercisable for a period of 3 months. However, an option may never be exercised
later than the expiration of its term.

  Transferability of Options. A non-employee director may not transfer options
granted to him or her under our Director Plan other than by will or the laws of
descent and distribution. Only the non-employee director may exercise his or
her options during his or her lifetime.

  Adjustments upon Change of Control. In the event of our merger with or into
another corporation in which our stockholders before such transaction do not
continue to hold at least 50% of the successor or resulting entity, a sale of
substantially all of our assets and other transactions set forth in the
Director Plan, the exercisability of each option granted under the Director
Plan shall accelerate as to all of the shares subject to the option. The option
will terminate following the change of control transaction.

  Amendment and Termination of the Director Plan. Unless terminated sooner, our
Director Plan will automatically terminate in 2009. Our board of directors has
the authority to amend, alter, suspend, or discontinue the Director Plan, but
none of those actions may adversely affect any grant made under the Director
Plan.

                                       66
<PAGE>

                       ARRANGEMENTS BETWEEN PALM AND 3COM

  We have provided below a summary description of the executed master
separation and distribution agreement, along with the key related agreements,
which we expect to be executed prior to the completion of this offering. This
description, which summarizes the material terms of the agreements, is not
complete. You should read the full text of these agreements, which have been
filed with the Securities and Exchange Commission as exhibits to the
registration statement of which this prospectus is a part.

Master Separation and Distribution Agreement

  The master separation and distribution agreement contains the key provisions
relating to our separation from 3Com, this offering and the distribution of our
shares to 3Com stockholders.

  The Separation. The separation is scheduled to occur on or around February
26, 2000. The separation agreement will provide for the transfer to us of
assets and liabilities from 3Com related to our business as described in this
prospectus, effective on the separation date. The various ancillary agreements
that are exhibits to the separation agreement and which detail the separation
and various interim and ongoing relationships between 3Com and us following the
separation date include:

  .  a general assignment and assumption agreement;

  .  technology, patent, and trademark ownership and license agreements;

  .  an employee matters agreement;

  .  a tax sharing agreement;

  .  a transitional services agreement

  .  a real estate matters agreement;

  .  a confidential disclosure agreement; and

  .  an indemnification and insurance matters agreement.

To the extent that the terms of any of these ancillary agreements conflict with
the separation agreement, the terms of these agreements will govern. These
agreements are described more fully below.

  The Initial Public Offering. Under the terms of the separation agreement 3Com
will own at least   % of our outstanding common stock following this offering
and the private placements to America Online, Motorola and Nokia. We are
obligated to use our reasonable commercial efforts to satisfy the following
conditions to the consummation of this offering, any of which may be waived by
3Com:

  .  the registration statement containing this prospectus must be effective;

  .  United States securities and blue sky laws must be satisfied;

  .  our common stock must be listed on the New York Stock Exchange or the
     Nasdaq Stock Market;

  .  all our obligations under the underwriting agreement must be met or
     waived by the underwriters;

  .  3Com must own at least   % of our stock and must be satisfied that the
     distribution will be tax-free to its United States stockholders;

  .  no legal restraints must exist preventing the separation or this
     offering;

                                       67
<PAGE>

  .  the separation must have occurred; and

  .  the separation agreement must not have been terminated.

  The Distribution. 3Com intends to, following consummation of this offering,
distribute by December 1, 2000 the remaining shares of our common stock that
3Com holds to 3Com stockholders on a pro rata basis. We will prepare an
information statement with 3Com and send it to 3Com stockholders before the
distribution becomes effective. The information statement will inform the
stockholders of the distribution and its specifics. 3Com may, in its sole
discretion, change the distribution date. 3Com intends to consummate the
distribution only if the following conditions are met, any of which may be
waived by 3Com:

  .  the Internal Revenue Service must issue a ruling that the distribution
     of Palm common stock will be tax-free to 3Com stockholders and that the
     transaction will qualify as a reorganization for United States federal
     income tax purposes;

  .  all required government approvals must be in effect;

  .  no legal restraints must exist preventing this distribution; and

  .  nothing must have happened in the intervening time between this offering
     and the distribution that makes the distribution harmful to 3Com or its
     stockholders.

  Covenants Between 3Com and Palm. In addition to signing documents that
transfer control and ownership of various assets and liabilities of 3Com
relating to our business, we have agreed with 3Com to enter into additional
transitional service agreements, exchange information, engage in auditing
practices and resolve disputes in particular ways.

  Additional Transitional Service Agreements. 3Com and we will enter into
transitional service agreements covering the provision of various transitional
services, including financial, legal, accounting, customer service, human
resources administration, supply chain, product order administration,
facilities and information technology services by 3Com to us. These services
will generally be provided for a fee equal to direct and indirect costs of
providing the services plus 5%. The transitional service agreements will
generally have a term of one year or less from the date of separation.

  Information Exchange. Both 3Com and we have agreed to share information with
each other, for a variety of purposes, unless the sharing would be commercially
detrimental. In furtherance of this, both 3Com and we have agreed as follows:

  .  Each party has agreed to maintain adequate internal accounting to allow
     the other party to satisfy its own reporting obligations and prepare its
     own financial statements.

  .  Each party will retain records beneficial to the other party for a
     specified period of time. If the records are going to be destroyed, the
     destroying party will give the other party an opportunity to retrieve
     all relevant information from the records, unless the records are
     destroyed in accordance with adopted record retention policies.

  .  Each party will use commercially reasonable efforts to provide the other
     party with directors, officers, employees, other personnel and agents
     who may be used as witnesses in and books, records and other documents
     which may reasonably be required in connection with legal,
     administrative or other proceedings.

  Auditing Practices. So long as 3Com is required to consolidate our results of
operations and financial position, we have agreed to:

  .  not select a different independent accounting firm from that used by
     3Com without 3Com's consent;

                                       68
<PAGE>

  .  use reasonable commercial efforts to enable our auditors to date their
     opinion on our audited annual financial statements on the same date as
     3Com's auditors date their opinion on 3Com's financial statements;

  .  exchange all relevant information needed to prepare financial
     statements;

  .  grant each other's internal auditors access to each other's records; and

  .  notify each other of any change in accounting principles.

  Dispute Resolution. If problems arise between us and 3Com, we have agreed to
the following procedures:

  .  The parties will make a good faith effort to first resolve the dispute
     through negotiation.

  .  If negotiations fail, the parties agree to attempt to resolve the
     dispute through non-binding mediation.

  .  If mediation fails, the parties can resort to binding arbitration. In
     addition, nothing prevents either party acting in good faith from
     initiating litigation at any time if failure to do so would cause
     serious and irreparable injury to one of the parties or to others.

  No Representations and Warranties. Neither party is making any promises to
the other regarding:

  .  the value of any asset that 3Com is transferring;

  .  whether there is a lien or encumbrance on any asset 3Com is
     transferring; or

  .  the legal sufficiency of any conveyance of title to any asset 3Com is
     transferring.

  No Solicitation. Each party has agreed not to directly solicit or recruit
employees of the other party without the other party's consent for two years
after the distribution date. However, this prohibition does not apply to
general recruitment efforts carried out through public or general solicitation
or where the solicitation is employee-initiated.

  Expenses. All of the costs and expenses related to this offering as well as
the costs and expenses related to the separation and distribution will be
allocated between us and 3Com. We will each bear our own internal costs
incurred in consummating these transactions.

  Termination of the Agreement. 3Com in its sole discretion can terminate the
separation agreement and all ancillary agreements and abandon the distribution
at any time prior to the closing of this offering. Both 3Com and Palm must
agree to terminate the separation agreement and all ancillary agreements at any
time between the closing of this offering and the distribution.

General Assignment and Assumption Agreement

  The general assignment and assumption agreement identifies the assets 3Com
will transfer to us and the liabilities we will assume from 3Com in the
separation. The agreement also describes when and how these transfers and
assumptions will occur.

  Asset Transfer. Effective on the separation date, 3Com will transfer the
following assets to us, to the extent that the assets were, prior to the
separation date, 3Com assets and except as provided in an ancillary agreement
or other agreement:

  .  assets reflected on our balance sheet as of August 27, 1999, minus any
     assets disposed of after August 27, 1999;

  .  written off, expensed or fully depreciated assets that would have
     appeared on our balance sheet as of August 27, 1999, if we had not
     written off, expensed or fully depreciated them;

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<PAGE>

  .  assets that 3Com acquired after August 27, 1999, that would have
     appeared in our financial statements as of the separation date if we
     prepared such financial statements using the same principles we used in
     preparing our balance sheet dated August 27, 1999;

  .  assets that our business primarily uses as of the separation date but
     are not reflected in our balance sheet as of August 27, 1999 due to
     mistake or omission;

  .  contingent gains related primarily to our business;

  .  contracts that relate primarily to our business entered into in our
     name;

  .  specified rights under existing insurance policies; and

  .  other specified assets.

  Excluded Assets. The general assignment and assumption agreement also
provides that 3Com will not transfer selected assets to us, including most
accounts receivable.

  Assumption of Liabilities. Effective on the separation date, we will assume
the following liabilities from 3Com, to the extent that the liabilities were,
prior to the separation date, 3Com liabilities and except as provided in an
ancillary or other agreement:

  .  liabilities reflected as liabilities on our balance sheet as of August
     27, 1999, minus any liabilities that were discharged after such date of
     the balance sheet;

  .  liabilities of 3Com that arise after August 27, 1999 that would have
     appeared in our financial statements as of the separation date if we
     prepared such financial statements using the same principles we used in
     preparing our balance sheet dated August 27, 1999;

  .  liabilities that are primarily related primarily of our business at the
     separation date but are not reflected in our balance sheet as of August
     27, 1999 due to mistake or omission;

  .  contingent liabilities primarily related to our business;

  .  liabilities other than taxes primarily resulting from the operation of
     our business, or resulting from any asset that 3Com transferred to us;

  .  liabilities arising out of specified terminated, divested or
     discontinued businesses and operations; and

  .  other specified liabilities.

  Excluded Liabilities. The general assignment and assumption agreement also
provides that we will not assume specified liabilities, including:

  .  most accounts payable;

  .  any liabilities that would otherwise be allocated to us but which are
     covered by 3Com's insurance policies, unless we are a named insured
     under such policies; and

  .  other specified liabilities.

  The Non-United States Plan. The transfer of international assets and
assumption of international liabilities will be accomplished through agreements
entered into between international subsidiaries. The agreement acknowledges
that circumstances in jurisdictions outside of the United States may require
the timing of the international separation to be delayed past the separation
date.

  Delayed Transfers. If it is not practicable to transfer specified assets and
liabilities on the separation date, the agreement provides that these assets
and liabilities will be transferred after the separation date.

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<PAGE>

  Terms of Other Ancillary Agreements Govern. If another ancillary agreement
expressly provides for the transfer of an asset or an assumption of a
liability, the terms of the other ancillary agreement will determine the manner
of the transfer and assumption.

  Obtaining Approvals and Consents. The parties agree to use all reasonable
efforts to obtain any required consents, substitutions or amendments required
to novate or assign all rights and obligations under any contracts that will be
transferred in the separation.

  Nonrecurring Costs and Expenses. Any nonrecurring costs and expenses that are
not allocated in the separation agreement or any other ancillary agreement
shall be the responsibility of the party that incurs the costs and expenses.

Master Technology Ownership and License Agreement

  The master technology ownership and license agreement, or the master
technology agreement, allocates rights in technology other than patents, patent
applications and invention disclosures. In the master technology agreement,
3Com will confirm that we own all technology developed by us and, to the extent
that any technology is registered in 3Com's name or 3Com otherwise has any
ownership rights in that technology, 3Com will assign it to us. In addition,
specified manufacturing technology will be jointly owned. 3Com will not
restrict our right to use the assigned or jointly owned technology. We will
commit to license our operating system to 3Com on favorable terms pursuant to a
separate agreement that we will negotiate.

  In the event of an acquisition of either party, the acquired party may assign
the master technology agreement, except that 3Com may not assign the commitment
to license the operating system.

Master Patent Ownership and License Agreement

  The master patent ownership and license agreement, or the master patent
agreement, allocates rights relating to patents, patent applications and
invention disclosures. In the master patent agreement, 3Com will confirm that
we own patents, patent applications and invention disclosures which were
developed by us and, to the extent that any of these patents or patent
applications are recorded in 3Com's name, 3Com will assign them to us. The
specific patents, patent applications and invention disclosures being assigned
are identified in a database. 3Com will not restrict our rights to practice the
assigned patents. 3Com will retain ownership of jointly developed patents,
patent applications and invention disclosures, but will grant us a license to
jointly developed patents, patent applications and invention disclosures that
have resulted or in the future result from our joint development with 3Com in
the wireless connectivity area. The license is non-exclusive and royalty-free
and will permit us to make, have made, use, lease, sell, offer for sale, and
import current and future Palm products and services. The license continues for
the life of the licensed patents. 3Com will not be restricted from licensing
these wireless connectivity patents for defensive purposes, but for purposes
other than for defensive purposes, 3Com will be restricted from licensing these
wireless connectivity patents in the field of lightweight handheld mobile
computing devices and operating systems for such devices.

  In addition, each party will covenant not to sue the other party or the other
party's customers or suppliers for infringement of its patents that exist as of
the separation date or that are based on applications or invention disclosures
that exist as of the separation date. The products and services that are
covered by the covenant are the products and services of each party's business
as it exists as of the separation date.

  In the event of an acquisition of either party, the acquired party may assign
the master patent agreement except that the licenses and covenants not to sue
may not be assigned. In addition, in the event a sale of a subsidiary or
business unit of either party, the licenses and covenants not to sue may not be
assigned. However, the non-acquired party is obligated to enter into licenses
or

                                       71
<PAGE>

covenants not to sue, as applicable, with a transferee acquiring a party or a
subsidiary or business unit of a party, subject to certain reductions in the
scope of the licenses and covenants not to sue and subject to the agreement of
the acquiring party to grant a license or covenant not to sue back to the non-
acquired party.

  The master patent agreement will also provide that 3Com and we will assist
each other in specified ways for a period of five years after the separation
date in the event either party is subject to patent litigation.

Master Trademark Ownership and License Agreement

  The master trademark ownership and license agreement, or the master trademark
agreement, will allocate rights relating to trademarks, service marks and trade
names. In the master trademark agreement, 3Com will confirm that we own our
trademarks, service marks and trade names that we use in connection with our
business and, to the extent that any of our marks are registered in 3Com's name
or 3Com otherwise has any rights in those marks, 3Com will assign them to us.
In addition, 3Com will grant us a royalty-free license to mark our existing
products with, and advertise and promote these products using, specified 3Com
trademarks. The term of this license is two years after the separation date. We
may allow authorized dealers to use the trademarks in the advertisement and
promotion of our existing products. During the first two years from the
separation date, 3Com will agree not to license the trademarks it licenses to
us to third parties for use in connection with products or services that
compete with our products shipping as of the distribution date, other than any
licenses that may have previously been granted.

  3Com may terminate the license under the master trademark agreement only with
regard to products that fail to meet required quality standards, subject to a
notice and cure period.

Employee Matters Agreement

  We will enter into an employee matters agreement with 3Com to allocate
assets, liabilities, and responsibilities relating to current and former
employees of Palm and their participation in the benefits plans, including
stock plans, that 3Com currently sponsors and maintains.

  All eligible Palm employees will continue to participate in the 3Com benefits
plans on comparable terms and conditions to those for 3Com employees until the
distribution date or until we establish benefit plans for our employees, or
elect not to establish comparable plans, if it is not legally or financially
practical. We intend to establish our own benefit program no later than the
time of the distribution.

  Once we establish our own benefits plans, we may modify or terminate each
plan in accordance with the terms of that plan and our policies. No Palm
benefit plan will provide benefits that overlap benefits under the
corresponding 3Com benefit plan at the time of the distribution. Each Palm
benefit plan will provide that all service, compensation and other benefit
determinations that, as of the distribution, were recognized under the
corresponding 3Com benefits plan will be taken into account under that Palm
benefit plan.

  Assets relating to the employee liabilities will be transferred to Palm or
the related Palm plans and trusts from trusts and other funding vehicles
associated with 3Com's benefits plans.

  Options. We will establish a replacement stock plan for eligible Palm
employees on or before the distribution. We will assume all 3Com options held
by Palm employees. These options will convert at the distribution into options
to purchase our common stock. The number of shares and the exercise price of
3Com options that convert into Palm options will be adjusted using a conversion
formula. The conversion formula will be based on the opening per-share price of
our common stock on the first trading day after the distribution relative to
the closing per-share price of 3Com common stock on the last trading day before
the distribution. The resulting Palm options will maintain the original vesting
provisions and option period.

                                       72
<PAGE>

  Restricted Stock. On or before the distribution, 3Com restricted stock
granted under incentive stock plans and held by Palm employees is expected to
be forfeited. Each Palm employee who forfeits 3Com restricted stock will
receive Palm restricted stock in replacement of his or her forfeited 3Com
restricted stock.

  Stock Purchase Plan. We anticipate that Palm employees will continue to
participate in the 3Com stock purchase plan through the date of this offering.
After that time, we will sponsor a stock purchase plan for the benefit of Palm
employees that is comparable to the 3Com stock purchase plan.

Tax Sharing Agreement

  We will enter into a tax sharing agreement with 3Com that will allocate
responsibilities for tax matters between Palm and 3Com. The agreement will
require us to pay 3Com for the incremental tax costs of our inclusion in
consolidated, combined or unitary tax returns with affiliated corporations. In
determining these incremental costs, the agreement will take into account not
only the group's incremental tax payments to the Internal Revenue Service or
other taxing authorities, but also the incremental use of tax losses of
affiliates to offset our taxable income, and the incremental use of tax credits
of affiliates to offset the tax on our income. The agreement will also provide
for compensation or reimbursement as appropriate to reflect redeterminations of
our tax liability for periods during which we joined in filing consolidated,
combined or unitary tax returns.

  The tax sharing agreement also requires us to indemnify 3Com for certain
taxes and similar obligations, including:

  .  sales taxes on the sale of products purchased from us by 3Com before the
     distribution;

  .  customs duties or harbor maintenance fees on products exported or
     imported by 3Com on our behalf;

  .  the additional taxes that would result if an acquisition of a
     controlling interest in our stock after the distribution causes the
     distribution not to qualify for tax-free treatment to 3Com; and

  .  any taxes resulting from transactions undertaken in preparation for the
     distribution.

  Our indemnity obligations include any interest and penalties on taxes, duties
or fees for which we must indemnify 3Com.

  Each member of a consolidated group for United States federal income tax
purposes is jointly and severally liable for the group's federal income tax
liability. Accordingly, we could be required to pay a deficiency in the group's
federal income tax liability for a period during which we were a member of the
group even if the tax sharing agreement allocates that liability to 3Com or
another member.

  The tax sharing agreement will also assign responsibilities for
administrative matters such as the filing of returns, payment of taxes due,
retention of records and conduct of audits, examinations or similar
proceedings.

Master Transitional Services Agreement

  The master transitional services agreement governs the provision of
transitional services by 3Com and us to each other, on an interim basis, until
one year after the separation date, unless extended for specific services or
otherwise indicated in the agreement. The services include data processing and
telecommunications services, such as voice telecommunications and data
transmission, and information technology support services, for functions
including accounting, financial management, tax, payroll, stockholder and
public relations, legal, procurement, and other administrative functions.
Services are generally cost plus 5%, but may increase to cost plus 10% if the
services extend beyond the one year period. The master transitional services
agreement also will cover the provision of additional transitional services
identified from time to time after the separation date that were inadvertently
or unintentionally omitted from the specified services, or that are essential
to effectuate an orderly transition under the separation agreement, so long as
the provision of such services would not significantly disrupt 3Com's
operations or significantly increase the scope of its responsibility under the
agreement.

                                       73
<PAGE>

Real Estate Matters Agreement

  The real estate matters agreement addresses real estate matters relating to
the 3Com leased and owned properties that 3Com will transfer to or share with
us. The agreement describes the manner in which 3Com will transfer to or share
with us various leased and owned properties, including the following types of
transactions:

  .  leases to us of portions of specified properties that 3Com owns;

  .  assignments to us of 3Com's leases for specified leased properties;

  .  subleases to us of portions of specified properties leased by 3Com; and

  .  short term licenses between 3Com and us permitting short term occupancy
     of selected leased and owned sites.

  The real estate matters agreement includes a description of each property to
be transferred to or shared with us for each type of transaction. The standard
forms of the proposed transfer documents, such as lease, sublease and license,
are contained in schedules.

  The real estate matters agreement also requires both parties to use
reasonable efforts to obtain any landlord consents required for the proposed
transfers of leased sites, including 3Com paying commercially reasonable
consent fees, if required by the landlords, and us agreeing to provide the
security required under the applicable leases.

  The real estate matters agreement further provides that we will be required
to accept the transfer of all sites allocated to us, even if a site has been
damaged by a casualty before the separation date. Transfers with respect to
leased sites where the underlying lease is terminated due to casualty or action
by the landlord prior to the separation date will not be made, and neither
party will have any liability related thereto.

  The real estate matters agreement also gives the parties the right to change
the allocation and terms of specified sites by mutual agreement based on
changes in the requirements of the parties. The real estate matters agreement
provides that all reasonable costs required to effect the transfers, including
landlord consent fees and landlord attorneys' fees, will be paid by 3Com.

Master Confidential Disclosure Agreement

  The master confidential disclosure agreement provides that both parties agree
not to disclose confidential information of the other party except in specific
circumstances. 3Com and we also agree not to use this information in violation
of any use restrictions in one of the other written agreements between us.

Indemnification and Insurance Matters Agreement

  General Release of Pre-Separation Claims. Effective as of the separation
date, subject to specified exceptions, we will release 3Com and its affiliates,
agents, successors and assigns, and 3Com will release us, and our affiliates,
agents, successors and assigns, from any liabilities arising from events
occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation, this offering and
the distribution. This provision will not impair a party from enforcing the
separation agreement, any ancillary agreement or any arrangement specified in
any of these agreements.

  Indemnification. The indemnification and insurance matters agreement also
contains provisions governing indemnification. In general, we have agreed to
indemnify 3Com and its affiliates, agents, successors and assigns from all
liabilities arising from:

  .  our business, any of our liabilities or any of our contracts; and

  .  any breach by us of the separation agreement or any ancillary agreement.

                                       74
<PAGE>

  3Com has agreed to indemnify us and our affiliates, agents, successors and
assigns from all liabilities arising from:

  .  3Com's business other than the Palm business; and

  .  any breach by 3Com of the separation agreement or any ancillary
     agreement.

  These indemnification provisions do not apply to amounts collected from
insurance. The agreement also contains provisions governing notice and
indemnification procedures.

  Liability Arising From This Prospectus. We will bear any liability arising
from any untrue statement of a material fact or any omission of a material fact
in this prospectus.

  Insurance Matters. The agreement also contains provisions governing our
insurance coverage from the separation date until the distribution date. In
general, we agree to reimburse 3Com for premium expenses related to insurance
coverage during this period. Prior to the distribution, 3Com will maintain
insurance policies on our behalf. We will work with 3Com to secure additional
insurance if desired and cost effective.

  Environmental Matters. 3Com has agreed to indemnity us and our affiliates,
agents, successors and assigns from all liabilities arising from environmental
conditions existing as of the separation date at facilities transferred to us,
or which arise out of operations occurring before the separation date at these
facilities. Further, 3Com has agreed to indemnify us and our affiliates,
agents, successors and assigns from all liabilities arising from environmental
conditions caused by operations occurring at any time, whether before or after
the separation date, at any 3Com facility.

  We have agreed to indemnify 3Com and its affiliates, agents, successors and
assigns from all liabilities arising from environmental conditions caused by
operations after the separation date at any of the facilities transferred to
us, and from environmental conditions at our facilities arising from an event
that occurs on or after the separation date.

  Each party will be responsible for all liabilities associated with any
environmental contamination caused by that party post-separation.

  Assignment. The indemnification and insurance matters agreement is not
assignable by either party without prior written consent.

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<PAGE>

                             PRINCIPAL STOCKHOLDER

  Prior to this offering and the private placements to America Online, Motorola
and Nokia, all of the outstanding shares of our common stock will be owned by
3Com. After this offering and the private placements to America Online,
Motorola and Nokia, 3Com will own about   %, or about   % if the underwriters
fully exercise their option to purchase additional shares of our outstanding
common stock. Except for 3Com, we are not aware of any person or group that
will beneficially own more than 5% of the outstanding shares of our common
stock following this offering.

                                       76
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

General

  Upon the completion of this offering and the private placements to America
Online, Motorola and Nokia, we will be authorized to issue
shares of common stock, $0.001 par value, and                shares of
undesignated preferred stock, $0.001 par value. The following description of
our capital stock is subject to our certificate of incorporation and bylaws,
which are included as exhibits to the registration statement of which this
prospectus forms a part, and by the provisions of applicable Delaware law.

Common Stock

  Prior to this offering and the private placements to America Online, Motorola
and Nokia, there were                shares of common stock outstanding, all of
which were held of record by 3Com.

  The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of our common
stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by our board of directors out of funds legally
available for that purpose. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, the holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. The holders of our common stock have no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to our common stock.

Preferred Stock

  Our board of directors has the authority, without action by the stockholders,
to designate and issue preferred stock in one or more series and to designate
the rights, preferences and privileges of each series, which may be greater
than the rights of our common stock. It is not possible to state the actual
effect of the issuance of any shares of preferred stock upon the rights of
holders of our common stock until our board of directors determines the
specific rights of the holders of the preferred stock. However, the effects
might include, among other things:

  .  restricting dividends on our common stock;

  .  diluting the voting power of our common stock;

  .  impairing the liquidation rights of our common stock; or

  .  delaying or preventing a change in control of us without further action
     by the stockholders.

  At the closing of this offering and the private placements to America Online,
Motorola and Nokia, no shares of preferred stock will be outstanding, and we
have no present plans to issue any shares of preferred stock.

Anti-Takeover Effects of Our Certificate and Bylaws and Delaware Law

  Some provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:

  .  acquisition of us by means of a tender offer;

  .  acquisition of us by means of a proxy contest or otherwise; or

  .  removal of our incumbent officers and directors.

  These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to

                                       77
<PAGE>

acquire control of us to first negotiate with our board of directors. We
believe that the benefits of increased protection give us the potential ability
to negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us and outweigh the disadvantages of discouraging those
proposals because negotiation of those proposals could result in an improvement
of their terms.

  Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term,
one class being elected each year by our stockholders. See "Management--
Directors and Executive Officers." This system of electing and removing
directors may discourage a third party from making a tender offer or otherwise
attempting to obtain control of us because it generally makes it more difficult
for stockholders to replace a majority of the directors.

  Stockholder Meetings. Under our bylaws, only our board of directors, the
chairman of our board of directors, and until 3Com owns less than 50% of our
common stock, 3Com, may call special meetings of stockholders.

  Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of our board of
directors or a committee of our board of directors.

  Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders. 3Com is an "interested stockholder" for this purpose.

  Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation eliminates the right of stockholders other than 3Com to act by
written consent without a meeting. 3Com will lose this right once it owns less
than 50% of our common stock.

  Elimination of Cumulative Voting. Our certificate of incorporation and bylaws
do not provide for cumulative voting in the election of directors.

  Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to change control of us. These and other provisions may have the effect
of deferring hostile takeovers or delaying changes in control or management of
us.

  Amendment of Charter Provisions. The amendment of any of the above provisions
would require approval by holders of at least 80% of our outstanding common
stock.

Transfer Agent and Registrar

  The transfer agent and registrar for our common stock is EquiServe.

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<PAGE>

                                  UNDERWRITING

  Palm and the underwriters named below (the "Underwriters") have entered into
an underwriting agreement with respect to the shares being offered. Subject to
some conditions, each Underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., Morgan
Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
and BancBoston Robertson Stephens Inc. are the representatives of the
Underwriters.

<TABLE>
<CAPTION>
                           Underwriters                         Number of Shares
                           ------------                         ----------------
   <S>                                                          <C>
   Goldman, Sachs & Co.........................................
   Morgan Stanley & Co. Incorporated...........................
   Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
   BancBoston Robertson Stephens Inc...........................
                                                                 -------------
     Total.....................................................
                                                                 =============
</TABLE>

  If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
           shares from Palm to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
Underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

  The following tables show the per share and total underwriting discounts and
commissions to be paid to the Underwriters by Palm. Such amounts are shown
assuming both no exercise and full exercise of the Underwriters' option to
purchase           additional shares.

<TABLE>
<CAPTION>
                                                          Paid by the Company
                                                       -------------------------
                                                       No Exercise Full Exercise
                                                       ----------- -------------
   <S>                                                 <C>         <C>
   Per Share.......................................... $            $
   Total.............................................. $            $
</TABLE>

  Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the Underwriters to securities dealers may be sold at a
discount of up to $         per share from the initial public offering price.
Any such securities dealers may resell any shares purchased from the
Underwriters to selected other brokers or dealers at a discount of up to
$         per share from the initial public offering price. If all the shares
are not sold at the initial offering price, the representatives may change the
offering price and the other selling terms.

  Palm, 3Com and Palm's directors and officers have agreed with the
Underwriters not to dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 180 days after the
date of this prospectus, except with the prior written consent of the
representatives. This agreement does not apply to any grants under Palm's
existing employee benefit plans. See "Shares Eligible For Future Sale" for a
discussion of transfer restrictions. America Online, Motorola and Nokia have
agreed with Palm, for the benefit of the Underwriters, not to dispose of or
hedge any of their common stock during the period from the date of the
consummation of this offering continuing through the date 180 days after the
date of this prospectus.

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<PAGE>

  Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Palm and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Palm's historical performance, estimates of the business
potential and earnings prospects of Palm, an assessment of Palm's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.

  At our request, the Underwriters have reserved up to six percent of the
shares of common stock to be issued by Palm and offered in this offering for
sale, at the initial public offering price, to persons with preexisting
strategic or other relationships with Palm. The number of shares available for
sale to the general public will be reduced to the extent that such persons
purchase such reserved shares. Any reserved shares which are not so purchased
will be offered by the Underwriters to the general public on the same basis as
the other shares of common stock offered by this prospectus.

  We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol "PALM".

  In connection with the offering, the Underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.

  The Underwriters also may impose a penalty bid. This occurs when a particular
Underwriter repays to the Underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such Underwriter in stabilizing or short covering
transactions.

  These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

  The Underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.

  Palm estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$      .

  Palm has agreed to indemnify the several Underwriters against specified
liabilities, including liabilities under the Securities Act of 1933.

                                       80
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

  All of the shares of our common stock sold in this offering will be freely
tradable without restriction under the Securities Act, except for any shares
which be may acquired by an affiliate of Palm, as that term is defined in Rule
144 under the Securities Act. Persons who may be deemed to be affiliates
generally include individuals or entities that control, are controlled by, or
are under common control with, Palm and may include directors and officers of
Palm as well as significant stockholders of Palm, if any.

  3Com currently plans to complete its divestiture of Palm approximately six
months following this offering by distributing all of the shares of Palm common
stock owned by 3Com to the holders of 3Com's common stock. Shares of our common
stock distributed to 3Com stockholders in the distribution generally will be
freely transferable, except for shares of common stock received by persons who
may be deemed to be affiliates. Persons who are affiliates will be permitted to
sell the shares of common stock that are issued in this offering or that they
receive in the distribution only through registration under the Securities Act,
or under an exemption from registration, such as the one provided by Rule 144.

  The shares of our common stock held by 3Com before distribution and the
shares of our common stock purchased in the America Online, Motorola and Nokia
private placements are deemed "restricted securities" as defined in Rule 144,
and may not be sold other than through registration under the Securities Act or
under an exemption from registration, such as the one provided by Rule 144.
3Com, our directors and officers and we have agreed not to offer or sell any
shares of our common stock, subject to exceptions, for a period of 180 days
after the date of this prospectus, without the prior written consent of the
underwriters. America Online, Motorola and Nokia have agreed with Palm not to
dispose of or hedge any of their common stock during the period from the date
of this prospectus continuing through the date 180 days after the date of this
prospectus.

  We will grant shares of our common stock pursuant to the 1999 Stock Plan
subject to restrictions. See "Management--Incentive Plans--1999 Stock Plan." We
currently expect to file a registration statement under the Securities Act to
register shares reserved for issuance under the 1999 Stock Plan and 1999
Employee Stock Purchase Plan. Shares issued pursuant to awards after the
effective date of the registration statement, other than shares issued to
affiliates, generally will be freely tradable without further registration
under the Securities Act. Shares issued pursuant to any vested and exercisable
options of 3Com converted into our options will also be freely tradable without
registration under the Securities Act after the effective date of the
registration statement. See "Management--Treatment of 3Com Options."

                            VALIDITY OF COMMON STOCK

  The validity of the common stock offered hereby and other legal matters will
be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. The validity of the common stock offered
hereby will be passed upon for the underwriters by Sullivan & Cromwell, Los
Angeles, California.

                                    EXPERTS

  The consolidated financial statements as of May 31, 1998 and May 28, 1999 and
for each of the three years in the period ended May 28, 1999 included in this
prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and are included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.

                                       81
<PAGE>

                      WHERE YOU CAN FIND MORE INFORMATION

  We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules to the registration statement. Some items are omitted in
accordance with the rules and regulations of the SEC. For further information
about Palm and its common stock, reference is made to the registration
statement and the exhibits and any schedules to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance,
if the contract or document is filed as an exhibit, reference is made to the
copy of the contract or other documents filed as an exhibit to the registration
statement, each statement being qualified in all respects by such reference. A
copy of the registration statement, including the exhibits and schedules to the
registration statement, may be read and copied at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at 1-
800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov, from which interested persons can electronically access the
registration statement, including the exhibits and any schedules to the
registration statement.

  As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to those requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain Internet
sites at http://www.palm.net and http://www.palm.com. Our websites and the
information contained therein or connected thereto shall not be deemed to be
incorporated into this prospectus or the registration statement of which it
forms a part.

                                       82
<PAGE>

                                   PALM, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Audited Consolidated Financial Statements:

  Independent Auditors' Report............................................ F-2

  Consolidated Balance Sheets at May 31, 1998, May 28, 1999, and August
   27, 1999 (unaudited)................................................... F-3

  Consolidated Statements of Operations for the Years Ended May 25, 1997,
   May 31, 1998, May 28, 1999 and Three Months Ended August 28, 1998 and
   August 27, 1999 (unaudited)............................................ F-4

  Consolidated Statements of Stockholder's Net Investment for the Years
   Ended May 25, 1997, May 31, 1998, May 28, 1999 and Three Months ended
   August 27, 1999 (unaudited)............................................ F-5

  Consolidated Statements of Cash Flows for the Years Ended May 25, 1997,
   May 31, 1998, May 28, 1999 and Three Months Ended August 28, 1998 and
   August 27, 1999 (unaudited)............................................ F-6

  Notes to Consolidated Financial Statements.............................. F-7
</TABLE>

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholder of Palm, Inc.:

  We have audited the consolidated balance sheets of Palm, Inc. and its
subsidiary ("Palm" or "the Company") as of May 31, 1998 and May 28, 1999, and
the related consolidated statements of operations, stockholder's net
investment, and cash flows for each of the three years in the period ended May
28, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

  In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Palm, Inc. and its subsidiary at
May 31, 1998 and May 28, 1999, and the results of their operations and their
cash flows for each of the three years in the period ended May 28, 1999 in
conformity with generally accepted accounting principles.

San Jose, California
November 29, 1999
(November 30, 1999 as to the first paragraph and
        , 2000 as to the second paragraph of Note 15)

                                ---------------

  The accompanying consolidated financial statements included herein reflect
the reincorporation of the Company in Delaware and prior to the initial public
offering will reflect a stock split of Palm's common stock as described in Note
15 to the consolidated financial statements. The above opinion is in the form
that will be signed by Deloitte & Touche LLP upon the effectiveness of such
events assuming that from November 29, 1999 to the effective date of such
events, no other events shall have occurred that would affect the accompanying
consolidated financial statements or notes thereto.

DELOITTE & TOUCHE LLP

San Jose, California
November 29, 1999

                                      F-2
<PAGE>

                                   PALM, INC.

                          CONSOLIDATED BALANCE SHEETS
                  (In thousands, except par and share amounts)

<TABLE>
<CAPTION>
                                                                      Pro Forma
                                      May 31,  May 28,   August 27,  August 27,
                                        1998     1999       1999        1999
                                      -------- --------  ----------- -----------
                                                         (Unaudited) (Unaudited)
<S>                                   <C>      <C>       <C>         <C>
               ASSETS
Current assets:
  Cash and cash equivalents.........  $     -- $    478   $ 37,138      $
  Accounts receivable, net of
   allowance for doubtful accounts
   of $4,451, $3,817 and $3,287.....    80,985   95,839     86,216
  Inventories.......................    13,769   12,186     31,230
  Deferred income taxes.............     8,092   20,688     23,412
  Prepaids and other................       192    1,038      1,129
                                      -------- --------   --------      ----
    Total current assets............   103,038  130,229    179,125
Property and equipment, net.........     9,121    8,136      9,160
Goodwill, intangibles and other
 assets.............................       175   13,829     13,009
Deferred income taxes...............     3,025       53         52
                                      -------- --------   --------      ----
      Total assets..................  $115,359 $152,247   $201,346      $
                                      ======== ========   ========      ====
   LIABILITIES AND STOCKHOLDER'S
           NET INVESTMENT
Current liabilities:
  Accounts payable..................  $ 15,792 $ 35,577   $ 51,095      $
  Payable to 3Com Corporation.......        --       --         --
  Other accrued liabilities.........    18,275   40,793     35,838
  Notes payable.....................        --    1,350      1,118
                                      -------- --------   --------      ----
    Total current liabilities.......    34,067   77,720     88,051
                                      -------- --------   --------      ----
Commitments and contingencies (Notes
 7 and 13)
Stockholder's net investment:
  Preferred stock,      par value,
              shares authorized pro
   forma; none outstanding pro
   forma............................        --       --         --        --
  Common stock,      par value,
             shares authorized pro
   forma;          shares
   outstanding pro forma............        --       --         --        --
  3Com Corporation equity...........    81,292   74,660    113,413
  Accumulated other comprehensive
   income (loss)....................        --     (133)      (118)
                                      -------- --------   --------      ----
    Total stockholder's net
     investment.....................    81,292   74,527    113,295
                                      -------- --------   --------      ----
      Total liabilities and
       stockholder's net
       investment...................  $115,359 $152,247   $201,346      $
                                      ======== ========   ========      ====
</TABLE>

                See notes to consolidated financial statements.

                                      F-3
<PAGE>

                                   PALM, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                   Years Ended             Three Months Ended
                            ----------------------------  ---------------------
                            May 25,   May 31,   May 28,   August 28, August 27,
                              1997      1998      1999       1998       1999
                            --------  --------  --------  ---------- ----------
                                                               (Unaudited)
<S>                         <C>       <C>       <C>       <C>        <C>
Revenues..................  $114,157  $272,137  $563,525   $116,069   $176,505
Cost of revenues..........    77,685   157,749   315,616     62,998     98,324
                            --------  --------  --------   --------   --------
  Gross profit............    36,472   114,388   247,909     53,071     78,181
                            --------  --------  --------   --------   --------
Operating expenses:
  Sales and marketing.....    30,305    70,765   127,726     23,969     42,648
  Research and
   development............    13,442    21,863    46,027      9,738     12,507
  General and
   administrative.........     6,238    15,299    23,692      6,233      7,160
  Purchased in-process
   technology.............        --        --     2,125         --         --
                            --------  --------  --------   --------   --------
    Total operating
     expenses.............    49,985   107,927   199,570     39,940     62,315
                            --------  --------  --------   --------   --------
Operating income (loss)...   (13,513)    6,461    48,339     13,131     15,866
Interest and other
 expense, net.............      (515)      (56)     (223)       (25)       (63)
                            --------  --------  --------   --------   --------
Income (loss) before
 income taxes.............   (14,028)    6,405    48,116     13,106     15,803
Income tax provision
 (credit).................    (6,166)    2,234    18,488      5,036      6,145
                            --------  --------  --------   --------   --------
Net income (loss).........  $ (7,862) $  4,171  $ 29,628   $  8,070   $  9,658
                            ========  ========  ========   ========   ========
Unaudited pro forma net
 income per share:
  Basic...................                      $                     $
                                                ========              ========
  Diluted.................                      $                     $
                                                ========              ========
Shares used in computing
 unaudited pro forma net
 income per share amounts:
  Basic...................
                                                ========              ========
  Diluted.................
                                                ========              ========
Supplemental unaudited pro
 forma net income per
 share:
  Basic...................                      $                     $
                                                ========              ========
  Diluted.................                      $                     $
                                                ========              ========
Shares used in computing
 supplemental unaudited
 pro forma net income per
 share amounts:
  Basic...................
                                                ========              ========
  Diluted.................
                                                ========              ========
</TABLE>

                See notes to consolidated financial statements.

                                      F-4
<PAGE>

                                   PALM, INC.

            CONSOLIDATED STATEMENTS OF STOCKHOLDER'S NET INVESTMENT
                                 (In thousands)

<TABLE>
<CAPTION>
                                                          Accumulated
                                                3Com         Other
                                             Corporation Comprehensive
                                               Equity    Income (Loss)  Total
                                             ----------- ------------- --------
<S>                                          <C>         <C>           <C>
Balances, May 27, 1996......................  $  7,218       $  --     $  7,218
Net loss....................................    (7,862)         --       (7,862)
Net transfers from 3Com Corporation.........    36,301          --       36,301
                                              --------       -----     --------
Balances, May 25, 1997......................    35,657          --       35,657
Net income..................................     4,171          --        4,171
Net transfers from 3Com Corporation.........    41,464          --       41,464
                                              --------       -----     --------
Balances, May 31, 1998......................    81,292          --       81,292
Components of comprehensive income:
  Net income................................    29,628          --       29,628
  Accumulated translation adjustments.......        --        (133)        (133)
                                                                       --------
    Total comprehensive income..............                             29,495
Net transfers to 3Com Corporation...........   (36,260)         --      (36,260)
                                              --------       -----     --------
Balances, May 28, 1999......................    74,660        (133)      74,527
Components of comprehensive income:
  Net income*...............................     9,658          --        9,658
  Accumulated translation adjustments*......        --          15           15
                                                                       --------
    Total comprehensive income*.............                              9,673
Net transfers from 3Com Corporation*........    29,095          --       29,095
                                              --------       -----     --------
Balances, August 27, 1999*..................  $113,413       $(118)    $113,295
                                              ========       =====     ========
</TABLE>
--------
* Unaudited


                See notes to consolidated financial statements.

                                      F-5
<PAGE>

                                   PALM, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                   Years Ended             Three Months Ended
                            ----------------------------  ---------------------
                            May 25,   May 31,   May 28,   August 28, August 27,
                              1997      1998      1999       1998       1999
                            --------  --------  --------  ---------- ----------
                                                               (Unaudited)
<S>                         <C>       <C>       <C>       <C>        <C>
Cash flows from operating
 activities:
 Net income (loss)......... $ (7,862) $  4,171  $ 29,628   $ 8,070    $  9,658
 Adjustments to reconcile
  net income (loss) to net
  cash provided by (used
  in) operating activities:
  Depreciation and
   amortization............      685     2,029     4,565       615       2,085
  Loss on disposal of
   property and equipment..       36       145     2,567       889          --
  Deferred income taxes....   (3,344)   (5,361)   (8,880)   (2,406)     (2,723)
  Purchased in-process
   technology..............       --        --     2,125        --          --
  Changes in assets and
   liabilities:
   Accounts receivable.....  (18,842)  (56,783)  (13,307)   (5,862)      9,623
   Inventories.............  (13,269)     (397)    1,650     5,072     (19,044)
   Prepaids and other......     (142)     (176)     (805)     (378)        (91)
   Accounts payable........    4,710    10,874    19,437    (5,864)     15,518
   Other accrued
    liabilities............    3,217    12,854    22,133     1,784      (4,955)
                            --------  --------  --------   -------    --------
    Net cash provided by
     (used in) operating
     activities............  (34,811)  (32,644)   59,113     1,920      10,071
                            --------  --------  --------   -------    --------
Cash flows from investing
 activities:
 Purchases of property and
  equipment................   (2,543)   (8,833)   (5,347)   (1,284)     (2,289)
 Business acquired in
  purchase transaction, net
  of cash acquired.........       --        --   (16,831)       --          --
 Other, net................       27        --        97        --          --
                            --------  --------  --------   -------    --------
    Net cash used in
     investing activities..   (2,516)   (8,833)  (22,081)   (1,284)     (2,289)
                            --------  --------  --------   -------    --------
Cash flows from financing
 activities:
 Net transfers (to) from
  3Com Corporation.........   36,301    41,464   (36,260)     (636)     29,095
 Other, net................       --        13      (294)       --        (217)
                            --------  --------  --------   -------    --------
    Net cash provided by
     (used in) financing
     activities............   36,301    41,477   (36,554)     (636)     28,878
                            --------  --------  --------   -------    --------
Change in cash and
 equivalents...............   (1,026)       --       478        --      36,660
Cash and equivalents,
 beginning of period.......    1,026        --        --        --         478
                            --------  --------  --------   -------    --------
Cash and equivalents, end
 of period................. $     --  $     --  $    478   $    --    $ 37,138
                            ========  ========  ========   =======    ========
Other cash flow
 information:
 Interest paid............. $     --  $     --  $     10   $    --    $      9
                            ========  ========  ========   =======    ========
 Notes payable assumed in
  purchase transaction..... $     --  $     --  $  1,481   $    --    $     --
                            ========  ========  ========   =======    ========
</TABLE>

                See notes to consolidated financial statements.

                                      F-6
<PAGE>

                                   PALM, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

1. Background and Basis of Presentation

  On September 13, 1999, 3Com Corporation ("3Com") announced its plan to create
an independent publicly-traded company, Palm, Inc. ("Palm" or "the Company"),
comprised of 3Com's handheld computing business. After completion of Palm's
initial public offering, 3Com will own at least 80.1% of Palm's outstanding
common stock. 3Com currently intends, subject to the satisfactory resolution of
certain conditions, to distribute all of the shares of Palm's common stock that
3Com owns to 3Com's stockholders approximately six months ("the distribution
date") after Palm's initial public offering.

  Palm develops, markets and sells a family of handheld computing device
products, licenses the Palm operating system to other device and information
appliance manufacturers and offers a wireless Internet access service. Palm
Computing, Inc. was originally incorporated in California in 1992 and was
acquired by U.S. Robotics Corporation (USR) in a pooling of interests
transaction in September 1995. Subsequent to 3Com's acquisition of USR in a
pooling of interests transaction in June 1997, Palm Computing, Inc. became a
wholly-owned subsidiary of 3Com. The accompanying consolidated financial
statements report the operations that comprised the handheld computing business
of 3Com, including Palm Computing, Inc.

  3Com and Palm have entered into a Master Separation and Distribution
Agreement (see Note 14 to the consolidated financial statements). In accordance
with our separation agreement, 3Com will transfer to us the 3Com-owned assets
and liabilities which relate to our business prior to the date of our
separation from 3Com ("the separation date"), except for most of our accounts
receivable and accounts payable.

  The consolidated financial statements of Palm reflect the historical results
of operations and cash flows of the handheld computing business of 3Com during
each respective period. The consolidated financial statements have been
prepared using 3Com's historical bases in the assets and liabilities and the
historical results of operations of Palm. Changes in stockholder's net
investment represent 3Com's transfer of its net investment in Palm, after
giving effect to the net income (loss) of Palm plus net cash transfers and
other transfers to and from 3Com.

  The consolidated financial statements include allocations of certain 3Com
expenses, including centralized legal, accounting, treasury, real estate,
information technology, distribution, customer service, sales, marketing,
engineering, and other 3Com corporate services and infrastructure costs. The
expense allocations have been determined on the bases that 3Com and Palm
considered to be reasonable reflections of the utilization of services provided
or the benefit received by Palm. However, the financial information included
herein may not reflect the consolidated financial position, operating results,
changes in stockholder's net investment and cash flows of Palm in the future or
what they would have been had Palm been a separate, stand-alone entity during
the periods presented.

2. Significant Accounting Policies

 Fiscal Year

  Prior to June 1, 1998, our 52-53 week fiscal year ended on the Sunday nearest
to May 31. Effective June 1, 1998, we changed our fiscal year to a 52-53 week
fiscal year ending on the Friday

                                      F-7
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

nearest to May 31. These changes did not have a significant effect on our
consolidated financial statements. Fiscal 1997, 1998 and 1999 contained 52
weeks, whereas fiscal 2000 will contain 53 weeks. For fiscal 2000, the first
three quarters will contain 13 weeks, whereas the fourth quarter will contain
14 weeks.

 Use of Estimates in the Preparation of Consolidated Financial Statements

  The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.

 Interim Financial Information

  The financial information as of August 27, 1999 and for the three months
ended August 28, 1998 and August 27, 1999 is unaudited and includes all
adjustments, consisting only of normal and recurring accruals, that management
considers necessary for a fair presentation of its consolidated financial
position, operating results and cash flows. Results for the three months ended
August 27, 1999 are not necessarily indicative of results to be expected for
the full fiscal year 2000 or for any future period.

 Principles of Consolidation

  The consolidated financial statements include the accounts of Palm and its
subsidiary. All significant intercompany balances and transactions are
eliminated in consolidation.

 Cash and Cash Equivalents

  Cash equivalents are highly liquid debt investments acquired with a remaining
maturity of three months or less. Historically, 3Com has managed cash and cash
equivalents on a centralized basis. Cash receipts associated with Palm's
business have been transferred to 3Com on a periodic basis and 3Com has funded
Palm's disbursements.

 Concentration of Credit Risk

  Financial instruments which potentially subject Palm to concentrations of
credit risk consist principally of accounts receivable. Palm sells the majority
of its products through distributors, retailers and resellers. Credit risk with
respect to accounts receivable is generally diversified due to the number of
entities comprising Palm's customer base and their dispersion across different
geographies. Palm generally sells on open account and performs periodic credit
evaluations of its customers' financial condition.

                                      F-8
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999


  The following individual customers accounted for 10% or more of total
revenue:

<TABLE>
<CAPTION>
                                         Years Ended        Three Months Ended
                                   ----------------------- ---------------------
                                   May 25, May 31, May 28, August 28, August 27,
                                    1997    1998    1999      1998       1999
                                   ------- ------- ------- ---------- ----------
                                                                (Unaudited)
<S>                                <C>     <C>     <C>     <C>        <C>
Company A.........................    28%     22%     24%      23%        35%
Company B.........................    --      --      14%      12%        --
Company C.........................    11%     --      --       --         --
</TABLE>

  The following individual customers accounted for 10% or more of total
accounts receivable:

<TABLE>
<CAPTION>
                                                     May 31, May 28, August 27,
                                                      1998    1999      1999
                                                     ------- ------- -----------
                                                                     (Unaudited)
<S>                                                  <C>     <C>     <C>
Company A...........................................    28%     24%       37%
Company B...........................................    --      17%       --
Company C...........................................    --      --        --
</TABLE>

 Inventories

  Inventories are stated at the lower of standard cost (which approximates
first-in, first-out cost) or market.

 Property and Equipment

  Property and equipment are stated at cost. Depreciation and amortization are
computed over the shorter of the estimated useful lives, lease or license terms
on a straight-line basis--generally three to five years.

 Long-Lived Assets

  Palm evaluates the carrying value of long-lived assets, including goodwill,
whenever events or changes in circumstances indicate that the carrying value of
the asset may be impaired. An impairment loss is recognized when estimated
future cash flows expected to result from the use of the asset, including
disposition, is less than the carrying value of the asset. Purchased technology
and goodwill are included in other assets and are amortized over their
estimated useful lives, generally two to six years.

 Software Development Costs

  Costs for the development of new software and substantial enhancements to
existing software are expensed as incurred until technological feasibility has
been established, at which time any additional development costs would be
capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, Computer Software To Be Sold, Leased, or Otherwise Marketed. We
believe our current process for developing software is essentially completed
concurrently with the establishment of technological feasibility; accordingly,
no costs have been capitalized to date.


                                      F-9
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

 3Com Corporation Equity

  3Com Corporation equity represents 3Com's net investment in and advances to
Palm. No intercompany interest income or expense has been allocated to, or
included in, the accompanying financial statements.

 Revenue Recognition

  Revenue is recognized when earned. Revenue from product sales is recorded
when related products are shipped, risk of loss has passed to the customer and
collection of the resulting receivable is deemed probable. In fiscal 1997, 1998
and 1999 and for the three months ended August 28, 1998 and August 27, 1999
(unaudited), product sales accounted for substantially all of our revenue.
Revenues from software license agreements are recognized on a per-unit royalty
basis or as specified in the agreement in accordance with applicable accounting
guidance, including American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 97-2, Software Revenue Recognition, and SOP 98-9,
Modification of SOP 97-2, with Respect to Certain Transactions. Related
maintenance and support revenue is recognized ratably over the term of the
agreement. Revenue from subscriptions to our wireless Internet access service
is recognized over the service period.

  Provisions are recorded at the time of sale for estimated product returns,
warranty, royalties and post-contract support obligations. Provisions for price
protection are recorded at the time a price reduction decision is made. Palm
provides a 12-month limited warranty for its products.

 Advertising

  Advertising costs are expensed as incurred. Cooperative advertising and
marketing development obligations for channel customers are expensed at the
time the related revenue is recognized.

 Income Taxes

  Palm's operating results historically have been included in 3Com's
consolidated U.S. and state income tax returns and in tax returns of certain
3Com foreign subsidiaries. The provision for income taxes in Palm's
consolidated financial statements has been determined on a separate-return
basis. Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.

 Foreign Currency Translation

  The majority of Palm's revenue is denominated in U.S. dollars. For foreign
operations with the local currency as the functional currency, assets and
liabilities are translated at year-end exchange rates, and statements of
operations are translated at the average exchange rates during the year. Gains
or losses resulting from foreign currency translation are included as a
component of other comprehensive income (loss).

  For Palm entities with the U.S. dollar as the functional currency, foreign
currency denominated assets and liabilities are translated at the year-end
exchange rates except for inventories, prepaid

                                      F-10
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

expenses, and property and equipment, which are translated at historical
exchange rates. Gains or losses resulting from foreign currency translation are
included in interest and other expense, net in the consolidated statements of
operations and were not significant for any period presented.

 Stock-Based Compensation

  Palm accounts for employee stock plans under the intrinsic value method
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees.

 Earnings Per Share

  Historical Earnings Per Share

  The historical capital structure of Palm Computing, Inc. is not
representative of the future capital structure of Palm. In addition, the
accompanying consolidated financial statements report the operations that
comprised the 3Com handheld computing business, which included operations in
addition to Palm Computing, Inc. and its subsidiary. Accordingly, the
historical net income (loss) per share and weighted average number of common
shares outstanding are not shown for any of the periods presented.

  Unaudited Pro Forma Net Income Per Share

  All of the outstanding Palm common stock is owned by 3Com. As discussed in
Note 15 to the consolidated financial statements, Palm effected a stock split
resulting in     common shares outstanding prior to the initial public
offering. Unaudited pro forma basic net income per share amounts are computed
by dividing the net income for the period by the pro forma common shares
outstanding of             shares after giving effect to such stock split.
Unaudited pro forma diluted net income per share amounts are computed by also
including the estimated effect of dilutive stock options, which totaled
          shares for the year ended May 28, 1999 and           shares for the
three months ended August 27, 1999. The effect of dilutive stock options was
computed using the treasury stock method assuming an initial public offering
price of $       per share.

  The estimated number of dilutive stock options assumes that all of the
outstanding 3Com stock options held by Palm employees are converted into Palm
stock options. The actual number of 3Com stock options to be converted into
Palm stock options will not be determined until the individual employee options
are converted into Palm stock options at the distribution date. See Note 8 to
the consolidated financial statements for a description of how 3Com stock
options will be converted into Palm stock options.

  Supplemental Unaudited Pro Forma Net Income Per Share

  As discussed in Note 15 to the consolidated financial statements, Palm
declared a dividend equal to 3Com's tax basis in Palm in the amount of $
million and intends to pay such dividend to 3Com using a portion of the
proceeds from the initial public offering. Supplemental unaudited pro forma
basic net income per share amounts include the effect of such dividend and are
calculated using pro forma common shares outstanding of         shares plus the
         shares of common stock whose proceeds will be used to pay the
dividend, assuming an initial public offering price of $       per share,
reduced by estimated per share offering costs. Supplemental unaudited pro forma
diluted net income per share has been computed by also including the estimated
dilutive effect of stock options.

                                      F-11
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999


 Unaudited Pro Forma Balance Sheet

  The unaudited pro forma balance sheet as of August 27, 1999 gives retroactive
effect to the dividend discussed in Note 15 to the consolidated financial
statements, as though it had been declared as of that date. The unaudited pro
forma balance sheet also gives effect to the authorizations of preferred and
common stock and the stock split to increase the outstanding amount of our
common stock as discussed in Note 15, the reclassification of approximately $49
million from 3Com Corporation equity to an intercompany payable to 3Com at
August 27, 1999 which we intend to repay using a portion of the proceeds from
the initial public offering, as well as the retention of most of our accounts
receivable and accounts payable by 3Com at the time of our separation, as
described in Note 14 to the consolidated financial statements, as though such
retention had occurred as of August 27, 1999.

 Comprehensive Income (Loss)

  On June 1, 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income.
Accumulated other comprehensive income (loss) presented in the accompanying
consolidated balance sheets consists of accumulated foreign translation
adjustments.

 Effects of Recent Accounting Pronouncements

  In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities
and SFAS 137, Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133. These statements
require companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133 will be
effective for Palm's fiscal year ending May 31, 2002. We believe that the
adoption of these statements will not have a significant impact on our
financial results.

  In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires that entities capitalize certain costs related to internal-use
software once certain criteria have been met. We adopted SOP 98-1 in the first
quarter of fiscal 2000. The adoption of this statement did not have a
significant impact on our financial results.

3. Business Combination

  The acquisition of Smartcode Technologie SARL ("Smartcode") on February 8,
1999 was accounted for as a purchase, and the consolidated statements of
operations include the operating results of the acquired company from the
acquisition date. Acquired assets and liabilities were recorded at their
estimated fair values at the date of acquisition, and the aggregate purchase
price plus costs directly attributable to the completion of the acquisition
have been allocated to the assets and liabilities acquired. No significant
adjustments were required to conform the accounting policies of the acquired
company.

  Palm acquired Smartcode for an aggregate purchase price of $17.4 million in
cash including $200,000 of costs directly attributable to the completion of the
acquisition. Approximately $2.1 million of

                                      F-12
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

the total purchase price represented purchased in-process technology that had
not yet reached technological feasibility, had no alternative future use and
was charged to operations in the third quarter of fiscal 1999. This purchase
resulted in approximately $14.4 million of goodwill and other intangible assets
that are being amortized over their estimated useful lives. Smartcode was a
provider of wireless data communications and Internet access software
technology and is based in France.

  Unaudited pro forma statement of operations information has not been
presented because the effect of this acquisition was not material.

4. Inventories

  Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                     May 31, May 28, August 27,
                                                      1998    1999      1999
                                                     ------- ------- -----------
                                                                     (Unaudited)
<S>                                                  <C>     <C>     <C>
Finished goods...................................... $ 8,809 $ 5,900   $22,439
Work in process.....................................   1,089   4,011     8,651
Purchased components................................   3,871   2,275       140
                                                     ------- -------   -------
  Total............................................. $13,769 $12,186   $31,230
                                                     ======= =======   =======
</TABLE>

5. Property and Equipment, Net

  Property and equipment, net consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                   May 31,  May 28,  August 27,
                                                    1998     1999       1999
                                                   -------  -------  -----------
                                                                     (Unaudited)
<S>                                                <C>      <C>      <C>
Equipment......................................... $ 7,945  $11,971    $13,995
Leasehold improvements............................   4,372    1,398      1,576
Furniture and fixtures............................      60      685        786
                                                   -------  -------    -------
  Total...........................................  12,377   14,054     16,357
Accumulated depreciation and amortization.........  (3,256)  (5,918)    (7,197)
                                                   -------  -------    -------
  Property and equipment, net..................... $ 9,121  $ 8,136    $ 9,160
                                                   =======  =======    =======
</TABLE>

6. Other Accrued Liabilities

  Other accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                   May 31, May 28, August 27,
                                                    1998    1999      1999
                                                   ------- ------- -----------
                                                                   (Unaudited)
<S>                                                <C>     <C>     <C>
Accrued payroll and related expenses.............. $ 3,217 $ 4,871   $ 5,097
Accrued product warranty..........................   4,112  11,329    12,097
Accrued cooperative advertising and marketing
 development expenses.............................   3,403   7,195     6,881
Accrued price protection..........................     224   6,994     1,642
Deferred revenue..................................   3,845     948     1,918
Other.............................................   3,474   9,456     8,203
                                                   ------- -------   -------
  Other accrued liabilities....................... $18,275 $40,793   $35,838
                                                   ======= =======   =======
</TABLE>

                                      F-13
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999


7. Borrowing Arrangements and Commitments

  Certain of our facilities are leased from third parties under operating
leases. Leases expire at various dates from November 1999 through May 2005, and
certain facility leases have renewal options with rentals based upon changes in
the Consumer Price Index or the fair market rental value of the property. At
the separation date, Palm intends to lease certain facilities from 3Com for up
to 29 months with annual increases of approximately 3%. See Note 14 to the
consolidated financial statements for further discussion of the Real Estate
Matters Agreement between Palm and 3Com.

  Future operating lease commitments are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  Third
     Fiscal Year                                                 Parties  3Com
     -----------                                                 ------- -------
     <S>                                                         <C>     <C>
      2000...................................................... $  820  $ 2,170
      2001......................................................    856    9,532
      2002......................................................    775   10,596
      2003......................................................    794    1,804
      2004......................................................    813       --
      Thereafter................................................    509       --
                                                                 ------  -------
        Total................................................... $4,567  $24,102
                                                                 ======  =======
</TABLE>

  Rent expense was $2.7 million, $2.3 million, and $3.0 million for fiscal
1997, 1998 and 1999.

  As of May 28, 1999, Palm had $1.4 million of debt acquired in the Smartcode
acquisition, and the interest rate on these obligations ranged from
approximately 6% to 9%. These obligations were repaid during the second quarter
of fiscal 2000.

  On November 27, 1999, 3Com sold to a third party the manufacturing plant that
produces the majority of Palm's products. Concurrently, Palm entered into a
two-year supply agreement with the buyer of the manufacturing plant which
commits Palm to purchase a minimum of 450,000 units of Palm products per
quarter. Any overage in purchase of products of no more than 20% that occurs
during any quarter may be credited towards the subsequent quarterly period
commitment. Any deficit in purchase of products of no more than 20% in any
quarter may be made up in the next quarter to the extent there is not a deficit
in such subsequent quarter. Failure by Palm to meet the minimum commitment is
subject to a 90-day notice and cure period. In addition, any failure of the
manufacturer to make the minimum commitment available to Palm in accordance
with Palm's orders in any quarter relieves Palm of its obligation to reach its
minimum commitment in such quarter to the extent of the manufacturer's
shortfall.

  Palm purchases product components from a vendor with which 3Com has agreed to
certain minimum purchase goals over a five-year period. 3Com's agreement with
the vendor provides for an incremental payment to be made to the vendor by 3Com
for any calendar year in which the minimum purchase goal is not met. In
connection with their separation, 3Com and Palm have agreed that Palm will
assume responsibility for 25% of the minimum purchase goal and 3Com will retain
responsibility for the remainder. In the event that Palm does not purchase its
share of the minimum annual purchase goal from the vendor in any of the five
calendar years, Palm will make an incremental payment to 3Com for the
applicable calendar year. In the event that Palm purchases none of its

                                      F-14
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

share of the minimum annual purchase goal in each year, it would be required to
make payments up to a maximum of the following payments: $1.3 million for 1999,
$1.9 million for 2000, $2.8 million for 2001, $3.7 million for 2002 and $4.9
million for 2003. The aggregate of such incremental payments in no event will
exceed $14.6 million.

8. Employee Stock Plans

 Employee Stock Purchase Plan

  Under the 3Com employee stock purchase plan, eligible Palm employees have
generally been able to contribute up to 10% of their compensation, as defined,
to the purchase of shares of 3Com's common stock at a price of 85% of the lower
of the fair market value as of the beginning or the end of the offering period.
Effective on or before the initial public offering of Palm common stock, Palm
intends to sponsor an employee stock purchase plan which is comparable to the
3Com plan.

 Employee Stock Option Plans

  3Com has stock option plans under which Palm employees and directors may be
granted options to purchase common stock. Options are generally granted at not
less than the fair market value at grant date, vest over a two- to five-year
period and expire five to ten years after the grant date.

  Prior to the distribution date, Palm intends to establish a stock option plan
for eligible Palm employees. 3Com options held by Palm employees are expected
to be converted into Palm stock options at the distribution date. The number of
shares and the exercise price of the 3Com options that convert into Palm
options will be adjusted using a conversion formula. The conversion of 3Com
options into Palm options will be done in such a manner that (1) the aggregate
intrinsic value of the options immediately before and after the exchange are
the same, (2) the ratio of the exercise price per option to the market value
per share is not reduced, and (3) the vesting provisions and option period of
the replacement Palm options are the same as the original vesting terms and
option period of the 3Com options. It is currently unknown how many 3Com
options held by Palm employees will be converted into Palm options.

 Restricted Stock Plan

  3Com has a restricted stock plan, under which shares of common stock are
reserved for issuance at no cost to key employees. Compensation expense, equal
to the fair market value on the date of the grant, is recognized as the granted
shares vest over a one- to four-year period. Certain Palm employees participate
in the 3Com restricted stock plan and the unvested portion of their grants will
be forfeited at the distribution date. Each Palm employee who forfeits 3Com
restricted stock will receive Palm restricted stock.

 Director Stock Plan

  3Com has a director stock plan, under which shares of common stock are issued
to members of its Board of Directors at an exercise price equal to the fair
market value on the date of grant and have historically vested over 24-month
increments. Grants made after July 21, 1999 were fully vested at the grant
date. Effective on or before the initial public offering of Palm common stock,
Palm also intends to

                                      F-15
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

sponsor a director option plan. For 3Com board members who resign from the 3Com
board and join the Palm Board of Directors, their unvested 3Com options will
expire 90 days after resignation.

 Accounting for Stock-Based Compensation

  As permitted under SFAS 123, Palm has elected to follow APB 25 and related
interpretations in accounting for stock-based awards to employees. Under APB
25, Palm generally recognizes no compensation expense with respect to such
awards.

  Pro forma information regarding net income (loss) and earnings per share is
required by SFAS 123. This information is required to be determined as if Palm
had accounted for stock-based awards to its employees, including employee stock
options and shares issued under the Employee Stock Purchase Plan, collectively
called "options", granted subsequent to May 31, 1995 under the fair value
method of that Statement. The fair value of the options granted in fiscal 1997,
1998 and 1999 reported below has been estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                             Employee Stock    Employee Stock
                                              Option Plans     Purchase Plan
                                             ----------------  ----------------
                                             1997  1998  1999  1997  1998  1999
                                             ----  ----  ----  ----  ----  ----
<S>                                          <C>   <C>   <C>   <C>   <C>   <C>
Risk-free interest rate.....................  6.1%  5.5%  5.3%  5.4%  5.5%  4.9%
Volatility.................................. 54.0% 56.0% 62.0% 54.0% 56.0% 62.0%
Dividend yield..............................  0.0%  0.0%  0.0%  0.0%  0.0%  0.0%
</TABLE>

  As of May 25, 1997, the expected life of options under the Employee Stock
Option Plan was estimated at approximately one year after the vesting date for
directors and nondirectors. As of May 31, 1998, the expected lives of options
under the Employee Stock Option Plan were estimated at approximately three
years after the vesting date for directors and approximately one year after the
vesting date for nondirectors. As of May 28, 1999, the expected lives of
options under the Employee Stock Option Plan were estimated at three and one-
half years after the vesting date for directors and approximately two years
after the vesting date for nondirectors. As of May 25, 1997, May 31, 1998 and
May 28, 1999, the expected life of options under the Employee Stock Purchase
Plan was estimated at six months.

  The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
The weighted average estimated fair value of 3Com employee stock options
granted during fiscal 1997, 1998 and 1999 was $22.61, $13.30 and $15.53 per
share, respectively. The weighted average estimated fair value of shares
granted under the Employee Stock Purchase Plan during fiscal 1997, 1998 and
1999 was $11.24, $12.47 and $9.02 per share, respectively. Because 3Com options
held by Palm employees and directors have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of these options.


                                      F-16
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

  For purposes of pro forma disclosures under SFAS 123, the estimated fair
value of the options is assumed to be amortized to expense over the options'
vesting period. Pro forma information related to the 3Com options held by Palm
employees and directors follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                           Years Ended
                                                    ---------------------------
                                                    May 25,   May 31,   May 28,
                                                      1997      1998     1999
                                                    --------  --------  -------
<S>                                                 <C>       <C>       <C>
Net income (loss):
  As reported...................................... $ (7,862) $  4,171  $29,628
  Pro forma........................................ $(22,162) $(10,235) $15,664

Net income (loss) per share:
  As reported...................................... $         $         $
  Pro forma........................................ $         $         $

  As reported--diluted............................. $         $         $
  Pro forma--diluted............................... $         $         $
</TABLE>

  The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is applicable only to options granted subsequent to May 31,
1995, the full effect on pro forma net income and earnings per share was not
reflected for periods prior to fiscal 1999.

9. Financial Instruments

  The following summary disclosures are made in accordance with the provisions
of SFAS No. 107, Disclosures About Fair Value of Financial Instruments, which
requires the disclosure of fair value information about both on- and off-
balance sheet financial instruments where it is practicable to estimate the
value. Fair value is defined in SFAS 107 as the amount at which an instrument
could be exchanged in a current transaction between willing parties, rather
than in a forced or liquidation sale, which is not Palm's intent.

  Because SFAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements, any aggregation of the fair value
amounts presented would not represent the underlying value to Palm. Financial
instruments consist of cash and cash equivalents and notes payable. The
estimated fair value of cash and cash equivalents as of May 28, 1999 and August
27, 1999 (unaudited) approximates the carrying amount. The difference between
the fair value of the notes payable and their carrying value is not significant
based on current market rates.

                                      F-17
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999


10. Income Taxes

The provision (credit) for income taxes consists of (in thousands):

<TABLE>
<CAPTION>
                                                            Years Ended
                                                      -------------------------
                                                      May 25,  May 31,  May 28,
                                                       1997     1998     1999
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
Current:
  Federal............................................ $(2,125) $ 6,421  $22,938
  State..............................................    (697)   1,173    5,174
                                                      -------  -------  -------
    Total current....................................  (2,822)   7,594   28,112
                                                      -------  -------  -------
Deferred:
  Federal............................................  (2,679)  (4,526)  (7,825)
  State..............................................    (665)    (834)  (1,799)
                                                      -------  -------  -------
    Total deferred...................................  (3,344)  (5,360)  (9,624)
                                                      -------  -------  -------
Total................................................ $(6,166) $ 2,234  $18,488
                                                      =======  =======  =======
</TABLE>

  The components of net deferred tax assets consist of (in thousands):

<TABLE>
<CAPTION>
                                                                May 31, May 28,
                                                                 1998    1999
                                                                ------- -------
<S>                                                             <C>     <C>
Deferred tax assets:
  Reserves not recognized for tax purposes..................... $ 7,828 $18,352
  Tax credit carryforwards.....................................   2,966   2,024
  Other........................................................     323     365
                                                                ------- -------
    Deferred tax assets........................................ $11,117 $20,741
                                                                ======= =======
</TABLE>

  The provision (credit) for income taxes differs from the amount computed by
applying the federal statutory income tax rate to income (loss) before income
taxes as follows:

<TABLE>
<CAPTION>
                                                              Years Ended
                                                        ------------------------
                                                        May 25,  May 31, May 28,
                                                         1997     1998    1999
                                                        -------  ------- -------
<S>                                                     <C>      <C>     <C>
Tax computed at federal statutory rate.................  (35.0)%  35.0%   35.0%
State income taxes, net of federal effect..............   (6.3)    3.4     4.5
Research tax credits...................................   (2.7)   (4.7)   (1.2)
Other..................................................     --     1.2     0.1
                                                         -----    ----    ----
  Total................................................  (44.0)%  34.9%   38.4%
                                                         =====    ====    ====
</TABLE>

  Palm has federal research credit carryforwards of approximately $2 million
available as a result of its consolidated federal tax filing with 3Com. These
carryforwards expire through the year 2014.

  See Note 14 to the consolidated financial statements for discussion of the
Tax Sharing Agreement between Palm and 3Com.


                                      F-18
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

11. Business Segment Information

  Palm operates in one reportable segment, handheld computing.

 Geographic Information

  Palm's headquarters and most of its operations are located in the United
States. Palm conducts its sales, marketing and customer service activities
throughout the world and also has a research and development facility in
France. Geographic revenue information is based on the location of the end
customer. Geographic long-lived assets information is based on the physical
location of the assets at the end of each period. Revenues from unaffiliated
customers and long-lived assets by geographic region are as follows (in
thousands):

<TABLE>
<CAPTION>
                                       Years Ended          Three Months Ended
                                -------------------------- ---------------------
                                May 25,  May 31,  May 28,  August 28, August 27,
                                  1997     1998     1999      1998       1999
                                -------- -------- -------- ---------- ----------
                                                                (Unaudited)
<S>                             <C>      <C>      <C>      <C>        <C>
Revenues:
  United States................ $ 96,280 $198,630 $400,168  $ 91,462   $121,480
  Other........................   17,877   73,507  163,357    24,607     55,025
                                -------- -------- --------  --------   --------
    Total...................... $114,157 $272,137 $563,525  $116,069   $176,505
                                ======== ======== ========  ========   ========
</TABLE>

  For fiscal 1997, 1998, 1999 and the three months ended August 28, 1998 and
August 27, 1999 (unaudited) no single country outside the United States
accounted for 10% or more of total revenues.

<TABLE>
<CAPTION>
                                                     May 31, May 28, August 27,
                                                      1998    1999      1999
                                                     ------- ------- -----------
                                                                     (Unaudited)
<S>                                                  <C>     <C>     <C>
Long-lived assets:
  United States..................................... $8,231  $7,247    $8,031
  United Kingdom....................................    827     811     1,017
  Other.............................................     63      78       112
                                                     ------  ------    ------
    Total........................................... $9,121  $8,136    $9,160
                                                     ======  ======    ======
</TABLE>

  At May 31, 1998, May 28, 1999 and August 27, 1999 (unaudited), no other
individual country had long-lived assets of 10% or more of total long-lived
assets.

12. Employee Benefit Plan

 401(k) Plan

  Palm's eligible U.S. employees may participate in a plan known as the 3Com
401(k) Plan ("the Plan") which was adopted to provide retirement benefits to
its employees. As allowed under Section 401(k) of the Internal Revenue Code,
the Plan provides tax-deferred salary deductions for eligible employees.
Participants may elect to contribute from 1% to 22% of their annual
compensation to the Plan each calendar year, limited to a maximum annual amount
as set periodically by the Internal Revenue Service. In addition, the Plan
provides for company matching contributions as determined by

                                      F-19
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

the Board of Directors. 3Com matches 50% for each dollar on the first 6% of
target income contributed by the employee. Employees become vested in 3Com
matching contributions according to a three year vesting schedule based on
initial date of hire. Palm's expense related to matching contributions to the
401(k) was $171,000 in fiscal 1997, $178,000 in fiscal 1998 and $508,000 in
fiscal 1999.

  On or about the distribution date, Palm intends to establish a separate
401(k) plan for its employees.

13. Litigation

  We are a party to lawsuits in the normal course of our business. Litigation
in general, and intellectual property and securities litigation in particular,
can be expensive and disruptive to normal business operations. Moreover, the
results of complex legal proceedings are difficult to predict. We believe that
we have defenses to the case set forth below and are vigorously contesting this
matter. An unfavorable resolution of this lawsuit could adversely affect our
business, results of operations or financial condition.

  On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case is now captioned: Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp, Palm
Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The
complaint alleges willful infringement of a United States patent relating to
computerized interpretation of handwriting. The complaint further seeks
unspecified damages and injunctive relief. Xerox has asserted that products
utilizing Graffiti script recognition software made, used, offered for sale or
sold in the United States, or imported into the United States since January 21,
1997, infringe its patent. On June 25, 1999, the court stayed the action
pending reexamination of the patent by the United States Patent and Trademark
Office. The reexamination of the patent is currently pending. In connection
with our separation from 3Com, pursuant to the terms of the Indemnification and
Insurance Matters Agreement, Palm will indemnify and hold 3Com harmless for any
damages or losses which may arise out of this litigation. In particular, an
adverse determination in the Xerox litigation could subject Palm to substantial
damages and require it to indemnify its customers and licensees for damages
that they may suffer. Moreover, if there is an adverse determination, a license
may be necessary to continue using the Grafitti script recognition software in
Palm devices and the Palm platform. A license may not be available or on terms
acceptable to Palm. If upon an adverse determination Palm was unable to obtain
a license on terms acceptable to it, it could be required to modify its script
recognition software or license alternative script recognition software from
third parties for inclusion in Palm devices and the Palm platform.

  We also file suits against others to protect our intellectual property, such
as the matters described below.

  On July 22, 1999, Palm filed a copyright infringement action against Olivetti
and CompanionLink in the United States District Court for the Northern District
of California and obtained a preliminary injunction against further
distribution, sale, import or export of Olivetti Office USA's "Royal daVinci"
handheld device and the daVinci OS Software Development Kit, distributed by
CompanionLink Software, Inc. The injunction is to remain in effect pending the
outcome of the lawsuit. Palm also initiated a copyright infringement action in
Hong Kong on July 21, 1999, against EchoLink Design

                                      F-20
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

Ltd., the company responsible for developing the operating system software
contained in the daVinci products. The High Court of the Hong Kong Special
Administrative Region issued an order the same day restraining EchoLink from
further copying, distribution, sale, import or export of Palm OS operating
system source code or EchoLink's "NEXUS OS" source code, which Palm maintains
infringes its copyrights.

14. Transactions with 3Com Corporation

  Palm's costs and expenses include allocations from 3Com for centralized
legal, accounting treasury, real estate, information technology, distribution,
customer service, sales, marketing, engineering, and other 3Com corporate
services and infrastructure costs. These allocations have been determined on
bases that 3Com and Palm considered to be reasonable reflections of the
utilization of services provided or the benefit received by Palm. The
allocation methods include relative revenues, headcount or square footage.
Allocated costs included in the accompanying consolidated statements of
operations follow (in thousands).

<TABLE>
<CAPTION>
                                        Years Ended        Three Months Ended
                                  ----------------------- ---------------------
                                  May 25, May 31, May 28, August 28, August 27,
                                   1997    1998    1999      1998       1999
                                  ------- ------- ------- ---------- ----------
                                                               (Unaudited)
<S>                               <C>     <C>     <C>     <C>        <C>
Cost of revenues................. $4,374  $3,694  $ 9,238   $1,770     $2,920
Sales and marketing..............  1,144   7,023   16,625    3,100      5,446
Research and development.........  1,573     845    3,437      528      1,647
General and administrative.......  2,574   5,212   14,085    2,485      3,952
Other income and expense, net....    523      25      218       25         63
</TABLE>

  Historically, Palm has outsourced all of its product manufacturing to 3Com
and other third parties.

  For purposes of governing certain of the ongoing relationships between Palm
and 3Com at and after the separation date and to provide for an orderly
transition, Palm and 3Com have entered or will enter into various agreements. A
brief description of each of the agreements follows.

 Master Separation and Distribution Agreement

  The Master Separation and Distribution Agreement contains the key provisions
relating to the separation, initial public offering and the distribution. The
agreement lists the documents and items that the parties must deliver in order
to accomplish the transfer of assets and liabilities from 3Com to Palm,
effective on the separation date. The agreement also contains conditions that
must occur prior to the initial public offering and the distribution. The
parties also entered into both short-term and long-term covenants, including
covenants to enter into transitional services agreements, exchange information,
engage in certain auditing practices and resolve disputes in particular ways.

 General Assignment and Assumption Agreement

  The General Assignment and Assumption Agreement identifies the assets that
3Com will transfer to Palm and the liabilities that Palm will assume from 3Com
in the separation. The agreement also describes when and how these transfers
and assumptions will occur. In general, the

                                      F-21
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

assets that will be transferred and the liabilities that will be assumed are
included in those that appear on the consolidated balance sheet, after
adjustment for certain assets and liabilities that will be retained by 3Com,
such as most of our accounts receivable and accounts payable, and for activity
that occurs between the balance sheet date and the separation date.

 Intellectual Property Agreements

  The Master Technology Ownership and License Agreement, the Master Patent
Ownership and License Agreement, the Master Trademark Ownership and License
Agreement and the Master Confidential Disclosure Agreement together are
referred to as the Intellectual Property Agreements. Under the Intellectual
Property Agreements, 3Com will confirm that Palm owns or will transfer to Palm
its rights in specified patents, patent applications, invention disclosures,
specified trademarks and other intellectual property related to Palm's current
business and research and development efforts. Neither 3Com nor Palm will sue
the other for claims of infringement related to existing patents. 3Com will
grant a license to Palm under certain patents owned by 3Com which were jointly
developed with Palm. Palm will commit to license its operating system to 3Com
on favorable terms pursuant to a separate agreement that the two parties will
negotiate. Both 3Com and Palm have agreed not to disclose confidential
information of the other party except in specific circumstances.

 Employee Matters Agreement

  The Employee Matters Agreement outlines how 3Com and Palm plan to allocate
assets, liabilities and responsibilities relating to current and former
employees of Palm and their participation in the benefits plans, including
stock plans, that 3Com currently sponsors and maintains. The agreement also
contains provisions describing some of Palm's employee benefit and employee
stock plans.

  All eligible Palm employees will continue to participate in the 3Com benefits
plans on comparable terms and conditions to those for 3Com employees until the
distribution date or until Palm establishes benefit plans for its employees, or
elects not to establish comparable plans if it is not legally or financially
practical. Palm intends to establish its own benefit program no later than the
time of the distribution.

  Once Palm establishes its own benefits plans, it may modify or terminate each
plan in accordance with the terms of that plan and its policies. No Palm
benefit plan will provide benefits that overlap benefits under the
corresponding 3Com benefit plan at the time of the distribution. Each Palm
benefit plan will provide that all service, compensation and other benefit
determinations that, as of the distribution, were recognized under the
corresponding 3Com benefits plan will be taken into account under that Palm
benefit plan.

  Following the date of 3Com's distribution of its Palm common stock to its
stockholders, Palm will be under no obligation to maintain these plans in the
form in which they were established or at all. The transfer to Palm of
employees at certain of 3Com's international operations, and of certain
employee benefit plans, may not take place until Palm receives consents or
approvals or has satisfied other applicable requirements.

                                      F-22
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999


 Tax Sharing Agreement

  The Tax Sharing Agreement allocates 3Com's and Palm's responsibilities for
certain tax matters. The agreement requires Palm to pay 3Com for the
incremental tax costs of Palm's inclusion in consolidated, combined or unitary
tax returns with affiliated corporations. In determining these incremental
costs, the agreement takes into account not only the group's incremental tax
payments to the Internal Revenue Service or other taxing authorities, but also
the incremental use of tax losses of affiliates to offset Palm's taxable
income, and the incremental use of tax credits of affiliates to offset the tax
on Palm's income. The agreement also provides for compensation or reimbursement
as appropriate to reflect redeterminations of Palm's tax liability for periods
during which Palm joined in filing consolidated, combined or unitary tax
returns.

  The tax sharing agreement also requires Palm to indemnify 3Com for certain
taxes and similar obligations, including (a) sales taxes on the sale of
products purchased by 3Com from Palm before the distribution, (b) customs
duties or harbor maintenance fees on products exported or imported by 3Com on
behalf of Palm, (c) the additional taxes that would result if an acquisition of
a controlling interest in Palm's stock after the distribution causes the
distribution not to qualify for tax-free treatment to 3Com, and (d) any taxes
resulting from transactions undertaken in preparation for the distribution.

  Palm's indemnity obligations include any interest and penalties on taxes,
duties or fees for which Palm must indemnify 3Com.

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

  The agreement also assigns responsibilities for certain administrative
matters such as the filing of returns, payment of taxes due, retention of
records, and the conduct of audits, examinations or similar proceedings.

 Master Transitional Services Agreement

  The Master Transitional Services Agreement governs the provision of
information technology services by 3Com and Palm to each other, on an interim
basis, for one year from the date of separation, unless extended for specific
services or otherwise indicated in the agreement. The services include data
processing and telecommunications services, such as voice telecommunications
and data transmission, and information technology support services, for
functions including accounting, financial management, tax, payroll, stockholder
and public relations, legal, procurement, and other administrative functions.
Specified charges for such services are generally intended to allow the
providing company to recover the direct and indirect costs of providing the
services, plus 5% for one year, and plus 10% for an extension of the agreements
beyond one year. The Master Transitional Services Agreement also will cover the
provision of certain additional transitional services identified from time to
time after the separation date that were inadvertently or unintentionally
omitted from the specified services, or that are essential to effectuate an
orderly transition under the separation agreement, so long as the provision of
such services would not significantly disrupt 3Com's operations or
significantly increase the scope of its responsibility under the agreement.

                                      F-23
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999


  In addition, the Master Transitional Services Agreement will provide for the
replication of some computer systems, including hardware, software, data
storage or maintenance and support components. Generally, the party needing the
replicated system will bear the costs and expenses of replication. Generally,
the party purchasing new hardware or licensing new software will bear the costs
and expenses of purchasing the new hardware or obtaining the new software
licenses.

 Real Estate Matters Agreement

  The Real Estate Matters Agreement addresses real estate matters relating to
the 3Com leased and owned properties that 3Com will transfer to or share with
Palm. The agreement describes the manner in which 3Com will transfer to or
share with Palm various leased and owned properties. The Real Estate Matters
Agreement provides that Palm will be required to accept the transfer of all
sites allocated to Palm, even if a site has been damaged by a casualty before
the separation date. The Real Estate Matters Agreement also provides that all
reasonable costs required to effect the transfers, including landlord consent
fees and landlord attorneys' fees will be paid by 3Com.

 Indemnification and Insurance Matters Agreement

  Effective as of the separation date, subject to specified expections, Palm
and 3Com will each release the other from any liabilities arising from events
occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation, the initial public
offering and the distribution. The agreement also contains provisions governing
indemnification. In general, Palm and 3Com will each indemnify the other from
all liabilities arising from their respective businesses or contracts, as well
as liabilities arising from a breach of the separation agreement or any
ancillary agreement. In addition, 3Com and Palm will each indemnify the other
against liability for specified environmental conditions. Palm will reimburse
3Com for the cost of any insurance coverage from the separation date to the
distribution date.

15. Subsequent Events

  On November 30, 1999, Palm's Board of Directors and sole stockholder
  approved the following:

  . The 1999 Stock Plan. The 1999 Stock Plan becomes effective upon the
    closing of the initial public offering. A total of    shares will be
    reserved for issuance under the 1999 Plan. In addition, the number of
    shares reserved under the plan will automatically increase on the first
    day of each fiscal year, beginning with our fiscal year 2001, in an
    amount equal to the lesser of (a)    shares, or (b) 5% of the shares
    outstanding on the first day of the fiscal year, or (c) a lesser amount
    determined by Palm's Board of Directors. The 1999 Stock Plan provides for
    issuance of incentive stock options, nonstatutory stock options and stock
    purchase rights to employees, directors and consultants.

  . The 1999 Director Option Plan. The 1999 Director Option Plan becomes
    effective upon the closing of the initial public offering. Under the 1999
    Director Option Plan, a total of     shares of common stock will be
    reserved for the grant of nonstatutory stock options to non-employee
    directors of Palm. In addition, the number of shares reserved under this
    plan will automatically increase on the first day of each fiscal year,
    beginning in fiscal year 2001, in an amount equal to       shares or a
    lesser amount determined by Palm's Board of Directors. The initial
    options granted under the 1999 Director Option Plan shall vest over three
    years and any subsequent annual stock option grants will vest over one
    year and expire ten years from the date of grant.

                                      F-24
<PAGE>

                                   PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999


  . The 1999 Employee Stock Purchase Plan. The 1999 Employee Stock Purchase
    Plan becomes effective upon the closing of the initial public offering.
    Under the Purchase Plan, eligible employees may purchase common stock
    through payroll deductions, which may not exceed 10% of any employee's
    compensation nor more than       shares in any one purchase period. A
    total of    shares of common stock will be reserved for issuance under
    the 1999 Employee Stock Purchase Plan. The number of shares reserved for
    issuance under the 1999 Employee Stock Purchase Plan will automatically
    increase annually, beginning with our fiscal year 2001, by an amount
    equal to the lesser of (a)    shares, or (b) 2% of the common shares
    outstanding on the first day of the fiscal year, or (c) another amount as
    may be determined by Palm's Board of Directors.

  On      , 2000, Palm's Board of Directors and sole stockholder approved the
following:

  . The reincorporation of Palm Computing, Inc. in the state of Delaware as
    Palm, Inc.

  . An increase in the authorized number of shares of common stock to
                shares and creation of newly undesignated preferred stock
    totaling             shares, contingent upon the approval of the
    reincorporation of Palm in Delaware and the closing of the initial public
    offering.

  . A     -for-one stock split of the outstanding shares of common stock. The
    stock split was effected on            , 2000. All shares and per share
    amounts in these financial statements have been adjusted to give effect
    to the stock split.

  . The payment of a dividend of $   million to 3Com.

                                   * * * * *


                                      F-25
<PAGE>

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

  No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.

                                --------------

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   3
Risk Factors.............................................................   7
Our Separation From 3Com.................................................  23
Special Note Regarding Forward-Looking Statements........................  22
Use of Proceeds..........................................................  25
Dividend Policy..........................................................  25
Capitalization...........................................................  26
Dilution.................................................................  27
Selected Consolidated Financial Data.....................................  29
Management's Discussion and Analysis of Financial Condition and Results
 of Operations ..........................................................  30
Business.................................................................  42
Management...............................................................  55
Arrangements Between Palm and 3Com.......................................  67
Principal Stockholders...................................................  76
Description of Capital Stock ............................................  77
Underwriting.............................................................  79
Shares Eligible for Future Sale..........................................  81
Validity of Common Stock.................................................  81
Experts..................................................................  81
Where You Can Find More Information......................................  82
Index to Consolidated Financial Statements............................... F-1
</TABLE>

                                --------------

  Through and including       , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                       Shares

                                  Palm, Inc.

                                 Common Stock

                                --------------

                                    [LOGO]
                        [PALM, INC. LOGO APPEARS HERE]

                                --------------

                             Goldman, Sachs & Co.

                          Morgan Stanley Dean Witter

                              Merrill Lynch & Co.

                              Robertson Stephens



                      Representatives of the Underwriters


-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

  The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission registration fee and the
registration fee. Palm has agreed to pay these costs and expenses.

<TABLE>
<CAPTION>
                                   Item                                 Amount
                                   ----                                 -------
   <S>                                                                  <C>
   Securities and Exchange Commission registration fee................. $26,400
   NASD registration fee...............................................  10,500
   Nasdaq Stock Market original and continued listing fees.............    *
   Blue Sky qualification fees and expenses............................  12,000
   Legal fees and expenses.............................................    *
   Accounting fees and expenses........................................    *
   Transfer agent and registrar fees...................................    *
   Printing and engraving expenses.....................................    *
   Miscellaneous expenses..............................................    *
                                                                        -------
     Total............................................................. $
                                                                        =======
</TABLE>
--------
*To be filed by amendment.

Item 14. Indemnification of Directors and Officers

  Palm is incorporated under the laws of the State of Delaware. Section 145
("Section 145") of the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended (the "General Corporation Law"), inter
alia, provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director, employee
or agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the corporation's best interests and, with respect
to any criminal action or proceeding, had no reasonable cause to believe that
his conduct was illegal.

  Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him in
any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.

  Palm's Certificate of Incorporation and Bylaws provide for the
indemnification of officers and directors to the fullest extent permitted by
the General Corporation Law.

  All of Palm's directors and officers will be covered by insurance policies
maintained by Palm against specified liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act of 1933, as
amended. In addition, Palm has entered into indemnity agreements with its
directors and executive officers (a form of which is filed as Exhibit 10.9 to
this Registration Statement) that obligate Palm to indemnify such directors and
executive officers to the fullest extent permitted by the General Corporation
Law.

                                      II-1
<PAGE>

Item 15. Exhibits and Financial Statement Schedules

(a) Exhibits.

<TABLE>
<CAPTION>
 Exhibit
 Number  Description
 ------- -----------
 <C>     <S>
  1.1*   Form of Underwriting Agreement.
  2.1    Master Separation and Distribution Agreement between 3Com and the
         registrant effective as of December 13, 1999.
  2.2    Form of General Assignment and Assumption Agreement between 3Com and
         the registrant.
  2.3    Form of Master Technology Ownership and License Agreement between 3Com
         and the registrant.
  2.4    Form of Master Patent Ownership and License Agreement between 3Com and
         the registrant.
  2.5    Form of Master Trademark Ownership and License Agreement between 3Com
         and the registrant.
  2.6    Form of Employee Matters Agreement between 3Com and the registrant.
  2.7    Form of Tax Sharing Agreement between 3Com and the registrant.
  2.8    Form of Master Transitional Services Agreement between 3Com and the
         registrant.
  2.9    Form of Real Estate Matters Agreement between 3Com and the registrant.
  2.10   Form of Master Confidential Disclosure Agreement between 3Com and the
         registrant.
  2.11   Form of Indemnification and Insurance Matters Agreement between 3Com
         and the registrant.
  2.12   Form of Non-U.S. Plan.
  3.1*   Certificate of Incorporation.
  3.2*   Bylaws.
  5.1*   Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
 10.1*   1999 Stock Plan.
 10.2*   1999 Stock Plan Agreements.
 10.3*   1999 Employee Stock Purchase Plan.
 10.4*   1999 Employee Stock Purchase Plan Agreements.
 10.5*   1999 Director Option Plan.
 10.6*   1999 Director Option Plan Agreements.
 10.7    Management Retention Agreement dated as of December 1, 1999 by and
         between Carl J. Yankowski and the registrant.
 10.8*   Form of Indemnification Agreement entered into by the registrant with
         each of its directors and executive officers.
 10.9*   RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement
         between RAM Mobile Data USA Limited Partnership and the registrant.
 10.10*  Supply Agreement between Manufacturers' Services Salt Lake City
         Operations, Inc. and the registrant.
 10.11*  Common Stock Purchase Agreement between America Online and the
         registrant.
 10.12*  Common Stock Purchase Agreement between Motorola and the registrant.
 10.13*  Common Stock Purchase Agreement Between Nokia and the registrant.
 21.1*   Subsidiaries of Palm.
 23.1*   Independent Auditors' Consent and Report on Schedule
 23.2*   Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
 24.1    Power of Attorney (contained on page II-4).
 27.1    Financial Data Schedule.
</TABLE>
--------
*  To be filed by amendment.


                                      II-2
<PAGE>

(b)Financial Statement Schedules.

<TABLE>
   <S>                                                                       <C>
   Valuation and Qualifying Accounts and Reserves........................... S-1
</TABLE>

Item 16. Undertakings

  The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

  Insofar as the indemnification for liabilities arising under the Securities
Act of 1933 may be permitted as to directors, officers and controlling persons
of the Registrant pursuant to the provisions described in Item 14, or
otherwise, the Registrant has been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payments by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

  The undersigned Registrant hereby undertakes that:

    (1) for purposes of determining any liability under the Securities Act of
  1933, the information omitted from the form of prospectus filed as part of
  this registration statement in reliance upon Rule 430A and contained in a
  form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
  (4) or 497(h) under the Securities Act shall be deemed to be part of this
  registration statement as of the time it was declared effective; and

    (2) for the purpose of determining any liability under the Securities Act
  of 1933, each post-effective amendment that contains a form of prospectus
  shall be deemed to be a new registration statement relating to the
  securities offered therein, and this offering of such securities at that
  time shall be deemed to be the initial bona fide offering thereof.

                                      II-3
<PAGE>

                                   SIGNATURES

  Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on December 13, 1999.

                                                  /s/ Carl J. Yankowski
                                          _____________________________________
                                                     Carl J. Yankowski
                                                Chief Executive Officer and
                                                          Director

                               POWER OF ATTORNEY

  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl J. Yankowski, Judy Bruner and Stephen Yu,
and each of them, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective
statements), and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof. This Power of Attorney may be signed in several counterparts.

<TABLE>
<CAPTION>
              Signature                           Title                    Date
              ---------                           -----                    ----

<S>                                    <C>                          <C>
       /s/ Carl J. Yankowski           Chief Executive Officer and   December 13, 1999
______________________________________  Director (Principal
          Carl J. Yankowski             Executive Officer)

          /s/ Judy Bruner              Senior Vice President and     December 13, 1999
______________________________________  Chief Financial Officer
             Judy Bruner                (Principal Financial and
                                        Accounting Officer)

       /s/ Eric A. Benhamou            Director                      December 13, 1999
______________________________________
           Eric A. Benhamou

      /s/ James L. Barksdale           Director                      December 13, 1999
______________________________________
          James L. Barksdale

      /s/ Gordon A. Campbell           Director                      December 13, 1999
______________________________________
          Gordon A. Campbell

       /s/ Susan G. Swenson            Director                      December 13, 1999
______________________________________
           Susan G. Swenson
</TABLE>

                                      II-4
<PAGE>

                                   PALM, INC.

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

            Years Ended May 25, 1997, May 31, 1998 and May 28, 1999
                                 (In thousands)

<TABLE>
<CAPTION>
                                                Additions
                                     Balance at Charged to            Balance at
                                     Beginning  Costs and               End of
            Description              of Period   Expenses  Deductions   Period
            -----------              ---------- ---------- ---------- ----------
<S>                                  <C>        <C>        <C>        <C>
Year ended May 25, 1997:
  Allowance for doubtful accounts...   $   39     $  567    $     (5)  $   601
  Product return reserve............      651     10,637      (4,042)    7,246
  Accrued product warranty..........       58      5,507      (3,912)    1,653

Year ended May 31, 1998:
  Allowance for doubtful accounts...   $  601     $3,893    $    (43)  $ 4,451
  Product return reserve............    7,246      8,982     (10,576)    5,652
  Accrued product warranty..........    1,653     17,527     (15,068)    4,112

Year ended May 28, 1999:
  Allowance for doubtful accounts...   $4,451     $4,271    $ (4,905)  $ 3,817
  Product return reserve............    5,652     24,145     (12,254)   17,543
  Accrued product warranty..........    4,112     25,949     (18,732)   11,329
</TABLE>

                                      S-1
<PAGE>

                               INDEX OF EXHIBITS

<TABLE>
<CAPTION>
 Exhibit
 Number  Description
 ------- -----------
 <C>     <S>
  1.1*   Form of Underwriting Agreement.
  2.1    Master Separation and Distribution Agreement between 3Com and the
         registrant effective as of December 13, 1999.
  2.2    Form of General Assignment and Assumption Agreement between 3Com and
         the registrant.
  2.3    Form of Master Technology Ownership and License Agreement between 3Com
         and the registrant.
  2.4    Form of Master Patent Ownership and License Agreement between 3Com and
         the registrant.
  2.5    Form of Master Trademark Ownership and License Agreement between 3Com
         and the registrant.
  2.6    Form of Employee Matters Agreement between 3Com and the registrant.
  2.7    Form of Tax Sharing Agreement between 3Com and the registrant.
  2.8    Form of Master Transitional Services Agreement between 3Com and the
         registrant.
  2.9    Form of Real Estate Matters Agreement between 3Com and the registrant.
  2.10   Form of Master Confidential Disclosure Agreement between 3Com and the
         registrant.
  2.11   Form of Indemnification and Insurance Matters Agreement between 3Com
         and the registrant.
  2.12   Form of Non-U.S. Plan.
  3.1*   Certificate of Incorporation.
  3.2*   Bylaws.
  5.1*   Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
 10.1*   1999 Stock Plan.
 10.2*   1999 Stock Plan Agreements.
 10.3*   1999 Employee Stock Purchase Plan.
 10.4*   1999 Employee Stock Purchase Plan Agreements.
 10.5*   1999 Director Option Plan.
 10.6*   1999 Director Option Plan Agreements.
 10.7    Management Retention Agreement dated as of December 1, 1999 by and
         between Carl J. Yankowski and the registrant.
 10.8*   Form of Indemnification Agreement entered into by the registrant with
         each of its directors and executive officers.
 10.9*   RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement
         between RAM Mobile Data USA Limited Partnership and the registrant.
 10.10*  Supply Agreement between Manufacturers' Services Salt Lake City
         Operations, Inc. and the registrant.
 10.11*  Common Stock Purchase Agreement between America Online and the
         registrant.
 10.12*  Common Stock Purchase Agreement between Motorola and the registrant.
 10.13*  Common Stock Purchase Agreement Between Nokia and the registrant.
 21.1*   Subsidiaries of Palm.
 23.1*   Independent Auditors' Consent and Report on Schedule
 23.2*   Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
 24.1    Power of Attorney (contained on page II-4).
 27.1    Financial Data Schedule.
</TABLE>
--------
 * To be filed by amendment.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 413757}]
{"company-data": {"conformed-name": "PALM INC", "cik": "0001100389", "assigned-sic": "", "irs-number": "943150688", "state-of-incorporation": "DE", "fiscal-year-end": "0531"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-92657", "film-number": "99773662"}, "business-address": {"street1": "54000 BAYFRONT PLAZA", "city": "SANTA CLARA", "state": "CA", "zip": "95022-8145", "phone": "4083265000"}, "mail-address": {"street1": "5400 BAYFRONT PLAZA", "city": "SANTA CLARA", "state": "CA", "zip": "95052-8145"}}
As filed with the Securities and Exchange Commission on December 13, 1999
                                                      Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                --------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                        Under The Securities Act of 1933

                                --------------
                                   PALM, INC.
             (Exact name of Registrant as specified in its charter)

                                --------------
Delaware                              3571                            94-3150688
 (State or other jurisdiction of      (Primary Standard Industrial             (I.R.S. Employer
 incorporation or organization)       Classification Code Number)           Identification Number)
5400 Bayfront Plaza
                           Santa Clara, CA 95052-8145
                                 (408) 326-5000
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)

                                --------------

                               Carl J. Yankowski
                                   Palm, Inc.
                              5400 Bayfront Plaza
                           Santa Clara, CA 95052-8145
                                 (408) 326-5000
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                --------------
                                   Copies to:
Larry W. Sonsini, Esq.                 Stephen Yu, Esq.                 John L. Savva, Esq.
      Aaron J. Alter, Esq.                     Palm, Inc.                  Steven B. Stokdyk, Esq.
    Katharine A. Martin, Esq.             5400 Bayfront Plaza                Sullivan & Cromwell
Wilson Sonsini Goodrich & Rosati       Santa Clara, CA 95052-8145           1888 Century Park East
    Professional Corporation                 (408) 326-5000                       Suite 2100
       650 Page Mill Road                                                 Los Angeles, CA 90067-1725
       Palo Alto, CA 94304                                                      (310) 712-6600
         (650) 493-9300
--------------
        Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

  If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

                                --------------

                        CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Amount of
       Title of Each Class of              Proposed Maximum       Registration
     Securities to be Registered      Aggregate Offering Price(1)     Fee
------------------------------------------------------------------------------
Common Stock, par value $0.001 per
 share..............................        $100,000,000.00        $26,400.00
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(o) promulgated under the Securities
    Act of 1933, as amended.

                                --------------

  The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effectiveness until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell securities and we are not soliciting offers to buy these        +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

                Subject to Completion. Dated December 13, 1999.

                                        Shares

                                   Palm, Inc.
                         [PALM, INC. LOGO APPEARS HERE]

                                  Common Stock

                                  -----------

  This is an initial public offering of shares of common stock of Palm, Inc.
 All of the              shares of common stock are being sold by Palm.

  Prior to this offering, there has been no public market for the common stock.
Palm has applied to have the common stock quoted on the Nasdaq National Market
under the symbol "PALM".

  See "Risk Factors" on page 7 to read about factors you should consider before
buying shares of the common stock.

                                  -----------

  Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

                                  -----------
Per Share Total
                                                                --------- -----
Initial public offering price..................................
Underwriting discount..........................................
Proceeds, before expenses, to Palm.............................
To the extent that the underwriters sell more than               shares of
the common stock, the underwriters have the option to purchase up to an
additional               shares from Palm at the initial public offering price
less the underwriting discount.

                                  -----------

  The underwriters expect to deliver the shares against payment in New York,
New York on        , 2000.

Goldman, Sachs & Co.                                  Morgan Stanley Dean Witter

                              Merrill Lynch & Co.

                                                             Robertson Stephens

                                  -----------

                    Prospectus dated                , 2000.
[description of artwork to be filed by amendment]
PROSPECTUS SUMMARY

   You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our historical consolidated financial statements and notes to
those statements included elsewhere in this prospectus.

                                      PALM

  We are the leading global provider of handheld computing devices. We develop,
design and market our Palm-branded handheld devices, which currently include
our Palm III, Palm V and Internet-enabled Palm VII product families. According
to International Data Corporation, in 1998 we had a 68% market share of the
worldwide personal companion handheld device market, which International Data
Corporation defines as small, pocket-sized devices that feature pen-based input
and synchronize with a personal computer. We believe our emphasis on
simplicity, elegance and ease of use and our focus on consumer needs have
contributed to our success to date. Our devices have also won numerous awards,
including Business Week's "Design of the Decade--Gold Award" and PC Computing's
Most Valuable Product award for "Best Pocket PC" in 1999. We intend to build on
our global market leadership in handheld computing devices through continued
innovation and focus on addressing customer needs.

  The Palm operating system and related software, which we refer to as our Palm
platform, have been the cornerstone of our success in the handheld device
market. The Palm platform combines the distinctive look, feel and ease of use
of our Palm OS operating system with HotSync synchronization technology, pen-
based input technology and personal information management applications such as
datebook and address book. Our Palm VII product also includes web-clipping
software that allows Internet content providers and users to send and receive
information via the Internet in a format optimized for handheld devices. In
addition to including the Palm platform in our Palm-branded devices, we license
the Palm platform to manufacturers of information appliances, which we define
as handheld devices that enable users to access and manage information. Most
recently, Nokia and Sony agreed to license the Palm platform for use in their
future products. We intend to establish our Palm platform as the leading
operating system in the rapidly converging markets of handheld computing
devices, information appliances, mobile phones and handheld entertainment
devices.

  We have also established a wireless Internet access service, Palm.net, which
supports the Palm VII device and generates revenue from monthly subscription
fees. Palm.net subscribers can obtain wireless access to information such as
real-time stock quotes, news headlines and airline flight schedules. In
addition, our Palm.net service enables mobile users to access an increasing
array of enterprise data and applications. We have also developed our Palm.com
website, which is emerging as an important destination site for our customers,
users and developer community. As part of our Internet strategy, we are
expanding our Internet destination sites to provide new web-clipping
applications and facilitate e-commerce.

  We believe that the continued adoption of handheld devices as well as our
strategic focus on Palm platform licensing and Internet services present us
with significant growth opportunities. We will continue our efforts to identify
and respond to customer needs as handheld computing devices become more
sophisticated, reach a broader customer base and become an increasingly
important means of Internet access on a global basis.

  As of December 1, 1999, we had sold over 5 million Palm devices worldwide. As
of December 1, 1999, more than 29,000 third-party developers had registered to
create applications based on the Palm platform. Our revenues have increased
from approximately $1 million in fiscal 1995 to $564 million in fiscal 1999. We
outsource the manufacturing of all of our devices to Manufacturers' Services
Limited and Flextronics.

                                       3
OUR RELATIONSHIP WITH 3COM

  We are currently a wholly-owned subsidiary of 3Com Corporation. After the
completion of this offering, 3Com will own approximately     % of the
outstanding shares of our common stock, or approximately     % if the
underwriters fully exercise their option to purchase additional shares. 3Com
currently plans to complete its divestiture of Palm approximately six months
following this offering by distributing all of the shares of Palm common stock
owned by 3Com to the holders of 3Com's common stock. However, 3Com is not
obligated to complete the distribution, and the distribution may not occur by
the anticipated time or at all.

  3Com will, in its sole discretion, determine the timing, structure and all
terms of its distribution of our common stock that it owns. 3Com's distribution
is subject to receiving a private letter ruling from the Internal Revenue
Service that the distribution of its shares of Palm common stock to 3Com
stockholders will be tax-free to the stockholders and that our separation from
3Com qualifies as a reorganization for United States federal income tax
purposes.

  Prior to the completion of this offering, we will enter into agreements with
3Com related to the separation of our business operations from 3Com. These
agreements provide for, among other things:

  .  the transfer from 3Com to us of assets and the assumption by us of
     liabilities relating to our business;

  .  the allocation of intellectual property between us and 3Com; and

  .  various interim and ongoing relationships between us and 3Com.

  The agreements regarding the separation of our business operations from 3Com
are described more fully in the section entitled "Arrangements Between Palm and
3Com" included elsewhere in this prospectus. The terms of these agreements,
which are being negotiated in the context of a parent-subsidiary relationship,
may be more or less favorable to us than if they had been negotiated with
unaffiliated third parties. See "Risk Factors--Risks Related To Our Separation
From 3Com." The assets and liabilities to be transferred to us are described
more fully in our consolidated financial statements and notes to those
statements that are also included elsewhere in this prospectus.

                         CONCURRENT PRIVATE PLACEMENTS

  America Online, Inc., Motorola, Inc. and Nokia have agreed to purchase from
us, in private placements that will occur concurrently with the closing of this
offering, an aggregate number of shares of our common stock equal to up to 4.5%
of our capital stock, which percentage is based on outstanding common stock as
well as options to purchase    shares which have been granted as of        ,
2000, but not exceeding an aggregate investment of more than $225 million.

  These investors will pay a per share purchase price for this common stock
equal to the initial public offering price in this offering.

                                       4
THE OFFERING
Common stock offered.......................           shares
Common stock to be outstanding immediately
 after this offering.......................           shares
Common stock to be held by 3Com immediately
 after this offering.......................           shares
Use of proceeds............................  For payment of a dividend to 3Com, payment
                                             of other amounts due to 3Com, capital
                                             expenditures, marketing expenses, working
                                             capital and potential investments in, or
                                             acquisitions of, other businesses or
                                             technologies.
Proposed Nasdaq Stock Market symbol........  PALM
This information is based on      shares outstanding as of       , 1999, all
of which are owned by 3Com. We will declare a     -for-one stock split to
increase the amount of outstanding shares of our common stock to
shares prior to this offering. Unless we specifically state otherwise, the
information in this prospectus does not take into account the issuance of up to
     shares of common stock that the underwriters have the option to purchase.
If the underwriters exercise in full their option to purchase additional
shares,      shares of common stock will be outstanding after this offering.

  The number of shares of our common stock to be outstanding immediately after
this offering listed above does not take into account approximately
shares of our common stock reserved for issuance under our stock plans, of
which options to purchase           shares have been granted as of
            , 2000 but does include an aggregate of    shares to be issued to
America Online, Motorola and Nokia concurrently with the closing of this
offering. In addition, we will assume substantially all of the 3Com options
held by our employees on the date 3Com distributes our common stock, which
options will convert into options to purchase our common stock.

  We were incorporated in California in January 1992 as Palm Computing, Inc. In
connection with this offering and our separation from 3Com, we intend to
reincorporate in Delaware and change our name to Palm, Inc. We were acquired by
3Com in June 1997 as part of 3Com's acquisition of U.S. Robotics Corporation.
We had been acquired by U.S. Robotics in September 1995. From June 1997 to the
time of this offering, we have been operated as a wholly-owned subsidiary of
3Com. Our principal executive offices are located at 5400 Bayfront Plaza, Santa
Clara, California 95052-8145, and our telephone number is (408) 326-5000. Our
websites are http://www.palm.com and http://www.palm.net. The information on
these websites is not a part of this prospectus.

  In this prospectus, "Palm," "we," "us" and "our" each refers to Palm, Inc.
and its subsidiaries, and not to the underwriters or 3Com. "3Com" refers to
3Com Corporation and its subsidiaries.

  Palm, our logo and other trademarks of Palm mentioned in this prospectus are
the property of Palm. All other trademarks or trade names referred to in this
prospectus are the property of their respective owners.

                                       5
SUMMARY CONSOLIDATED FINANCIAL DATA

  The following tables present our summary consolidated financial data. The
data presented in these tables are from "Selected Consolidated Financial Data"
and our historical consolidated financial statements and notes to those
statements included elsewhere in this prospectus. You should read those
sections for a further explanation of the financial data summarized here.

  The historical financial information may not be indicative of our future
performance and does not reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented.
Three Months
                                          Years Ended                          Ended
                          ---------------------------------------------- -----------------
                          June 30,  May 26,  May 25,   May 31,  May 28,  Aug. 28, Aug. 27,
                            1995(1) 1996(2)    1997      1998     1999     1998     1999
                          --------  -------  --------  -------- -------- -------- --------
                                    (in thousands, except per share amounts)
Consolidated Statements
 of Operations Data:
Revenues................  $ 1,403   $ 7,054  $114,157  $272,137 $563,525 $116,069 $176,505
Gross profit............    1,229     2,575    36,472   114,388  247,909   53,071   78,181
Operating income
 (loss).................   (2,231)   (6,777)  (13,513)    6,461   48,339   13,131   15,866
Net income (loss).......   (2,166)   (3,062)   (7,862)    4,171   29,628    8,070    9,658
Unaudited pro forma net
 income per share:......
  Basic.................                                        $                 $
  Diluted...............                                        $                 $
Shares used in computing
 unaudited pro forma net
 income per share:
  Basic.................
  Diluted...............
Supplemental unaudited
 pro forma net income
 per share:
  Basic.................                                        $                 $
  Diluted...............                                        $                 $
Shares used in computing
 supplemental unaudited
 pro forma net income
 per share:
  Basic.................
  Diluted...............
August 27, 1999
                                                         -----------------------
                                                                    Pro Forma
                                                          Actual  As Adjusted(3)
                                                         -------- --------------
                                                             (in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents............................... $ 37,138      $
Working capital.........................................   91,074
Total assets............................................  201,346
Stockholder's net investment............................  113,295
-------
Notes:
(1) Our fiscal year end was June 30 prior to our acquisition by 3Com.
(2) Fiscal 1996 includes only eleven months of operating results.
(3) Pro forma as adjusted amounts give effect to the following actions as
    though these actions had been taken as of August 27, 1999:
  . our sale of     shares of common stock in this offering at an assumed
    initial public offering price of $   per share and after deducting an
    assumed underwriting discount and estimated offering expenses payable by
    us;
  . our sale of    shares of common stock to America Online, Motorola and
    Nokia concurrently with the closing of this offering at an assumed
    offering price of $   per share;
  . retention of most of our accounts receivable and accounts payable by 3Com
    at the time of our separation;
  . payment of a dividend to 3Com equal to its tax basis in us, which was
    approximately $   million at     , 2000; and
  . repayment of an intercompany payable to 3Com, which was approximately $49
    million at August 27, 1999.

                                       6
RISK FACTORS

   You should carefully consider the risks described below and the other
information in this prospectus before investing in our common stock. Our
business could be seriously harmed by any of these risks. The trading price of
our common stock could decline due to any of these risks, and you may lose all
or part of your investment.

                         Risks Related to Our Business

If we fail to develop and introduce new products and services rapidly and
successfully, we will not be able to compete effectively and our business will
suffer.

  We operate in a highly competitive, quickly changing environment, and our
future success depends on our ability to develop and introduce new products and
services that our customers and end users choose to buy. If we are unsuccessful
at developing and introducing new products and services that are appealing to
end users, our business and operating results would be seriously harmed.

  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 and technological trends
accurately or are otherwise unable to complete the development of products and
services quickly, we will be unable to introduce new products and services into
the market on a timely basis, if at all. For example, our most recently
introduced handheld device product, the Palm VII device, took more than two
years to develop. In addition, because the Palm VII device requires Internet
services and applications to support it, we must also continue to develop new
services to maintain and broaden its user appeal.

  Because the sales and marketing life cycle of our handheld devices is
generally 12 to 18 months or less, we must:

  .  continue to develop updates to our Palm platform, new handheld devices
     and new Internet services, or our existing products and services will
     quickly become obsolete;

  .  manage the timing of new product introductions so that we minimize the
     impact of customers delaying purchases of existing products in
     anticipation of new product releases;

  .  manage the levels of existing and older product and component
     inventories to minimize inventory write-offs; and

  .  adjust the prices of our existing products in order to increase customer
     demand for these products.

If we do not correctly anticipate demand for our products, our operating
results will suffer.

  Historically, we have seen steady increases in demand for our products and
have generally been able to increase production to meet that demand. However,
the demand for our products depends on many factors and will be difficult to
forecast. We expect that it will become more difficult to forecast demand as we
introduce and support multiple handheld device products and as competition in
the market for our products intensifies. Significant unanticipated fluctuations
in demand could cause the following problems in our operations:

  .  If demand increases beyond what we forecast, we would have to rapidly
     increase production at our third-party manufacturers. We would depend on
     suppliers to provide additional volumes of components and those
     suppliers might not be able to increase production rapidly enough to
     meet unexpected demand. Even if we are able to procure enough
     components, our third-party manufacturers might not be able to produce
     enough of our devices as fast as we need them. The inability of either
     our manufacturers or our suppliers to increase production rapidly enough
     could cause us to fail to meet customer demand.

                                       7
.  Rapid increases in production levels to meet unanticipated demand could
     result in higher costs for manufacturing and supply of components and
     other expenses. These higher costs could lower our profit margins.
     Further, if production is increased rapidly, manufacturing yields could
     decline, which may also lower our margins.

  .  If forecasted demand does not develop, we could have excess production
     resulting in higher inventories of finished products and components,
     which would use cash and could lead to write-offs of some or all of the
     excess inventories. Lower than forecasted demand could also result in
     excess manufacturing capacity at our third-party manufacturers and
     failure to meet some minimum purchase commitments, each of which could
     result in lower margins.

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

  Our operating results are difficult to predict. Our future quarterly
operating results may fluctuate significantly and may not meet the expectations
of securities analysts or investors. If this occurs, the price of our stock
would likely decline. Factors that may cause fluctuations in our operating
results include the following:

  .  Seasonality. Historically, our revenues have usually been weaker in the
     first and third quarters of each fiscal year and have, from time to
     time, been lower than the preceding quarter. This weakness is due to the
     fact that our devices are highly consumer-oriented, and consumer buying
     is traditionally lower in these quarters. As our licensing revenues
     grow, we expect that they will contribute to the fluctuations in our
     quarterly results because the products offered by our licensees are also
     primarily consumer-oriented. In addition, we attempt to time our new
     product releases to coincide with relatively higher consumer spending in
     the second and fourth fiscal quarters, which contributes to these
     seasonal variations.

  .  Increases in Operating Expenses. As we expand our operations, we expect
     that our operating expenses, particularly our sales, marketing and
     research and development costs, will continue to increase. We also
     expect to make significant expenditures, including using a portion of
     the proceeds from this offering, to expand our Internet services through
     increased marketing activities and investments in network expansion
     related to our subscription-based Internet access service. These
     Internet services expenditures as well as a significant portion of our
     sales, marketing and research and development costs are fixed, at least
     in the short term. If revenues decrease and we are unable to reduce
     those costs rapidly, our operating results would be negatively affected.
     In addition, we will add new fixed costs to build an independent
     business and administration infrastructure after we separate from 3Com.
     Over the next several quarters we expect expenses to grow more rapidly
     than revenues, which will hurt our quarterly operating results.

  .  Product Mix. Our profit margins differ among the handheld device, Palm
     platform licensing and Internet services parts of our business. In
     addition, the product mix of our device sales affects profit margins in
     any particular quarter. As our business evolves and the mix of revenues
     from devices, licenses and services varies from quarter to quarter, our
     operating results will likely fluctuate.

  .  New Product Introductions. As we introduce new products and services,
     the timing of these introductions will affect our quarterly operating
     results. We may have difficulty predicting the timing of new product and
     service introductions and the user acceptance of these new products and
     services. If products and services are introduced earlier or later than
     anticipated, or if user acceptance is unexpectedly high or low, our
     quarterly operating results may fluctuate unexpectedly. In addition, we
     typically increase sales and marketing expenses to support new product
     introductions.

                                       8
.  Use of Purchase Orders with Customers. We rely on one-time purchase
     orders rather than long-term contracts with our distributor customers.
     Because we cannot predict with certainty incoming purchase orders,
     decreases in orders or failure to fulfill orders may cause our operating
     results to fluctuate.

We rely on third-party manufacturers to produce our handheld devices, and our
operations could be adversely affected by our inability to control their
operations.

  We outsource all of our manufacturing to Manufacturers' Services Limited and
Flextronics. We depend on these third-party manufacturers to produce sufficient
volume of our products in a timely fashion and at satisfactory quality levels.
If our third-party manufacturers fail to produce quality products on time and
in sufficient quantities, our reputation and results of operations would
suffer. We depend on Flextronics to manufacture some of our device products at
its facilities in Mexico, California and Malaysia, and the rest of our device
products are manufactured by Manufacturers' Services Limited at its Utah
facility. The cost, quality and availability of third-party manufacturing
operations are essential to the successful production and sale of our handheld
devices. Our reliance on third parties exposes us to the following risks
outside our control:

  .  unexpected increases in manufacturing costs;

  .  interruptions in shipments if one of our manufacturers is unable to
     complete production;

  .  inability to control quality of finished device products;

  .  inability to control delivery schedules;

  .  unpredictability of manufacturing yield;

  .  potential lack of adequate capacity; and

  .  potential inability to secure adequate volumes of components.

  We have only limited experience working with Manufacturers' Services Limited,
which recently purchased 3Com's Utah facility. If we are unable to manage our
relationship with Manufacturers' Services Limited successfully, our ability to
manufacture our products would be harmed and our results of operations would
suffer.

  We do not have a manufacturing agreement with Flextronics, upon whom we rely
to manufacture a significant number of our device products. We presently order
our products on a purchase order basis from Flextronics. The absence of a
manufacturing agreement means that, with little or no notice, Flextronics could
refuse to continue to manufacture all or some of the units of our devices that
we require or change the terms under which it manufactures our device products.
If Flextronics were to stop manufacturing our devices, we may be unable to
replace the lost manufacturing capacity on a timely basis and our results of
operations could be harmed. In addition, if Flextronics were to change the
terms under which they manufacture for us, our manufacturing costs could
increase and our profitability could suffer.

We depend on our suppliers, many of which are the sole source for our
components, and our production would be seriously harmed if these suppliers are
not able to meet our demand and alternative sources are not available.

  Our products contain components, including liquid crystal displays, touch
panels, memory chips and microprocessors, 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. In particular, some
components, such as displays, power supply integrated circuits, digital signal
processors, Motorola microprocessors and several radio frequency and discrete
components, come from sole or single source suppliers. Alternative sources are
not currently available for these single source components. If suppliers are
unable to meet our demand for sole source components and if we are unable to
obtain an alternative source or if the price for an alternative source is
prohibitive, our ability to maintain timely and cost-effective production of
our handheld computing device products

                                       9
would be seriously harmed. In addition, because we rely on one-time purchase
orders with our suppliers, we cannot predict with certainty our ability to
procure components in the longer term. For example, we recently had to modify
the design of our Palm VII device as a result of our inability to obtain
adequate supplies of the radio crystals that our original design required
because of limited supply and unexpectedly high demand from cellular telephone
manufacturers. We are also aware of a current shortage in the availability of
memory chips, and we have modified the design of our Palm VII device because of
this shortage. If either the shortage in radio crystals or memory chips or any
other key component persists or worsens, we will likely not be able to deliver
sufficient quantities of our products to satisfy demand.

We do not know if the Palm platform licensing and Internet services parts of
our business will be able to generate significant revenue in the future, and we
will continue to rely on our handheld device products as the primary source of
our revenue for the foreseeable future.

  Our future growth and a significant portion of our future revenue depend on
the commercial success of our Palm handheld devices, which comprise the primary
product line that we currently offer. Palm handheld devices accounted for
approximately 99% of our revenues in the three months ended August 27, 1999. We
expanded our Palm platform licensing and Internet services parts of our
business only recently, and these parts of our business have not yet generated
a material portion of our revenues. If revenues from our device business do not
grow, our other business activities will not be able to compensate for this
shortfall.

A significant portion of our revenues currently comes from a small number of
distributors, and any decrease in revenues from these distributors could harm
our business.

  A significant portion of our revenues comes from only a small number of
distributors. Ingram Micro represented approximately 35% of our revenues in the
three months ended August 27, 1999 and 24% of our revenues in fiscal 1999. Tech
Data represented approximately 4% of our revenues in the three months ended
August 27, 1999 and 14% of our revenues in fiscal 1999. We expect that the
majority of our revenues will continue to depend on sales of our handheld
devices to a small number of distributors. Any downturn in the business of
these customers could seriously harm our revenues and results of operations.

We rely on distributors, retailers and resellers to sell our products, and
disruptions to these channels would harm our business.

  Because we sell a significant portion of our products to distributors,
retailers and resellers, we are subject to many risks, including risks related
to their inventory levels and support for our products. In particular, our
distributors, retailers and resellers maintain significant levels of our
products in their inventories. If distributors, retailers and resellers attempt
to reduce their levels of inventory or if they do not maintain sufficient
levels to meet customer demand, our sales could be negatively impacted. If we
reduce the prices of our products to these customers, we may have to compensate
them for the difference between the higher price they paid to buy their
inventory and the new lower prices. In addition, like other manufacturers, we
are exposed to the risk of product returns from distributors, either through
their exercise of contractual return rights or as a result of our strategic
interest in assisting distributors in balancing inventories.

  Our distributors, retailers and resellers also sell products offered by our
competitors. If our competitors offer our distributors, retailers and resellers
more favorable terms, those distributors, retailers and resellers may de-
emphasize or decline to carry our products. In the future, we may not be able
to retain or attract a sufficient number of qualified distributors, retailers
and resellers. Further, distributors, retailers and resellers may not
recommend, or continue to recommend, our products. If we are unable to maintain
successful relationships with distributors, retailers and resellers or to
expand our distribution channels, our business will suffer.

                                       10
We believe our distributors, retailers and resellers are experiencing
heightened competition from Internet-based suppliers that distribute directly
to end-user customers. We also sell our products directly to end-user customers
from our Palm.com website. These actions could cause conflict among our
channels of distribution, which could seriously harm our revenues and results
of operations.

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

  We compete in the handheld device, operating system software and Internet
services markets. The markets for these products and services are highly
competitive and we expect competition to increase in the future. Some of our
competitors or potential competitors have significantly greater financial,
technical and marketing resources than we do. These competitors may be able to
respond more rapidly than us to new or emerging technologies or changes in
customer requirements. They may also devote greater resources to the
development, promotion and sale of their products than we do.

  .  Our handheld computing device products compete with a variety of smart
     handheld devices, including keyboard-based devices, sub-notebook
     computers, smart phones and two-way pagers. Our principal competitors
     include Casio, Compaq, Hewlett-Packard, Psion, Sharp and Palm platform
     licensees such as TRG and Handspring, which was formed by two of our
     original founders.

  .  Our Palm platform competes primarily with operating systems such as
     Microsoft's Windows CE for palm-sized personal computers and Symbian's
     EPOC for wireless devices.

  .  Our Internet services compete with a variety of alternative technologies
     and services, such as those based on different industry standards for
     wireless Internet access, information appliances that provide Internet
     connectivity and other traditional and developing methods.

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

If we fail to effectively respond to competition from products introduced by
licensees of our Palm platform or if our licensees fail to sell products based
on the Palm platform, our results of operations may suffer as the revenues we
receive from license fees may not compensate for the loss of revenues from our
device products.

  The success of our business depends on both the sale of handheld device
products and the licensing of our Palm platform. However, licensees of our Palm
platform offer products that compete directly or indirectly with our handheld
computing devices. For example, licensees such as Nokia, Sony or QUALCOMM may
use our Palm platform in devices such as mobile phones or other similar
products that can compete indirectly with our handheld devices. In addition,
while we expect to receive licensing revenue from Handspring and TRG, our
device products compete directly for users and distributors with their devices.
If revenues from our handheld devices suffer because of competition from
licensees of our Palm platform, our results of operations would suffer and our
ability to implement our business model would be seriously challenged. In
addition, our licensees may not be successful in selling products based on the
Palm platform, which could harm our business and results of operations.

                                       11
Our Palm platform and handheld devices may contain errors or defects, which
could result in the rejection of our products and damage to our reputation, as
well as lost revenues, diverted development resources and increased service
costs and warranty claims.

  Our Palm platform and our devices are complex and must meet stringent user
requirements. We must develop our software and hardware products quickly to
keep pace with the rapidly changing handheld device market. Products and
services as sophisticated as ours are likely to contain undetected errors or
defects, especially when first introduced or when new models or versions are
released. We have in the past experienced delays in releasing some models and
versions of our products until problems were corrected. Our products may not be
free from errors or defects after commercial shipments have begun, which could
result in the rejection of our products, damage to our reputation, lost
revenues, diverted development resources and increased customer service and
support costs and warranty claims. Any of these results could harm our
business.

If we fail to manage expansion effectively, our business, financial condition
and prospects could be seriously harmed.

   Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. We continue to increase the scope of our operations domestically and
internationally and have grown our shipments and headcount substantially. Our
handheld device shipments grew from approximately 461,000 units in fiscal 1997
to approximately 2 million units in fiscal 1999. At November 30, 1997, we had a
total of approximately 220 employees and at November 26, 1999, we had a total
of approximately 630 employees. In addition, we plan to continue to hire a
significant number of employees this year. This growth has placed, and our
anticipated growth in future operations will continue to place, a significant
strain on our management systems and resources.

  We expect that we will need to continue to improve our financial and
managerial controls, reporting systems and procedures. For example, we intend
to implement an enterprise-wide supply chain management system that we
anticipate will cost up to $7 million to implement. If we experience delays or
cost overruns in implementing this system or if this system is not as effective
as we anticipate, we could experience significant difficulties in managing our
supply chain. While we are currently implementing stand-alone versions of most
of the transaction processing systems historically used by 3Com, we may decide
to purchase new systems in the future that more closely match our business
needs and incur significant additional expenses in connection with those
systems. In addition, we will need to continue to expand, train and manage our
work force worldwide. Furthermore, we expect that we will be required to manage
multiple relationships with various customers and other third parties. In
particular, after our separation from 3Com, we will have to implement a new
administrative and managerial infrastructure. Our future success depends on the
implementation of this infrastructure after our separation.

The market for the delivery of Internet services through handheld devices is
new and rapidly evolving, and our business could suffer if this market does not
develop or we fail to address this market effectively.

  The market for the delivery of Internet services through handheld devices is
new and rapidly evolving. In addition, our Internet services strategy has been
developed only recently, and we must continue to adapt it to compete in the
rapidly evolving Internet services market. We only recently introduced our
Palm.net service, a subscription-based wireless access service that enables
Palm VII users to access web-clipped content on the Internet. Other competitors
have introduced or developed, or are in the process of introducing or
developing, products that facilitate the delivery of Internet services through
handheld devices. We cannot assure you that individuals currently using
competing products to access the Internet remotely, such as portable personal
computers and wireless telephones, will widely adopt handheld devices as a
means of accessing Internet services. Accordingly, it is extremely difficult to
predict which products will be successful in this market or the

                                       12
future size and growth of this market. In addition, given the limited history
and rapidly evolving nature of this market, we cannot predict the price that
wireless subscribers will be willing to pay for these products and services.
These risks could affect our ability to support the Palm.net service on a large
scale and price the service at a level that produces expected returns.

Our Internet services business will suffer if our telecommunications carrier
raises its rates, discontinues doing business with us or does not deliver
acceptable service.

  The future success of our Internet services business substantially depends on
the capacity, affordability, reliability and security of our telecommunications
networks. Only a small number of telecommunications providers offer the network
services we require. We currently rely on BellSouth to provide all of our Palm
VII wireless network services pursuant to an agreement. Our agreement with
BellSouth permits each party to terminate the agreement on an annual basis. If
BellSouth failed to provide us with service at rates acceptable to us or at
all, we may not be able to provide Internet access to our users. In addition,
our Palm VII products are configured around the frequency standard used by
BellSouth. If we needed to switch to another telecommunications carrier, we
would have to redesign significant portions of our software and hardware to
permit transmission on a different frequency and service to users of existing
Palm VII products would be disrupted. If we were required to redesign these
elements, our Internet services part of our business could be adversely
affected. If BellSouth delivers unacceptable service, the quality of our
Internet services would suffer and we would likely lose users who are
dissatisfied with our service. In addition, BellSouth provides service only in
the continental United States. We intend to expand our network services to
support Internet services internationally, but doing so will require us to
enter into new relationships with telecommunications providers abroad. Many
international telecommunications providers use different standards and transmit
data on different frequencies than BellSouth, which will require us to redesign
significant portions of our software and hardware.

Our reputation and ability to generate revenues will be harmed if demand for
our Internet services exceeds our telecommunications and network capacity.

  We may from time to time experience increases in our Internet services usage
which exceed our available telecommunications capacity and the capacity of our
third-party network servers. As a result, users may be unable to register or
log on to our service, may experience a general slow-down in their Internet
access or may be disconnected from their sessions. Excessive user demand could
also result in system failures of our third-party network servers' networks.
Inaccessibility, interruptions or other limitations on the ability to access
our service due to excessive user demand, or any failure of our third-party
network servers to handle user traffic, would have a material adverse effect on
our reputation and our revenues.

We plan to expand our direct e-commerce operation, and our business and
financial condition could be harmed if this operation is not successful.

  We may not be able to achieve any or all of the necessary components of a
successful e-commerce operation. We intend to expand our Palm.com and Palm.net
websites. This expansion will require additional expenditures, including the
use of part of the proceeds of this offering. These expenditures are
anticipated to exceed revenues from these services over the next few years. We
have little experience in implementing or operating a direct e-commerce
business, and if we are not successful in operating it or in successfully
managing our current sales channels alongside our direct e-commerce channel,
our business and financial condition could be materially harmed.

Our Internet services business prospects could suffer if the Internet does not
continue to grow as a medium for interactive content and services.

  Our future success depends in part on the continued growth and reliance by
consumers and businesses on the Internet, particularly in the market for
Internet services and networking of handheld computing devices. Use and growth
of the Internet will depend in significant part on continued rapid

                                       13
growth in the number of households and commercial, educational and government
institutions with access to the Internet. The use and growth of the Internet
will also depend on the number and quality of products and services designed
for use on the Internet. Because use of the Internet as a source of
information, products and services is a relatively recent phenomenon, it is
difficult to predict whether the number of users drawn to the Internet will
continue to increase and whether the market for commercial use of the Internet
will continue to develop and expand. Internet use patterns may decline as the
novelty of the medium recedes.

  The rapid rise in the number of Internet users and the growth of electronic
commerce and applications for the Internet has placed increasing strains on the
Internet's communications and transmission infrastructure. This could lead to
significant deterioration in transmission speeds and the reliability of the
Internet as a commercial medium and could reduce the use of the Internet by
businesses and individuals. The Internet may not be able to support the demands
placed upon it by this continued growth. Any failure of the Internet to support
growth due to inadequate infrastructure or for any other reason would seriously
limit its development as a viable source of commercial and interactive content
and services. This could impair the development and acceptance of our Internet
services which could in turn harm our business prospects.

If the security of our websites is compromised, our reputation and business
could suffer.

  A significant barrier to widespread use of electronic commerce sites, such as
our Palm.com site, and network services sites, such as our Palm.net site, is
concern for the security of confidential information transmitted over public
networks. Despite our efforts to protect the integrity of our Palm.com and
Palm.net sites, a party may be able to circumvent our security measures and
could misappropriate proprietary information or cause interruptions in our
operations and damage our reputation. Any such action could negatively affect
our customers' willingness to engage in online commerce with us. We may be
required to expend significant capital and other resources to protect against
these security breaches or to alleviate problems caused by these breaches.

Our business will suffer if we are not able to retain, hire and integrate
sufficient qualified personnel.

  Our future success depends partly on the continued contribution of our key
executive, technical, sales, marketing, manufacturing and administrative
personnel. It also depends on our ability to expand, integrate and retain our
management team after our separation from 3Com. Many members of our senior
management have been with the business only a short time. In particular, our
Chief Executive Officer has only been employed with us since December 1999 and
we have only limited experience under his leadership. In addition, recruiting
and retaining skilled personnel, including software and hardware engineers, is
highly competitive. If we fail to retain, hire and integrate qualified
employees and contractors, we will not be able to maintain and expand our
business.

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

  In the course of our business, we frequently receive claims of infringement
or otherwise become aware of potentially relevant patents or other intellectual
property rights held by other parties. We evaluate the validity and
applicability of these intellectual property rights, and determine in each case
whether we must negotiate licenses or cross-licenses to incorporate or use the
proprietary technologies in our products. Third parties may claim that we or
our customers or Palm platform licensees are infringing their intellectual
property rights, and we may be found to infringe those intellectual property
rights and require a license to use those rights. We may be unaware of
intellectual property rights of others that may cover some of our technology,
products and services.

                                       14
Moreover, in connection with future intellectual property infringement claims,
we will not have the benefit of asserting counterclaims based on 3Com's
intellectual property portfolio, and we will not be able to offer licenses to
3Com's intellectual property rights in order to resolve claims.

  On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case is now captioned: Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm
Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The
complaint alleges willful infringement of a Xerox United States patent, issued
on January 21, 1997, relating to computerized interpretation of handwriting.
The complaint further seeks unspecified damages and injunctive relief. Xerox
has asserted that products utilizing Graffiti script recognition software made,
used, offered for sale or sold in the United States, or imported into the
United States since January 21, 1997, infringe its patent. On June 25, 1999,
the court stayed the action pending reexamination of the patent by the United
States Patent and Trademark Office. The reexamination of the patent is
currently pending. In connection with our separation from 3Com, pursuant to the
terms of the Indemnification and Insurance Matters Agreement, we will indemnify
and hold 3Com harmless for any damages or losses which may arise out of this
litigation. In particular, an adverse determination in the Xerox litigation
could subject us to substantial damages and require us to indemnify our
customers and licensees for damages that they may suffer. Moreover, if there is
an adverse determination, a license may be necessary to continue using the
Grafitti script recognition software in our Palm devices and Palm platform. A
license may not be available or on terms acceptable to us. If upon an adverse
determination we were unable to obtain a license on terms acceptable to us, we
could be required to modify our script recognition software or license
alternative script recognition software from third parties for inclusion in our
Palm devices and our Palm platform.

  Any litigation regarding patents or other intellectual property could be
costly and time-consuming, and divert our management and key personnel from our
business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements or indemnify our Palm platform licensees.
However, we may not be able to obtain royalty or license agreements on terms
acceptable to us, or at all. We also may be subject to significant damages or
injunctions against development and sale of our products.

  We often rely on licenses of intellectual property for use in our business.
We cannot assure you that these licenses will be available in the future on
favorable terms or at all. In addition, our position with respect to the
negotiation of licenses may deteriorate after our separation from 3Com.

If third parties infringe 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. We rely on a
combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
our proprietary rights. 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 registration applications may not be allowed
or competitors may challenge the validity or scope of these patent applications
or trademark registrations. In addition, our patents may not provide us a
significant competitive advantage.

  We may be required to spend significant resources to monitor and police our
intellectual property rights. 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.

                                       15
Over the last twelve months, there have been several thefts of computer
equipment from us and our employees. This computer equipment has contained
proprietary information. We have formulated a security plan to reduce the risk
of any future thefts and have cooperated with state and federal law enforcement
officials in an investigation of past incidents. We may not be successful in
preventing future thefts, or in preventing those responsible for past thefts
from using our technology to produce competing products. The unauthorized use
of Palm technology by competitors could have a material adverse effect on our
ability to sell our products in some markets.

Our business is subject to economic, political and other risks associated with
international sales and operations.

  Since we sell our products worldwide, our business is subject to risks
associated with doing business internationally. We anticipate that revenue from
international operations will represent an increasing portion of our total
revenue. In addition, two of the facilities where our devices are manufactured
are located outside the United States. Accordingly, our future results could be
harmed by a variety of factors, including:

  .  changes in foreign currency exchange rates;

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

  .  trade protection measures and import or export licensing requirements;

  .  potentially negative consequences from changes in tax laws;

  .  difficulty in managing widespread sales and manufacturing operations;
     and

  .  less effective protection of intellectual property.

We intend to pursue strategic acquisitions and our business could be materially
harmed if we fail to successfully integrate acquired businesses.

  We often evaluate acquisition opportunities that could provide us with
additional product or services offerings or additional industry expertise. Any
future acquisition could result in difficulties assimilating acquired
operations and products, diversion of capital and management's attention away
from other business issues and opportunities and amortization of acquired
intangible assets. Integration of acquired companies may result in problems
related to integration of technology and inexperienced management teams. Our
management has had limited experience in assimilating acquired organizations
and products into our operations. We may not successfully integrate any
operations, personnel or products that we may acquire in the future. If we fail
to successfully integrate acquisitions, our business could be materially
harmed.

Potential year 2000 problems associated with our products, our internal systems
or the products of our suppliers and customers could harm our business.

  Many currently installed computer systems and software were written to accept
and process only two digit entry codes for the year when storing dates.
Beginning with the year 2000, these entry codes will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. As a result,
computer systems and products may need to be upgraded to solve this problem to
avoid incorrect or lost data. Although we believe the products we are currently
offering are year 2000 ready, the first generation of our handheld device
product, which is no longer being sold, does not properly display the European
date format. We expect to release a downloadable software patch to fix this
problem. If any of our products do not operate properly in the year 2000, we
could have increased warranty costs, customer satisfaction issues, litigation
or other material costs or liabilities. We have relied on 3Com to address any
year 2000 readiness issues in the internal and external systems we currently
use. If 3Com's year 2000 readiness preparations are insufficient, we may be
required to bear the costs of upgrading or replacing any systems after our
separation from 3Com. In addition, we could experience delays in our ability to
manufacture and ship products and deliver services, disruptions in

                                       16
our customer service and technical support facilities and interruptions of
customer access to our online products and services. We cannot assure you that
all year 2000 problems have been identified or corrected in time to prevent
serious harm to us. In addition, we have relied on assurances from third
parties, including our suppliers and manufacturers in the United States and
abroad and our wireless telecommunications network provider, BellSouth, that
they and the products and services they supply are year 2000 compliant. We have
not independently verified these assurances in many cases, and any failure of
these third-party products and services to be year 2000 compliant could harm
us. There is a risk that our users could initiate litigation against us for
damages arising from our products that are not year 2000 compliant. Year 2000
issues could harm our future results of operations, cash flows or financial
condition.

                   Risks Related to Our Separation from 3Com

We currently use 3Com's operational and administrative infrastructure, and our
business will suffer if we do not develop our own infrastructure quickly and
cost-effectively.

  We currently use 3Com's systems to support our operations, including systems
to manage inventory, order processing, human resources, shipping, accounting,
payroll and internal computing operations. Many of these systems are
proprietary to 3Com and are very complex. These systems have been modified, and
are in the process of being further modified, to enable us to separately track
items related to our business. These modifications, however, may result in
unexpected system failures or the loss or corruption of data.

  We are in the process of creating our own systems to replace 3Com's systems.
We may not be successful in implementing these systems and transitioning data
from 3Com's systems to ours.

  Any failure or significant downtime in 3Com's or our own information systems
could prevent us from taking customer orders, shipping products or billing
customers and could harm our business. In addition, 3Com's and our information
systems require the services of employees with extensive knowledge of these
information systems and the business environment in which we operate. In order
to successfully implement and operate our systems, we must be able to attract
and retain a significant number of highly skilled employees. If we fail to
attract and retain the highly skilled personnel required to implement,
maintain, and operate our information systems, our business could suffer.

  In addition, we currently have office space in 3Com's Santa Clara campus. We
have entered into arrangements with 3Com to lease these facilities under a
lease that is terminable with six months notice beginning in July 2001 and
expires in July 2002. After this transition period, we will need to find
alternative facilities. If we fail to find replacement facilities in a timely
fashion, our business will be harmed.

Our stock price and business may suffer if 3Com does not complete its
distribution of our common stock.

  3Com currently intends that, subject to obtaining approval by the 3Com board
of directors and a ruling from the Internal Revenue Service that the
distribution will be tax-free to 3Com stockholders and that our separation from
3Com qualifies as a reorganization, it will distribute to its stockholders all
of our common stock that it owns approximately six months after this offering,
although it is not obligated to do so. This distribution may not occur by that
time or at all. At the time of this offering, we will not know what the ruling
from the Internal Revenue Service regarding the tax treatment of the separation
and the distribution will be. If 3Com does not receive a favorable tax ruling,
it is not likely to make the distribution in the expected time frame or at all.
In addition, until this distribution occurs, the risks discussed below relating
to 3Com's control of us and the potential business conflicts of interest
between 3Com and us will continue to be relevant to our stockholders. If the
distribution is delayed or not completed at all, the liquidity of our shares in
the market will be severely constrained

                                       17
unless and until 3Com elects to sell some of its significant ownership. There
are no limits on these sales and the sale or potential sale by 3Com could
adversely affect market prices. In addition, because of the limited liquidity
until the distribution occurs, relatively small trades of our stock will have a
disproportionate effect on our stock price. Also, if 3Com does not distribute
its shares, we will face significant difficulty hiring and retaining key
personnel, many of whom are attracted by the potential of operating our
business as a fully independent entity.

We will be controlled by 3Com as long as it owns a majority of our common
stock, and our other stockholders will be unable to affect the outcome of
stockholder voting during such time.

  After the completion of this offering and the private placements to America
Online, Motorola and Nokia, 3Com will own approximately     % of our
outstanding common stock, or approximately     % if the underwriters exercise
in full their option to purchase additional shares. As long as 3Com owns a
majority of our outstanding common stock, 3Com will continue to be able to
elect our entire board of directors and to remove any director, with or without
cause, without calling a special meeting. Investors in this offering will not
be able to affect the outcome of any stockholder vote prior to the planned
distribution of our stock to the 3Com stockholders. As a result, 3Com will
control all matters affecting us, including:

  .  the composition of our board of directors and, through it, any
     determination with respect to our business direction and policies,
     including the appointment and removal of officers;

  .  the allocation of business opportunities that may be suitable for us and
     3Com;

  .  any determinations with respect to mergers or other business
     combinations;

  .  our acquisition or disposition of assets;

  .  our financing;

  .  changes to the agreements providing for our separation from 3Com;

  .  the payment of dividends on our common stock; and

  .  determinations with respect to our tax returns.

  3Com is not prohibited from selling a controlling interest in us to a third
party.

Our historical financial information may not be representative of our results
as a separate company.

  The historical financial information we have included in this prospectus does
not reflect what our financial position, results of operations and cash flows
would have been had we been a separate, stand-alone entity during the periods
presented. 3Com did not account for us, and we were not operated, as a
separate, stand-alone entity for the periods presented. In addition, the
historical financial information is not necessarily indicative of what our
results of operations, financial position and cash flows will be in the future.
We have not made adjustments to our historical financial information to reflect
many significant changes that will occur in our cost structure, funding and
operations as a result of our separation from 3Com, including increased costs
associated with reduced economies of scale, increased marketing expenses
related to building a company brand identity separate from 3Com and increased
costs associated with being a publicly traded, stand-alone company.

We will not be able to rely on 3Com to fund our future capital requirements,
and we cannot assure you that financing from other sources will be available on
favorable terms or at all.

  In the past, our capital needs have been satisfied by 3Com. However,
following our separation, 3Com will no longer provide funds to finance our
working capital or other cash requirements. We

                                       18
cannot assure you that financing from other sources, if needed, will be
available on favorable terms or at all.

  We believe our capital requirements will vary greatly from quarter to
quarter, depending on, among other things, capital expenditures, fluctuations
in our operating results, financing activities, acquisitions and investments
and inventory and receivables management. We believe that the proceeds from
this offering, along with our future cash flow from operations, will be
sufficient to satisfy our working capital, capital expenditure and research and
development requirements for the foreseeable future. However, we may require or
choose to obtain additional debt or equity financing in order to finance
acquisitions or other investments in our business. Future equity financings
would be dilutive to the existing holders of our common stock. Future debt
financings could involve restrictive covenants. We will likely not be able to
obtain financing with interest rates as favorable as those that 3Com could
obtain.

We may have potential business conflicts of interest with 3Com with respect to
our past and ongoing relationships that could harm our business operations.

  Conflicts of interest may arise between 3Com and us in a number of areas
relating to our past and ongoing relationships, including:

  .  labor, tax, employee benefit, indemnification and other matters arising
     from our separation from 3Com;

  .  intellectual property matters;

  .  employee retention and recruiting;

  .  sales or distributions by 3Com of all or any portion of its ownership
     interest in us;

  .  the nature, quality and pricing of transitional services 3Com has agreed
     to provide us; and

  .  business opportunities that may be attractive to both 3Com and us.

  Nothing restricts 3Com from competing with us.

  We may not be able to resolve any potential conflicts, and even if we do, the
resolution may be less favorable than if we were dealing with an unaffiliated
party. The agreements we have entered into with 3Com may be amended upon
agreement between the parties. While we are controlled by 3Com, 3Com may be
able to require us to agree to amendments to these agreements that may be less
favorable to us than the current terms of the agreements.

Our directors and executive officers may have conflicts of interest because of
their ownership of 3Com common stock.

  Many of our directors and executive officers have a substantial amount of
their personal financial portfolios in 3Com common stock and options to
purchase 3Com common stock. Their options to purchase 3Com common stock may not
convert into options to purchase our common stock if the distribution does not
occur. Ownership of 3Com common stock by our directors and officers after our
separation from 3Com could create, or appear to create, potential conflicts of
interest when directors and officers are faced with decisions that could have
different implications for 3Com and us.

If the transitional services being provided to us by 3Com are not sufficient to
meet our needs, or if we are not able to replace these services after our
agreements with 3Com expire, we will be unable to manage critical operational
functions of our business.

  3Com has agreed to provide transitional services to us, including services
related to:

  .  information technology systems;

                                       19
.  supply chain;

  .  human resources administration;

  .  product order administration;

  .  customer service;

  .  buildings and facilities;

  .  treasury; and

  .  legal, finance and accounting.

  Although 3Com is contractually obligated to provide us with these services,
these services may not be provided at the same level as when we were part of
3Com, and we may not be able to obtain the same benefits. We will also lease
and sublease office space from 3Com. These transitional service and leasing
arrangements generally have a term of less than two years following the
separation. After the expiration of these various arrangements, we may not be
able to replace the transitional services or enter into appropriate leases in a
timely manner or on terms and conditions, including cost, as favorable as those
we will receive from 3Com.

  These agreements were made in the context of a parent-subsidiary relationship
and were negotiated in the overall context of our separation from 3Com. The
prices charged to us under these agreements may be lower than the prices that
we may be required to pay third parties for similar services or the costs of
similar services if we undertake them ourselves.

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

Substantial sales of common stock may occur in connection with the
distribution, which could cause our stock price to decline.

  3Com currently intends to distribute the approximately          shares of our
common stock it owns to 3Com stockholders approximately six months after this
offering. Substantially all of these shares will be eligible for immediate
resale in the public market. We are unable to predict whether significant
amounts of common stock will be sold in the open market in anticipation of, or
following, this distribution, or by 3Com if the distribution does not occur. We
are also unable to predict whether a sufficient number of buyers will be in the
market at that time. Any sales of substantial amounts of common stock in the
public market, or the perception that such sales might occur, whether as a
result of this distribution or otherwise, could harm the market price of our
common stock.

Our securities have no prior market, and we cannot assure you that our stock
price will not decline after the offering.

  Before this offering, there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. The market price of our common stock could be
subject to significant fluctuations after this offering. Among the factors that
could affect our stock price are:

  .  quarterly variations in our operating results;

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

  .  speculation in the press or investment community;

  .  strategic actions by us or our competitors, such as acquisitions or
     restructurings;

  .  actions by institutional stockholders or by 3Com prior to its
     distribution of our stock;

                                       20
.  general market conditions; and

  .  domestic and international economic factors unrelated to our
     performance.

  The stock markets in general, and the markets for high technology stocks in
particular, have experienced extreme 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. In
particular, we cannot assure you that you will be able to resell your shares at
or above the initial public offering price, which will be determined by
negotiations between the representatives of the underwriters and us.

Provisions in our charter documents and Delaware law may delay or prevent
acquisition of us, which could decrease the value of your shares.

  Our certificate of incorporation and bylaws and Delaware law contain
provisions that could make it harder for a third party to acquire us without
the consent of our board of directors, although these provisions have little
significance while we are controlled by 3Com. These provisions include a
classified board of directors and limitations on actions by our stockholders by
written consent. 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. 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. 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.

Purchasers in this offering will experience immediate dilution in net tangible
book value per share.

  Purchasers of our common stock in this offering and the America Online,
Motorola and Nokia private placements will experience immediate dilution of
$         in net tangible book value per share.

                                       21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

  You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify these
forward-looking statements. This prospectus also contains forward-looking
statements attributed to third parties relating to their estimates regarding
the growth of our markets. Forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that may cause our actual
results, as well as those of the markets we serve, levels of activity,
performance, achievements and prospects to be materially different from those
expressed or implied by the forward-looking statements. These risks,
uncertainties and other factors include, among others, those identified in
"Risk Factors" and elsewhere in this prospectus.

                                       22
OUR SEPARATION FROM 3COM

Overview

  On September 13, 1999, 3Com announced its plan to make Palm, a wholly-owned
subsidiary, into an independent, publicly-traded company focused on the
handheld device industry. Until the completion of this offering, we will
continue as a wholly-owned subsidiary of 3Com. We expect that the separation of
our business from 3Com, including the transfer of related assets, liabilities
and intellectual property rights, will be substantially completed before the
completion of this offering.

 Benefits of the Separation

  We believe that we will realize benefits from our complete separation from
3Com, including the following:

    Greater Strategic Focus. In addition to the Palm handheld computing
  business, 3Com generates significant revenue from other lines of products,
  including switches, hubs, remote access systems, routers, network
  management software, network interface cards and modems. Our focus will be
  on developing businesses and strategic opportunities for handheld devices.
  This effort will be supported by our own board of directors, management
  team and employees.

    Increased Speed and Responsiveness. As a company smaller in size than
  3Com, we expect to be able to make decisions more quickly, deploy resources
  more rapidly and efficiently and operate with more agility than we could as
  a part of a larger organization. In addition, we expect to enhance our
  responsiveness to customers and partners.

    Better Incentives for Employees and Greater Accountability. We expect the
  motivation of our employees and the focus of our management will be
  strengthened by incentive compensation programs tied to the market
  performance of our common stock. The separation will enable us to offer our
  employees compensation directly linked to the performance of the Palm
  business, which we expect to enhance our ability to attract and retain
  qualified personnel.

    More Direct Access to Capital Markets. As a separate company, we will
  have more direct access to the capital markets to issue debt or equity
  securities and to grow through acquisitions.

 Separation and Transitional Arrangements

  We and 3Com, and, in some cases, our respective subsidiaries, will enter into
agreements providing for the separation of our businesses from 3Com, including
a master separation and distribution agreement. These agreements generally
provide for, among other things:

  .  the transfer from 3Com to us of assets and the assumption by us of
     liabilities relating to our business;

  .  the allocation of intellectual property between us and 3Com; and

  .  various interim and ongoing relationships between us and 3Com.

The Distribution by 3Com of Our Common Stock

  After completion of this offering, 3Com will own approximately     % of the
outstanding shares of our common stock, or approximately     % if the
underwriters fully exercise their option to purchase additional shares. 3Com
currently plans to complete its divestiture of Palm approximately

                                       23
six months after this offering by distributing all of its shares of our common
stock to the holders of 3Com's common stock. However, 3Com is not obligated to
complete the distribution, and we cannot assure you as to whether or when it
will occur.

  3Com has advised us that it would not complete the distribution if its board
of directors determines that the distribution is no longer in the best interest
of 3Com and its stockholders. 3Com has further advised us that it currently
expects that the principal factors that it would consider in determining
whether and when to complete the distribution include:

  .  the relative market prices of our common stock and 3Com's common stock;

  .  the issuance by the Internal Revenue Service of a ruling that the
     distribution will be tax-free to 3Com stockholders and that the
     transaction will qualify as a reorganization for United States federal
     income tax purposes;

  .  the absence of any court orders or regulations prohibiting or
     restricting the completion of the distribution; and

  .  other conditions affecting our business or 3Com's business.

                                       24
USE OF PROCEEDS

  We estimate that our net proceeds from this offering will be approximately
$         , based on an assumed initial public offering price of $        per
share and after deducting an assumed underwriting discount and estimated
offering expenses payable by us. We estimate that our net proceeds from the
private placements to America Online, Motorola and Nokia will be approximately
$   , based on an assumed offering price of $   per share. We intend to use the
proceeds of this offering and the private placements for:

  .  payment of a dividend to 3Com approximately equal to its tax basis in
     Palm, which was approximately $   million at     , 2000;

  .  repayment of an intercompany payable to 3Com, which was approximately
     $49 million at August 27, 1999;

  .  increased capital expenditures to support anticipated growth in
     operations, infrastructure for our wireless and Internet services and
     hardware and software for our information systems and personnel;

  .  increased marketing expenses to establish our Palm brand;

  .  replacing the working capital retained by 3Com and funding our increased
     working capital needs associated with revenue growth; and

  .  potential investments in, or acquisitions of, other businesses or
     technologies.

                                DIVIDEND POLICY

  We currently intend to retain any future earnings to fund the development and
growth of our business. Therefore, other than the cash dividend to 3Com to be
paid with a portion of the proceeds of this offering, we do not anticipate
paying any cash dividends in the foreseeable future.

                                       25
CAPITALIZATION

  The following table sets forth our capitalization as of August 27, 1999. Our
capitalization is presented:

  .  on an actual basis;

  .  on a pro forma basis to give effect to the retention of most of our
     accounts receivable and accounts payable by 3Com at the time of our
     separation, as though such retention had occurred as of August 27, 1999,
     the payment of a dividend to 3Com equal to its tax basis in Palm, which
     was approximately $   million at     , 2000, and the reclassification of
     approximately $49 million at August 27, 1999 from 3Com Corporation
     equity to an intercompany payable to 3Com; and

  .  on a pro forma as adjusted basis to reflect our receipt of the estimated
     net proceeds from the sale of     shares of common stock in this
     offering and our sale of     shares in the private placements to America
     Online, Motorola and Nokia and the payment of the amounts payable to
     3Com Corporation.

  You should read the information set forth below together with "Selected
Consolidated Financial Data," our historical consolidated financial statements
and the notes to those statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
August 27, 1999
                               ------------------------------
                                           Pro     Pro Forma
                                Actual    Forma   As Adjusted
                               --------  -------  -----------
                                      (in thousands)
Payable to 3Com
 Corporation(1)(2)............ $    --   $48,902      $
                               ========  =======     =====
Stockholders' equity:
  Preferred stock............. $    --   $   --      $ --
  Common stock................      --       --
  Additional paid-in capital..      --       --
  3Com Corporation
   equity(1)(2)...............  113,413
  Accumulated other
   comprehensive income
   (loss).....................     (118)    (118)     (118)
                               --------  -------     -----
    Total stockholders'
     equity................... $113,295  $           $
                               ========  =======     =====
      Total capitalization.... $113,295  $           $
                               ========  =======     =====
--------
Notes:
(1) We intend to declare a dividend payable to 3Com approximately equal to its
    tax basis in Palm. We intend to pay this dividend using a portion of the
    proceeds from this offering.
(2) Intercompany payable amounts due to 3Com are included as a component of
    3Com Corporation equity as no interest was charged on such balances and
    there was no scheduled repayment. We intend to repay our intercompany
    payable to 3Com, which was approximately $49 million as of August 27, 1999,
    using a portion of the proceeds of this offering.

                                       26
DILUTION

  Our net tangible book value at August 27, 1999 was approximately $100.6
million, or $      per share. Net tangible book value per share is determined
by dividing our tangible net worth, which is total tangible assets less total
liabilities, by the number of shares of common stock outstanding after giving
effect to the     -for-one stock split immediately before this offering and the
private placements. Dilution in net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the private placements and the net tangible
book value per share of our common stock immediately afterwards. After giving
effect to the following:

  .  our sale of     shares of common stock in this offering at an assumed
     initial public offering price of $   per share and after deducting an
     assumed underwriting discount and estimated offering expenses payable by
     us;

  .  our sale of     shares of common stock to America Online, Motorola and
     Nokia concurrently with the closing of this offering at an assumed
     offering price of $   per share;

  .  retention of most of our accounts receivable and accounts payable by
     3Com at the time of our separation as though such retention had occurred
     as of August 27, 1999;

  .  payment of a dividend to 3Com approximately equal to its tax basis in
     Palm, which was approximately $   million at     , 2000; and

  .  repayment of an intercompany payable to 3Com, which was approximately
     $49 million at August 27, 1999;

our pro forma as adjusted net tangible book value at August 27, 1999 would have
been approximately $   , or $   per share. This represents an immediate
increase in net tangible book value of $       per share to our existing
stockholder and an immediate dilution in net tangible book value of $       per
share to new investors purchasing shares of common stock in this offering and
the private placements. The following table illustrates this dilution per
share:
Assumed initial public offering price per share.............           $
  Pro forma net tangible book value per share as of August
   27, 1999................................................. $
  Increase in pro forma book value per share attributable to
   new investors (including the private placements).........
Pro forma, as adjusted, net tangible book value per share
 after this offering and the private placements.............
                                                                       -------
Dilution in pro forma net tangible book value per share to
 new investors (including the private placements)...........           $
                                                                       =======
The discussion and table above assume no exercise of options outstanding
under our 1999 Stock Plan and no issuance of shares reserved for future
issuance under our 1999 Employee Stock Purchase Plan. As of August 27, 1999,
there were options outstanding to purchase a total of           shares of
common stock at a weighted average price of $    per share. To the extent that
any of these options are exercised, there will be further dilution to new
investors.

                                       27
The following table sets forth, as of August 27, 1999 on the pro forma as
adjusted basis described above, the differences between the number of shares of
common stock purchased from us, the total price paid and average price per
share paid by our existing stockholder and by the new investors in this
offering and the private placements at an assumed initial public offering price
of $      per share, before deducting the estimated underwriting discounts and
commissions and offering expenses payable by us, and after giving effect to the
    -for-one stock split immediately before this offering and the private
placements.
Total        Average
                                  Shares Purchased    Consideration     Price
                                  ----------------- ------------------   Per
                                  Number Percentage Amount  Percentage  Share
                                  ------ ---------- ------- ---------- -------
Existing stockholder.............               %   $              %   $
New investors (including the
 private placements).............
                                  ------   -----    -------   -----    -------
  Total..........................          100.0%   $         100.0%
                                  ======   =====    =======   =====    =======
If the underwriters' option to purchase additional shares is exercised in
full, the following will occur:

  .  the number of shares of common stock held by our existing stockholder
     will decrease to approximately      % of the total number of shares of
     common stock outstanding; and

  .  the number of shares held by new public investors will be increased to
              or approximately      % of the total number of shares of our
     common stock outstanding after this offering.

                                       28
SELECTED CONSOLIDATED FINANCIAL DATA

  The following tables present our selected consolidated financial data. The
information set forth below should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our historical consolidated financial statements and notes to those statements
included in this prospectus. Our consolidated statements of operations data set
forth below for the years ended May 25, 1997, May 31, 1998 and May 28, 1999 and
the consolidated balance sheet data as of May 31, 1998 and May 28, 1999 are
derived from our audited consolidated financial statements included in this
prospectus which have been audited by Deloitte & Touche LLP, independent
auditors, whose report is also included in this prospectus.

  The consolidated statements of operations data for the year ended June 30,
1995 and the eleven month period ended May 26, 1996 and the consolidated
balance sheet data as of June 30, 1995, May 26, 1996 and May 25, 1997 are
derived from our unaudited consolidated financial data that is not included in
this prospectus. The consolidated statements of operations data for the three
months ended August 28, 1998 and August 27, 1999 and the consolidated balance
sheet data as of August 27, 1999 are derived from unaudited consolidated
financial statements included in this prospectus and, in the opinion of
management, include all adjustments, consisting only of normal recurring
accruals, that are necessary for a fair presentation of our financial position
and results of operations for these periods. The historical financial
information may not be indicative of our future performance and does not
reflect what our financial position and results of operations would have been
had we operated as a separate, stand-alone entity during the periods presented.
Three Months
                                          Years Ended                             Ended
                          ------------------------------------------------  ------------------
                          June 30,  May 26,   May 25,   May 31,   May 28,   Aug. 28,  Aug. 27,
                          1995(1)   1996(2)     1997      1998      1999      1998      1999
                          --------  --------  --------  --------  --------  --------  --------
                                       (in thousands, except per share data)
Consolidated Statements
 of Operations Data:
Revenues................  $ 1,403   $ 7,054   $114,157  $272,137  $563,525  $116,069  $176,505
Cost of revenues........      174     4,479     77,685   157,749   315,616    62,998    98,324
                          -------   -------   --------  --------  --------  --------  --------
 Gross profit...........    1,229     2,575     36,472   114,388   247,909    53,071    78,181
                          -------   -------   --------  --------  --------  --------  --------
Operating expenses:
 Sales and marketing....    1,099     2,783     30,305    70,765   127,726    23,969    42,648
 Research and
  development...........    1,384     4,716     13,442    21,863    46,027     9,738    12,507
 General and
  administrative........      977     1,853      6,238    15,299    23,692     6,233     7,160
 Purchased in-process
  technology............      --        --         --         --     2,125       --        --
                          -------   -------   --------  --------  --------  --------  --------
  Total operating
   expenses.............    3,460     9,352     49,985   107,927   199,570    39,940    62,315
                          -------   -------   --------  --------  --------  --------  --------
Operating income
 (loss).................   (2,231)   (6,777)   (13,513)    6,461    48,339    13,131    15,866
Interest and other
 expense, net...........       65        81       (515)      (56)     (223)      (25)      (63)
                          -------   -------   --------  --------  --------  --------  --------
Income (loss) before
 income taxes...........   (2,166)   (6,696)   (14,028)    6,405    48,116    13,106    15,803
Income tax provision
 (credit)...............      --     (3,634)    (6,166)    2,234    18,488     5,036     6,145
                          -------   -------   --------  --------  --------  --------  --------
Net income (loss).......  $(2,166)  $(3,062)  $ (7,862) $  4,171  $ 29,628  $  8,070  $  9,658
                          =======   =======   ========  ========  ========  ========  ========
Unaudited pro forma net
 income per share:
 Basic..................                                          $                   $
                                                                  ========            ========
 Diluted................                                          $                   $
                                                                  ========            ========
Shares used in computing
 unaudited pro forma net
 income per share:
 Basic..................
                                                                  ========            ========
 Diluted................
                                                                  ========            ========
Supplemental unaudited
 pro forma net income
 per share:
 Basic..................                                          $                   $
                                                                  ========            ========
 Diluted................                                          $                   $
                                                                  ========            ========
Shares used in computing
 supplemental unaudited
 pro forma net income
 per share:
 Basic..................
                                                                  ========            ========
 Diluted................
                                                                  ========            ========
June 30,  May 26,   May 25,   May 31,   May 28,   Aug. 27,
                                    1995(1)   1996(2)     1997      1998      1999      1999
                                    --------  --------  --------  --------  --------  --------
                                                        (in thousands)
Consolidated Balance Sheet Data:
Working capital..................   $   318   $  4,651  $ 31,375  $ 68,971  $ 52,509  $ 91,074
Total assets.....................     2,432      9,618    45,984   115,359   152,247   201,346
Stockholder's net investment.....       627      7,218    35,657    81,292    74,527   113,295
-------
Notes:
(1)Our fiscal year end was June 30 prior to our acquisition by 3Com.
(2)Fiscal 1996 includes only eleven months of operating results.

                                       29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

  The following discussion of our financial condition and results of operations
should be read together with our consolidated financial statements and notes to
those statements included elsewhere in this prospectus. The following
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
contemplated by these forward-looking statements due to a number of factors,
including those discussed below and elsewhere in this prospectus.

Overview

  We were founded in 1992 and introduced our first handheld device in 1996. We
are currently a wholly-owned subsidiary of 3Com. Our business has focused
primarily on developing and selling our Palm-branded handheld devices, and as
of December 1, 1999, we had sold over 5 million Palm devices worldwide. In
1999, we expanded our strategy of licensing our Palm platform and developed our
wireless Internet access service to support Internet-enabled handheld devices.

  On September 13, 1999, 3Com announced its plan to make us an independent,
publicly-traded company focused on the handheld device industry. After the
completion of this offering, 3Com will own approximately  % of our outstanding
common stock, or approximately  % if the underwriters fully exercise their
option to purchase additional shares. 3Com currently intends to complete its
divestiture of Palm approximately six months after this offering by
distributing all of its shares of our common stock to the holders of 3Com's
common stock.

  We have entered into various agreements related to interim and ongoing
relationships with 3Com. These agreements provide for transitional services and
support in the areas of information technology systems, supply chain, human
resources administration, product order administration, customer service,
buildings and facilities, treasury, legal and finance and accounting. Specified
charges for transitional services are generally at cost plus 5%, but may
increase to cost plus 10% if the services extend beyond a one-year period. The
transition period varies depending on the agreement but is generally less than
two years. Although the fees provided for in the agreements are intended to
represent the fair market value of these services, we cannot assure you that
these fees necessarily reflect the costs of obtaining the services from
unrelated third parties or of our providing these services internally. However,
we believe that purchasing these services from 3Com provides an efficient means
of obtaining these services during the transition period.

  We must also negotiate new or revised agreements with various third parties
as a separate, stand-alone entity. We cannot assure you that the terms we will
be able to negotiate will be as favorable as those that we enjoyed as part of
3Com. In addition, as part of 3Com, we benefited from various economies of
scale including shared global administrative functions, facilities and volume
purchase discounts. We expect our costs will increase as a result of the loss
or renegotiation of these arrangements, although the amount of the cost
increase is not determinable at this time.

 Our Business

  Substantially all of our revenues to date have been generated from sales of
our handheld devices and, to a lesser extent, peripherals and accessories. We
have not derived material revenues to date from licensing our Palm platform or
from subscriptions to our wireless Internet access service. As we expand our
focus on Palm platform licensing and Internet services, we expect that an
increasing portion of our revenues in future periods will come from these
sources. International revenues represented 29% of our total revenues in fiscal
1999 and 31% of our total revenues for the three months ended August 27, 1999.

                                       30
Revenues from our handheld devices consist primarily of sales to
distributors, retailers and resellers and to end users who buy directly from us
through our Palm.com website. We recognize revenues when the product has been
shipped, risk of loss has passed to the customer and collection of the
resulting receivable is deemed probable. We provide for estimated product
returns, warranty, royalties and post-contract support obligations at the time
of sale. We provide a 12-month limited warranty on our products. We generally
grant price protection to our distributors, retailers and resellers at the time
of price reductions.

  Revenues from licenses of the Palm platform are derived from agreements with
our licensees that range from three to five years in length. Revenues from our
software license agreements are recognized on a per-unit royalty basis or as
specified in the agreement. Related maintenance and support revenues are
recognized ratably over the term of the agreement.

  Revenues from Internet services consist primarily of fees paid by subscribers
for our wireless Internet access service. We recognize subscription service
revenues over the period during which services are provided, typically one
month.

  The mix of our device products has a significant impact on gross margins. In
the past, prices of specific models of handheld devices have declined over
time. Our average selling prices across our product lines have increased
moderately due to our introduction of new and higher priced products. We cannot
be sure that we will continue to maintain our average selling prices in the
future and we expect our ability to do so will be challenged by increased
competition. If we are unable to maintain our average selling prices, our gross
margins will decline. Other factors that will affect our gross margins include
the product and services mix in any particular period, competitive pressures,
manufacturing costs, levels of volume discounts for components and sub-
assemblies and distribution costs.

  We also expect our gross margins to fluctuate due to changes in our product
and services mix as we expand our focus on licensing the Palm platform and
selling our Internet services. As the relatively low gross margin of our
Internet subscription service revenues grow as a percentage of total Palm
revenues, we expect our overall gross margins to decline. In the short term, we
expect Internet services gross margins to be negative because we have
significant fixed costs associated with providing our Internet access service.
We expect that over time the growth of our licensing revenue, which we expect
to continue to have a higher gross margin than our device and Internet service
revenues, will contribute positively to our overall gross margins.

  We expect to increase our operating expenses significantly as we invest in
the Palm platform and Internet services areas of our business. In addition, we
expect sales and marketing expenses to increase significantly as we focus on
establishing ourselves as a stand-alone entity. We also plan to increase
branding activities for our devices as well as for the Palm platform and our
Internet services. We expect research and development expenses to increase
significantly as we focus on developing the Palm platform for our licensees in
the handheld device and other markets and on building our Internet services. In
addition, for a period of time before the separation from 3Com and during the
transition period thereafter, we will increase general and administrative
expenses as we implement our own information system infrastructure and build
the corporate resources required to operate as a public company. During this
transition period, we will incur duplicative costs until we can operate solely
on our own infrastructure. As a result of these increased operating expenses,
we expect to incur net losses and negative cash flows from operations for
several quarters following this offering.

 Basis of Presentation

  Prior to June 1, 1998, our 52-53 week fiscal year ended on the Sunday nearest
to May 31. Effective June 1, 1998, we changed our fiscal year to a 52-53 week
fiscal year ending on the Friday nearest to May 31. Unless otherwise stated,
all years and dates refer to our fiscal year and fiscal periods.

                                       31
Our consolidated financial statements have been carved out from the
consolidated financial statements of 3Com using the historical results of
operations and historical bases of the assets and liabilities of the 3Com
business that Palm comprises. The consolidated financial statements also
include allocations to us of 3Com corporate expenses, including centralized
legal, accounting, treasury, real estate, information technology, distribution,
customer services, sales, marketing, engineering and other 3Com corporate
services and infrastructure costs. The expense allocations have been determined
on bases that 3Com and we considered to be reasonable reflections of the
utilization of the services provided to us or the benefit received by us.
Expenses were allocated based on relative revenues, headcount or square
footage.

  The financial information presented in this prospectus is not indicative of
our financial position, results of operations or cash flows in the future, nor
is it necessarily indicative of what our financial position, results of
operations or cash flows would have been had we been a separate, stand-alone
entity for the periods presented. The financial information presented in this
prospectus does not reflect the many significant changes that will occur in our
funding and operations as a result of our becoming a stand-alone entity and
this offering.

Results of Operations

  The following table sets forth consolidated statements of operations data
expressed as a percentage of revenues for the periods indicated:
Three Months
                                            Years Ended             Ended
                                      ----------------------- -----------------
                                      May 25, May 31, May 28, Aug. 28, Aug. 27,
                                       1997    1998    1999     1998     1999
                                      ------- ------- ------- -------- --------
Revenues.............................   100%    100%    100%    100%     100%
Cost of revenues.....................    68      58      56      54       56
                                        ---     ---     ---     ---      ---
Gross profit.........................    32      42      44      46       44
                                        ---     ---     ---     ---      ---
Operating expenses:
  Sales and marketing................    27      26      23      22       24
  Research and development...........    12       8       8       8        7
  General and administrative.........     5       5       4       5        4
  Purchased in-process technology....   --      --        1     --       --
                                        ---     ---     ---     ---      ---
    Total operating expenses.........    44      39      36      35       35
                                        ---     ---     ---     ---      ---
Operating income (loss)..............   (12)      3       8      11        9
Interest and other expense, net......   --      --      --      --       --
                                        ---     ---     ---     ---      ---
Income (loss) before income taxes....   (12)      3       8      11        9
Income tax provision (credit)........    (5)      1       3       4        4
                                        ---     ---     ---     ---      ---
Net income (loss)....................    (7)%     2%      5%      7%       5%
                                        ===     ===     ===     ===      ===
Three Months Ended August 27, 1999 and August 28, 1998

 Revenues

  Revenues in the three months ended August 27, 1999 and August 28, 1998
consisted almost entirely of revenues from sales of our handheld device
products. Revenues were $176.5 million in the three months ended August 27,
1999, a 52% increase over revenues of $116.1 million in the three months ended
August 28, 1998. The increase in revenues resulted from increased demand for
our handheld devices, which reflects the growing market adoption of our
products. Average selling prices over this period remained relatively constant.
International revenues have become an increasing percentage of our total
revenues, increasing to 31% of total revenues in the three months

                                       32
ended August 27, 1999 from 21% in the three months ended August 28, 1998. As we
continue to expand the number of international markets we serve, we expect our
international business to become an increasing percentage of our overall
business.

 Gross Margin

  Gross margin is the excess of revenues over cost of revenues expressed as a
percentage of revenues. Cost of revenues includes product manufacturing,
warranty and technical support costs and, beginning in the three months ended
August 27, 1999, costs related to our wireless Internet service resulting from
the introduction of our Palm VII product. Gross margin was 44% of revenues in
the three months ended August 27, 1999, a two percentage point decline from a
gross margin of 46% of revenues in the three months ended August 28, 1998. The
decline in gross margin in the three months ended August 27, 1999 was a result
of cost of revenues including significant fixed costs related to our wireless
Internet service, which we expect to continue to incur.

 Sales and Marketing

  Sales and marketing expenses consist primarily of employee compensation and
commissions, advertising, promotional materials, conferences, meetings and
marketing development. Sales and marketing expenses were $42.6 million in the
three months ended August 27, 1999, a 78% increase over expenses of $24.0
million in the three months ended August 28, 1998. Sales and marketing expenses
represented 24% of revenues in the three months ended August 27, 1999 compared
to 22% in the three months ended August 28, 1998. These expenses increased due
to additional spending on demand generation activities, such as point of
purchase displays for retail sales channels and advertising promotional
materials, as we prepared to launch the Palm Vx device and extend the launch of
the Palm VII device nationwide in the second quarter of fiscal 2000.

 Research and Development

  Research and development expenses consist primarily of employee compensation
and related costs associated with our product development efforts, including
third-party consulting and prototyping costs. Research and development expenses
were $12.5 million in the three months ended August 27, 1999, a 29% increase
over expenses of $9.7 million in the three months ended August 28, 1998.
Research and development expenses represented 7% of revenues in the three
months ended August 27, 1999 compared to 8% in the three months ended August
28, 1998. The increase in research and development spending from period to
period was primarily a result of increased personnel and related costs
associated with a larger research and development organization that is
designing new handheld devices as well as developing new releases of the Palm
platform. Increased spending in the later period also resulted, to a lesser
extent, from design and prototype expenses incurred in connection with new
handheld devices that are currently under development.

 General and Administrative

  General and administrative expenses consist primarily of employee
compensation, professional and contractor fees and provisions for doubtful
accounts receivable. General and administrative expenses were $7.2 million in
the three months ended August 27, 1999, an increase of 16% over expenses of
$6.2 million in the three months ended August 28, 1998. The increase in
expenses is due to increased infrastructure costs as a result of our continued
growth. As a percentage of revenues, general and administrative expenses
decreased to 4% in the three months ended August 27, 1999 from 5% in the three
months ended August 28, 1998. The decrease as a percentage of revenues was the
result of expenses, primarily personnel related, growing at a slower rate than
revenues. We expect general and administrative expenses to increase in dollar
amount and as a

                                       33
percentage of revenues in future periods as we continue to build our
infrastructure to support operating as a stand-alone, publicly-held company.

 Income Tax Provision

  Our operating results historically have been included in 3Com's consolidated
United States federal and state income tax returns. The provision for income
taxes in our consolidated financial statements has been determined on a
separate return basis. Our effective tax rate in the three months ended August
27, 1999 was 39% compared to 38% in the three months ended August 28, 1998.
This rate is based on estimates of our income before taxes for federal and
state tax jurisdictions. As foreign subsidiaries are established in the future,
our mix of income before taxes in the various tax jurisdictions could cause the
effective tax rate to fluctuate. Our tax liability for periods prior to the
date of 3Com's distribution will be determined in accordance with our tax
sharing agreement with 3Com.

Years Ended May 28, 1999, May 31, 1998 and May 25, 1997

 Revenues

  Revenues from handheld devices were $563.5 million in fiscal 1999, an
increase of 107% over fiscal 1998. Revenues in fiscal 1998 were $272.1 million,
an increase of 138% over revenues of $114.2 million in fiscal 1997. The growth
in revenues in both years was primarily due to increasing unit sales as a
result of increasing demand for our handheld devices. We have increased demand
by regularly adding new differentiated products to our product line. We added
the Palm IIIx, Palm V and Palm VII devices to our product line in fiscal 1999.
We introduced the Palm III device late in fiscal 1998. We introduced the
PalmPilot Professional and PalmPilot Personal devices in late fiscal 1997.
Declining prices of existing products over the three-year period have been
offset by introducing an increasingly broad range of new products with
additional features such as increased memory, backlit screens, higher
resolution screens, sleeker styling, thinner and lighter form factor, and
wireless Internet capability. As a result, average selling prices have
increased moderately, although we do not expect this trend to continue in
future years.

 Gross Margin

  Gross margin was 44% in fiscal 1999, a two percentage point increase over
fiscal 1998. Gross margin was 42% in fiscal 1998, a 10 percentage point
increase over gross margin of 32% in fiscal 1997. The improvement in gross
margin in fiscal 1999 reflects increased sales of higher margin Palm IIIx and
Palm V products, as well as reduced manufacturing costs due to better pricing
that we were able to obtain from our component suppliers and contract
manufacturers. The improvement in gross margin in fiscal 1998 reflects product
cost improvements through engineering design changes, significant volume-
related cost reductions from component suppliers and contract manufacturers and
reduced period costs relative to fiscal 1997, which had higher than normal
period costs as a result of establishing manufacturing operations and
introducing new products.

 Sales and Marketing

  Sales and marketing expenses were $127.7 million in fiscal 1999, an 80%
increase over fiscal 1998. Sales and marketing expenses were $70.8 million in
fiscal 1998, a 134% increase over expenses of $30.3 million in fiscal 1997.
Sales and marketing expenses comprised 23% of revenues in fiscal 1999 as
compared to 26% of revenues in fiscal 1998 and 27% in fiscal 1997. Due to the
slower growth in our sales organization in fiscal 1999 and the continued rapid
growth in our revenues, sales and marketing expenses as a percentage of
revenues declined by three percentage points in fiscal 1999 compared to fiscal
1998. The absolute dollar increase in sales and marketing

                                       34
expenses in fiscal 1999 resulted primarily from increased advertising,
including expenditures on our "Simply Palm" national advertising campaign, and
increased product introduction activities associated with the launches of our
Palm IIIe, Palm IIIx, Palm V and Palm VII handheld devices. These launch
activities included increased personnel-related expenses associated with
increasing the size of our marketing organization, increased trade show
activities and related travel expenses, point of sale displays, sales
collateral and marketing development. The absolute dollar increase in sales and
marketing expenses in fiscal 1998 was primarily the result of the expansion of
our sales organization into Europe, continued growth of our sales and marketing
organization in the United States and our first international product launch
for the Palm III handheld devices at the CBIT technology show in Germany in
March 1998.

 Research and Development

  Research and development expenses were $46.0 million in fiscal 1999, a 110%
increase over fiscal 1998. Research and development expenses were $21.9 million
in fiscal 1998, a 63% increase over expenses of $13.4 million in fiscal 1997.
The absolute dollar increase in research and development expenses resulted
primarily from increased personnel-related expenses associated with expanding
the size of our engineering organization and increased expenses related to
contractors, consultants, prototyping and project materials. Research and
development expenses as a percentage of revenues were 8% in fiscal 1999
compared to 8% in fiscal 1998 and 12% in fiscal 1997. The decrease in research
and development expenses as a percentage of revenues from fiscal 1997 to fiscal
1998 resulted from economies of scale. During fiscal 1999 and fiscal 1998 we
supported the development of two new families of handheld products, the Palm V
and Palm VII product families, and two new additions to the Palm III family,
the Palm IIIx and the Palm IIIe. In addition, we incurred significant
engineering costs to develop our wireless Internet access service that supports
our wireless Palm VII device. In fiscal 1999, we also added engineering staff
in order to begin development programs for two new releases of our platform
software as well as future handheld devices.

 General and Administrative

  General and administrative expenses were $23.7 million in fiscal 1999, a 55%
increase over fiscal 1998. General and administrative expenses were $15.3
million in fiscal 1998, an increase of 147% over expenses of $6.2 million in
fiscal 1997. General and administrative expenses as a percentage of revenues
were 4% in fiscal 1999 compared to 5% in fiscal 1998 and fiscal 1997. The
absolute dollar increases in general and administrative expenses resulted
primarily from increased personnel-related expenses and shared infrastructure
costs with 3Com to support the growth of our business. In addition, general and
administrative expenses were higher in fiscal 1998 compared to fiscal 1997 as a
result of an increased provision for doubtful accounts receivable.

 Purchased In-Process Technology

  We acquired Smartcode Technologie SARL on February 8, 1999 for $17.4 million
in cash, including approximately $200,000 in costs directly related to the
acquisition. Approximately $2.1 million of the purchase price represented
purchased in-process technology that had not yet reached technological
feasibility, had no alternative future use and was charged to operations in the
third quarter of fiscal 1999.

 Income Tax Provision

  Our effective tax rate was 38% in fiscal 1999 and 35% in fiscal 1998, and in
fiscal 1997 we recorded a tax credit. The primary reasons for the fluctuation
in our tax rate are less research and development credit being available in
fiscal 1999 than in fiscal 1998 and our net loss in fiscal 1997.

                                       35
Quarterly Results of Operations

  The following tables present our operating results for each of the nine
fiscal quarters in the period ended August 27, 1999, in dollars and as a
percentage of revenues. The information for each of these quarters is unaudited
and has been prepared on the same basis as the audited consolidated financial
statements included in this prospectus. In the opinion of management, all
necessary adjustments, which consist only of normal and recurring accruals,
have been included to fairly present the unaudited quarterly results. This data
should be read together with our consolidated financial statements and the
notes to those statements included in this prospectus.

  The historical financial information may not be indicative of our future
performance and does not reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented.
Three Months Ended
                          ---------------------------------------------------------------------------------------
                          Aug. 31,  Nov. 30,   Mar. 1,  May 31,  Aug. 28,  Nov. 27,  Feb. 26,  May 28,   Aug. 27,
                            1997      1997      1998     1998      1998      1998      1999      1999      1999
                          --------  --------   -------  -------  --------  --------  --------  --------  --------
                                                          (in thousands)
Consolidated Statements
 of Operations Data:
Revenues................  $51,675   $69,997    $65,766  $84,699  $116,069  $147,233  $125,889  $174,334  $176,505
Cost of revenues........   29,906    42,115     37,392   48,336    62,998    84,289    67,583   100,746    98,324
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Gross profit............   21,769    27,882     28,374   36,363    53,071    62,944    58,306    73,588    78,181
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Operating expenses:
 Sales and marketing....   11,314    20,286     17,335   21,830    23,969    33,893    28,725    41,139    42,648
 Research and
  development...........    4,538     5,170      5,209    6,946     9,738    10,722    10,989    14,578    12,507
 General and
  administrative........    2,470     3,290      3,181    6,358     6,233     5,071     5,739     6,649     7,160
 Purchased in-process
  technology............      --        --         --       --        --        --      2,125       --        --
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
 Total operating
  expenses..............   18,322    28,746     25,725   35,134    39,940    49,686    47,578    62,366    62,315
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Operating income
 (loss).................    3,447      (864)     2,649    1,229    13,131    13,258    10,728    11,222    15,866
Interest and other
 expense, net...........      (35)      (44)        (5)      28       (25)      (75)      (15)     (108)      (63)
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Income (loss) before
 income taxes...........    3,412      (908)     2,644    1,257    13,106    13,183    10,713    11,114    15,803
Income tax provision
 (credit)...............    1,190      (317)       922      439     5,036     5,066     4,116     4,270     6,145
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Net income (loss).......  $ 2,222   $  (591)   $ 1,722  $   818  $  8,070  $  8,117  $  6,597  $  6,844  $  9,658
                          =======   =======    =======  =======  ========  ========  ========  ========  ========
As a Percentage of
 Revenues:
Revenues................      100%      100%       100%     100%      100%      100%      100%      100%      100%
Cost of revenues........       58        60         57       57        54        57        54        58        56
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Gross profit............       42        40         43       43        46        43        46        42        44
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Operating expenses:
 Sales and marketing....       22        29         26       26        22        23        23        24        24
 Research and
  development...........        9         7          8        8         8         7         9         8         7
 General and
  administrative........        5         5          5        7         5         4         4         4         4
 Purchased in-process
  technology............      --        --         --       --        --        --          2       --        --
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
 Total operating
  expenses..............       36        41         39       41        35        34        38        36        35
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Operating income
 (loss).................        6        (1)         4        2        11         9         8         6         9
Interest and other
 expense, net...........      --        --         --       --        --        --        --        --        --
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Income (loss) before
 income taxes...........        6        (1)         4        2        11         9         8         6         9
Income tax provision
 (credit)...............        2       --           1        1         4         3         3         2         4
                          -------   -------    -------  -------  --------  --------  --------  --------  --------
Net income (loss).......        4%       (1)%        3%       1%        7%        6%        5%        4%        5%
                          =======   =======    =======  =======  ========  ========  ========  ========  ========
36
We have experienced seasonal variations in our operating results.
Historically, our revenues have been weaker in the first and third fiscal
quarters and have often been lower than the preceding quarter. This seasonal
variation is due to the fact that our products are highly consumer-oriented,
and consumer buying patterns traditionally reflect reduced purchases in those
quarters. As our licensing revenues grow, we expect that they will contribute
to the fluctuations in our quarterly results because the products offered by
our licensees are also primarily consumer-oriented. In addition, we attempt to
time our new product releases to coincide with relatively higher consumer
spending in the second and fourth fiscal quarters, which contributes to these
seasonal variations.

  In the second quarter of fiscal 1998, our gross margin declined compared to
the prior and subsequent quarters primarily due to price reductions. Sales and
marketing expenses increased in this same quarter as a result of costs related
to our first third-party developer conference and start-up costs incurred for
setting up our international sales and marketing organization. In addition,
sales and marketing expenses increased after the first quarter of fiscal 1998
in preparation for the worldwide launch of the Palm III product family in the
fourth quarter of fiscal 1998. In the fourth quarter of fiscal 1998, our
general and administrative expenses were higher due to increased provisions for
doubtful accounts receivable identified during the quarter.

  In the first and third quarters of fiscal 1999, our gross margin improved due
to the mix of new products with higher gross margins consisting of the Palm
III, Palm IIIx, and Palm V devices. Research and development expenses and
general and administrative expenses decreased as a percentage of revenues in
the second quarter of fiscal 1999 compared to the prior and subsequent quarters
as a result of seasonally strong second quarter revenues and a lower provision
for doubtful accounts receivable than in the first quarter. In the third
quarter of fiscal 1999, we incurred a one-time charge of $2.1 million for
purchased in-process technology as a result of the Smartcode acquisition.

Liquidity and Capital Resources

  Historically, 3Com has managed cash on a centralized basis. Cash receipts
associated with our business have been transferred to 3Com on a periodic basis
and 3Com has provided funds to cover our disbursements. Accordingly, we have
reported no cash or cash equivalents at May 31, 1998 and May 25, 1997. At May
28, 1999, we reported cash of $478,000 acquired in the Smartcode acquisition
and at August 27, 1999, we reported cash of $37.1 million as a result of a
transfer from 3Com.

  In accordance with our separation agreement, 3Com will transfer to us the
3Com-owned assets and liabilities which relate to our business prior to the
separation date, except for most of our accounts receivable and accounts
payable. We will receive the net proceeds of the offering and the private
placements to America Online, Motorola and Nokia and will pay a dividend to
3Com approximately equal to its tax basis in us, which was approximately $
million at      , 2000. In addition, we will make a payment to 3Com of an
intercompany payable, which was approximately $49 million as of August 27,
1999. We anticipate that we will use some of the proceeds from the offering and
the private placements to America Online, Motorola and Nokia to replace the
working capital retained by 3Com and fund our increased working capital needs
associated with revenue growth.

  Cash provided from operating activities was $10.1 million for the three
months ended August 27, 1999. Cash provided by operating activities was $59.1
million in fiscal 1999, cash used in operating activities was $32.6 million in
fiscal 1998 and $34.8 million in fiscal 1997. Cash provided by operating
activities in fiscal 1999 resulted primarily from net income adjusted for non-
cash charges for depreciation and amortization and changes in working capital.
Cash used in operating activities in fiscal 1998 resulted primarily from an
increase in accounts receivable which more than offset net income, and
adjustments for non-cash charges and other working capital items. Cash used in
operating activities in fiscal 1997 resulted primarily from our net loss as
well as increases in accounts receivable and inventories.

                                       37
We had capital expenditures of $2.3 million in the three months ended August
27, 1999, $5.3 million in fiscal 1999, $8.8 million in fiscal 1998 and $2.5
million in fiscal 1997. In addition, in fiscal 1999, we expended $16.8 million,
net of cash acquired, for the acquisition of Smartcode.

  Our future capital requirements will depend on a number of factors, including
the timing and rate of the expansion of our business. We anticipate a
substantial increase in our capital expenditures to support anticipated growth
in operations, infrastructure for our wireless and Internet services plus
hardware and software for our information systems and personnel. We believe
that our cash, cash equivalents and proceeds from this offering and the private
placements to America Online, Motorola and Nokia will provide sufficient
capital to fund our operations for the foreseeable future. We cannot assure
you, however, that the underlying assumed levels of revenues and expenses will
prove to be accurate. We may need to raise additional funds through public or
private financings or other arrangements in order to:

  .  support more rapid expansion of our business than we anticipate;
  .  develop and introduce new or enhanced products or services;
  .  respond to competitive pressures;
  .  invest in or acquire businesses or technologies; or
  .  respond to unanticipated requirements or developments.

  We cannot be certain that financing will be available to us when we need it
on favorable terms or at all. If additional funds are raised through the
issuance of equity securities, dilution to existing stockholders may result. If
insufficient funds are available, we may not be able to introduce new products
and services, expand the development of our Palm platform and our Internet
services or compete effectively in any of our markets, any of which could
materially harm our business, financial condition and results of operations.

Quantitative and Qualitative Disclosures About Market Risk

 Market Risk Disclosures

  The following discussion about market risk involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We are exposed to market risk related to changes in
interest rates and foreign currency exchange rates. We do not use derivative
financial instruments for speculative or trading purposes.

 Interest Rate Sensitivity

  As of August 27, 1999, we had cash and cash equivalents of $37.1 million
which consisted of highly liquid money market instruments with maturities less
than 90 days. Because of the short maturities of these instruments, a sudden
change in market interest rates would not have a material impact on the fair
value of the portfolio. We would not expect our operating results or cash flows
to be affected to any significant degree by the effect of a sudden change in
market interest rates on our portfolio.

 Foreign Currency Exchange Risk

  Historically, our exposure to exchange rate risk has been managed on an
enterprise-wide basis as part of 3Com's risk management strategy. This strategy
has utilized foreign exchange forward and option contracts to hedge certain
balance sheet exposures and intercompany balances against future movements in
foreign exchange rates. Gains and losses on the forward and option contracts
are largely offset by gains and losses on the underlying exposure and
consequently a sudden or significant change in foreign exchange rates would not
have a material impact on future net income or cash flows. We are currently
evaluating our exchange rate risk management strategy. We do not currently and
do not intend in the future to utilize derivative financial instruments for
trading purposes.

                                       38
Equity Security Price Risk

  We do not own any equity investments. Therefore, we do not currently have any
direct equity price risk.

Effects of Recent Accounting Pronouncements

  In June 1998 and June 1999, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting Standards, or SFAS, 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133." These statements require companies
to record derivatives on the balance sheet as assets or liabilities, measured
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 will be effective for our
fiscal year ending May 31, 2002. We believe that adoption of these statements
will not have a significant impact on our financial results.

  In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Statement of Position No. 98-1
requires that entities capitalize costs related to internal-use software once
certain criteria have been met. We adopted Statement of Position 98-1 in our
first quarter of fiscal 2000. The adoption of this statement did not have a
significant impact on our financial results.

Year 2000 Compliance

  Many computer systems and software programs were written to accept and
process only two digit entry codes for the year when storing dates. Beginning
with the year 2000 these entry codes will need to accept four digit entries to
distinguish 21st century dates from the 20th century dates. As a result,
computer systems and software programs may need to be updated to solve this
problem and avoid incorrect or lost data.

  We face risks associated with the year 2000 issue. Our operations could be
adversely affected if systems do not correctly recognize date information when
the year changes to 2000. We face risks primarily in the following areas:

  .  systems used by us and 3Com to run our business including information
     systems, equipment and facilities;

  .  systems used by our and 3Com's suppliers; and

  .  potential warranty or other claims from our customers.

  We have relied on 3Com to address any year 2000 readiness issues in the
internal and external systems we currently use. If 3Com's year 2000 readiness
preparations are insufficient, we may be required to bear the costs of
upgrading or replacing any systems after our separation from 3Com. We continue
to evaluate and mitigate our exposure in these areas where appropriate. We
intend for some of our disclosures and announcements concerning our products
and year 2000 programs, including those in this prospectus, to constitute "Year
2000 Readiness Disclosures" as defined in the recently enacted Year 2000
Information and Readiness Disclosure Act. We cannot be certain that year 2000
issues will not have a material adverse impact on us.

 State of Readiness and Risks

  We have identified four key exposure internal areas with respect to the year
2000 issue, namely: key transaction processing applications, equipment and
facilities, products and key suppliers.

  Key transaction processing applications. Key transaction processing
applications include those used to run our business, finance, order processing
and distribution operations. 3Com has

                                       39
completed its evaluation of these applications for year 2000 readiness and has
been upgrading or replacing systems, where necessary. If we or 3Com identify
significant new non-compliance issues, or if we encounter unexpected
difficulties in areas previously considered to be year 2000 ready, our ability
to conduct our business or record transactions could be disrupted, which could
adversely affect our results of operations or financial condition.

  Equipment and facilities. We have evaluated year 2000 readiness of our
equipment and facilities. We have contacted our key suppliers to ascertain year
2000 compliance of our critical equipment. We expect our critical equipment to
be ready for year 2000. If our year 2000 assessment is incorrect, our design,
production and shipping capabilities could be disrupted, which could adversely
affect our results of operations or financial condition.

  Products. We have conducted an extensive evaluation of our currently
available products. We believe that the products we are currently offering are
year 2000 ready. However, the first generation of our handheld device product,
which is no longer being sold, does not properly display the European date
format. We expect to release a downloadable software patch to fix this problem.
If any of our products do not operate properly in the year 2000, we could have
increased warranty costs, customer satisfaction issues, litigation or other
material costs and liabilities, which could adversely affect our results of
operations or financial condition.

  Key suppliers. We have contacted our critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are year 2000 ready. Our third-party manufacturers
advised us that their manufacturing operations are or will be year 2000
compliant by December 31, 1999. Confirmation of the continued year 2000
readiness of these key suppliers will continue throughout the remainder of
1999. If key suppliers fail to adequately address the year 2000 issue for the
products or services they provide to us, critical materials, products and
services may not be delivered in a timely manner, which could adversely affect
our results of operations or financial condition.

 Most Reasonably Likely Worst-Case Scenario

  We believe that our most reasonably likely worst-case year 2000 scenario
would relate to problems with the systems and services of third parties rather
than with our internal systems or products. We believe the risks are greatest
with infrastructure services such as electricity supply and water and sewer
service, telecommunications, transportation and distribution channels and
critical suppliers of materials and services.

  Our operations are conducted in a variety of domestic and foreign facilities.
Each location relies on local private and governmental suppliers for utilities,
telephone, and other necessary services and supplies. For example, failure in
the electricity grid or disruption to the continuous supply of power would be a
worst-case scenario that would completely shut down the affected facilities.
Widespread electrical failures could also adversely affect the delivery of
water and sewer services, and hinder the transportation of employees to and
from the workplace.

  We cannot identify all possible disruption scenarios. We are preparing
contingency plans specifying our actions if failures occur in key internal
systems and/or critical third party systems and services. The process includes
identifying and prioritizing risks, assessing the business impact of those
risks, evaluating risk mitigation alternatives, and preparing written
contingency plans for those failures with the greatest business risk to us.

  Contingency plans for critical business operations are expected to be in
place by the end of the year and these plans will be validated and modified as
needed. Contingency plans will continue to be refined through the end of 1999
as we learn more about the preparations and potential exposure of third parties
to year 2000 disruptions.

                                       40
Costs to Address Year 2000 Issues

  Although we currently do not expect future year 2000 compliance costs to be
material, the costs could include:

  .  hardware and software upgrades or replacements primarily related to
     desktop systems and telephone equipment;

  .  consultant and contractor fees to assist in assessments and to perform
     remediation and integration testing;

  .  increased staffing in our customer service area to address the expected
     increase in support calls during the year 2000 transition; and

  .  a contingency for potential unexpected costs associated with replacing
     or repairing systems previously considered to be year 2000 ready.

  If we identify unexpected problems relating to the year 2000 issue, we may
incur additional costs in identifying and responding to the problems.

                                       41
BUSINESS

Introduction

  We are the leading global provider of handheld computing devices. We believe
that we have achieved our leadership position by focusing on customer needs and
emphasizing simplicity and ease of use in design and engineering. We design,
develop and market our Palm-branded handheld devices, which currently include
our Palm III, Palm V and Internet-enabled Palm VII families. According to
International Data Corporation, in 1998 we had a 68% market share of the
worldwide personal companion handheld device market.

  We believe that the success of our devices is attributable to our innovative
product designs, our Palm platform, our technology leadership and the strength
of the Palm brand. We are building on these strengths to expand our business by
licensing the Palm platform to other device and information appliance
manufacturers. In addition, we are expanding our wireless and Internet
offerings through Palm.net, our subscription-based wireless access service, and
Palm.com, our Internet destination site. As the functionalities of handheld
computing devices, information appliances, mobile phones and handheld
entertainment devices converge, we believe that we are well-positioned to
establish the Palm platform as an industry standard.

  The rapid proliferation of our devices based on our Palm platform has led to
the emergence of a community of developers who create applications for the Palm
platform as well as peripherals and accessories that increase the functionality
of Palm platform-based devices. These developers have created over 4,500
applications for Palm devices to date, enhancing the functionality and
usefulness of products based on the Palm platform. We believe the Palm platform
is attractive to our licensees because it has been widely adopted by end users
and has broad third-party development support. This adoption further drives an
increase in the size of the Palm platform user base. We refer to this
reinforcing community of users, developers and licensees as the Palm economy.

Industry Overview

  As professionals have become increasingly mobile, often spending long periods
of time away from traditional work settings, they have sought out tools to
access and manage critical personal and professional information.
Traditionally, these professionals used paper-based organizers and, later,
stand-alone electronic pocket organizers or portable computers to accomplish
these tasks. These early tools met with mixed success and often were slow,
large, expensive and difficult to use and offered limited functionality.

  The introduction of Palm's first device ushered in a new generation of
handheld devices that offered users a combination of simplicity and
functionality. Innovations in design, synchronization technology, user
interface, programmability, functionality and battery power management
transformed these devices into convenient productivity tools. These
enhancements significantly accelerated user demand. According to International
Data Corporation, annual worldwide sales of personal companions will increase
from approximately one million units in 1997 to an estimated 14 million units
in 2003. We believe that further market growth will be driven by continued
innovation, increased wireless data connectivity and the emergence of new usage
patterns driven by Internet content and enterprise data.

  We believe that continued technological innovations that address end-user
needs are an important component of industry growth. Technological advances
have led to significant reductions in size and weight, as well as improvements
in battery life, reliability and storage capacity, of handheld devices. Third
party developers, who create software applications and complementary hardware
peripherals and accessories, supplement manufacturers' innovations and allow
users to customize and enhance their devices. These feature enhancements and
performance improvements, driven by both manufacturers and third party
developers, continue to attract new users and encourage device upgrades.

                                       42
The emergence of technologies enabling wireless access to the Internet and
enterprise data is again transforming the handheld device industry. The
Internet has become an important way for consumers and professionals to access
personal and business information, download new applications and access new
services. We believe that wireless access to Internet content and enterprise
data will make handheld computing devices increasingly valuable to users. This
value proposition is driving a variety of handheld information appliance makers
to add Internet connectivity features to products such as mobile phones.

  As handheld devices are adopted in greater numbers and handheld device
applications become increasingly integrated into other handheld information
appliances, an opportunity exists for operating system developers to extend
their platforms for use on other handheld devices. We believe that the
extension of an operating system to a diverse set of handheld information
appliances, including mobile phones, increases the utility of all devices that
use the operating system and expands the scope and potential market for both
operating system developers and device manufacturers.

Business Summary

  In 1996, we introduced our first handheld device product, based on our
innovative Palm platform, and quickly established global market leadership in
the handheld device industry. Our revenues have grown from approximately $1
million in fiscal 1995 to $564 million in fiscal 1999. Our international
business accounted for 29% of revenues in fiscal 1999. We believe that our
users associate the Palm brand with high-quality products that offer a
combination of portability, connectivity, simplicity and style. By capitalizing
on the market-leading position of our handheld devices in domestic and
international markets and on our Palm platform and emerging Internet services
and applications, we believe we can extend our leadership in this evolving
industry.

  Handheld Devices. We currently have three families of handheld devices, the
Palm III, Palm V and Palm VII product families, each of which is based on the
Palm platform. We develop our handheld devices by focusing on customer needs.
While all Palm devices are designed to offer a combination of utility,
simplicity, wearability and mobility, we have further differentiated individual
products to appeal to specific market segments. For example, to appeal to users
who place the most value on wearability, we introduced the Palm V product,
which combines the traditional functionality of our products with a sleek,
compact and light-weight form factor. In fiscal 1999, the Palm V product family
became our largest product line measured in terms of revenues. Similarly, to
appeal to mobile professionals and enterprise customers that want to provide
their employees with convenient remote access to enterprise data, we introduced
the Palm VII product, which combines connectivity and mobility. Customers
buying our devices receive a Palm handheld device, a cradle to connect the
device to a personal computer and personal information management and
synchronization software which runs on a personal computer and serves as a
conduit between the device and other personal computer applications.

  Palm Platform. The Palm platform combines the distinctive look, feel and ease
of use of our Palm OS operating system with our HotSync synchronization
technology, pen-based input technology, personal information management
applications such as address book and datebook, and, in our Palm VII product,
web-clipping software that allows content providers and users to send and
receive Internet data in a handheld device format. We also make development
tools available for our developer community, and we share select parts of the
Palm OS operating system source code in order to enable developers to optimize
the interface of their applications with the Palm platform. As a result, the
Palm OS operating system has emerged as a highly flexible, efficient operating
system.

  In addition to including the Palm platform in our Palm-branded devices, we
have expanded our strategy of licensing the platform to device and information
appliance manufacturers. In October

                                       43
1999, we announced a non-exclusive agreement with Nokia, the world's leading
provider of mobile phones, to integrate the Palm platform into several of
Nokia's mobile phone products. We believe this agreement represents a
significant endorsement of the Palm platform for the worldwide wireless phone
market. Similarly, in November 1999 we entered into an agreement with Sony to
license and develop the Palm platform for use in future Sony products. We
believe that the potential of these and other new markets represents a
significant growth opportunity for us and our developer community.

  Internet Services and Applications. The Internet allows enhanced contact with
our users by allowing us to offer products and services directly to our users
and by creating an online destination where users, resellers and developers can
participate in the Palm economy. We offer users of our Palm VII device a new
way to access and navigate the Internet through our web-clipping software,
which allows users to download specific information from the Internet. To
support the wireless connectivity of our Palm VII device, we offer Palm.net
which is a monthly fee, subscription-based Internet access service. In
addition, we have developed a website that is also called Palm.net, an Internet
destination where content providers and third party developers can post web-
clipping applications for users to download. We have also developed our
Palm.com website, which is emerging as an important destination site for our
customers, users and developer community. These Internet services and
applications increase the functionality of our products, provide us with
expanded opportunities for product sales, advertising and transaction revenue
and keep us at the forefront of technology and innovation in our rapidly
changing markets.

  The Palm Economy. Our broad user base has attracted a large community of
third-party developers that create software applications and peripherals that
increase the performance and functionality of Palm devices. As of December 1,
1999, more than 29,000 developers had registered to use Palm developer tools to
create software applications for the Palm platform. In addition, we distribute
approximately 80 peripherals and accessories developed by us and third parties
ranging from wireless modems to keyboards to leather cases. This expanding Palm
economy has, in turn, encouraged licensees to integrate the Palm platform with
new handheld information appliances providing new opportunities to grow the
Palm economy. The Internet is further expanding the Palm economy by attracting
new users and by encouraging developers to create Internet-specific
applications. We believe that the Palm economy creates opportunities for all
participants by continually extending the functionality and market appeal of
both existing and next-generation Palm-branded products and products based on
the Palm platform.

Strategy

  Our objective is to increase our handheld device market leadership and
establish our Palm platform as the industry standard operating system for the
next generation of handheld computing devices, mobile information appliances,
mobile phones and handheld devices for entertainment such as games and music.
In addition, we plan to further develop our Internet services and expand our
enterprise sales. The key elements of our strategy to achieve these objectives
are to:

  Extend Market Leadership through Continued Dedication to the Palm Design
Philosophy. Our design philosophy carefully balances elegant form with simple
and useful functions. We intend to continue to increase the size of the
handheld device market by extending this philosophy to products targeted at new
market segments. We have recently accelerated our market segmentation
activities by identifying specific user needs across consumer, mobile
professional and enterprise markets and by introducing new versions of our
handheld devices that combine features tailored to address these specific
needs. For example, we introduced both an entry-level Palm IIIe product for
price-sensitive consumers and the Palm V product for consumers seeking a
slimmer, sleeker Palm device. Underlying our design philosophy is a fundamental
commitment to innovation. We have been first to market with a number of
innovative technologies that we have incorporated into our products ranging
from our first Palm device to our recently introduced Palm VII product. We
believe that continuing product and technology innovation will be important to
our overall success.

                                       44
Accelerate Adoption of Palm Products and Services in the Enterprise
Market. We believe the enterprise market represents a significant opportunity
for Palm. Most Palm devices are used in professional environments but have
historically been purchased by users on an individual basis rather than by
corporations or institutions for enterprise-wide deployment. With the recent
introduction of wireless-enabled devices, the development of enterprise
customer support programs and the addition of a direct enterprise salesforce,
we are beginning to see increased adoption of Palm devices by our enterprise
customers. For example, Cedars-Sinai Medical Center is deploying Palm VII
devices to manage patient information. To accelerate the adoption of our
devices by enterprises, we have established relationships with enterprise
software vendors such as Oracle, PeopleSoft, Remedy and SAP to develop
applications that provide access to enterprise databases using devices based on
the Palm platform. Additionally, we are developing synchronization features and
network security capabilities tailored to enterprise networks and computer
servers and working with third party developers to design enterprise-specific
software applications.

  License the Palm Platform to Establish a Standard, Open Operating System for
Information Appliances. We intend to further expand the use of the Palm
platform in a wide variety of handheld devices and information appliances. This
strategy involves licensing the Palm platform to other handheld device
manufacturers such as Sony and to manufacturers of other information appliances
that are looking to incorporate an operating system that is widely adopted by
consumers and has broad third-party developer support. We plan to continue to
pursue licensing agreements with wireless telephone companies such as Nokia and
QUALCOMM as well as providers of other mobile information appliances.

  Continue to Develop Products and Services that Leverage Wireless Connectivity
and the Internet. The introduction of the Palm VII product represents the first
step in our rollout of wireless Internet-enabled devices. Our Internet services
strategy has four complementary components. First, through strategic
relationships we plan to expand the geographic coverage of our Palm.net
wireless access service on a global basis. Second, we intend to develop
hardware and software solutions to enable previous generations of Palm products
to access Palm.net. Third, we intend to enhance the wireless functionality of
our Palm.net service to increase its utility for enterprise and carrier
applications. Finally, we believe that the proliferation of wireless devices
that link to the Internet will enable us to leverage our Internet properties.
In this regard, we believe that Palm may be particularly well-positioned to
build an Internet access portal around our Palm.net and Palm.com properties.
For example, in addition to providing access for Palm devices through Palm.net,
we plan to make content, such as Internet calendaring and information
management, available through the Palm.net site.

  Expand International Business. We intend to continue to expand our
international business. For the first three months of fiscal 2000, revenues
outside the United States accounted for 31% of our total revenues compared to
21% for the first three months of fiscal 1999. With the help of the Palm
developer community, we have introduced localized versions of Palm devices in
five languages. According to International Data Corporation, we had a 72%
market share of the personal companion market in Europe and 59% market share in
Asia in 1998. We plan to build on this success by expanding our international
product offerings, introducing additional local-language versions of the Palm
platform and broadening our distribution channels overseas.

  Support the Palm Economy. As the community of users, licensees and hardware
and software developers for Palm products has grown, we have expanded our
efforts to support the Palm economy. Support of the developer community takes a
variety of forms, ranging from offering software tools and technical support
services for third-party developers to hosting PalmSource conferences that
allow us to give direction regarding product and strategy trends. In addition,
we expect to make strategic investments in new companies or make acquisitions
that we believe will support or expand the Palm economy. We may also
selectively develop applications designed to

                                       45
increase the functionality of Palm-based devices and support expansion of the
Palm economy. We expect to continue these efforts to support the Palm economy
to stimulate overall demand for products based on the Palm platform.

Products and Services

  Handheld Devices. Each of our handheld devices is designed with the Palm
philosophy of providing the user with a simple, elegant and useful productivity
tool. People use our handheld devices for many different purposes, including
managing both personal information and enterprise data and accessing e-mail and
content from the Internet. Users can also customize their devices by adding a
wide range of applications, peripherals and accessories. We have developed each
of our three current product families to address specific customer needs.

  The Palm III product family combines the small form factor, seamless desktop
synchronization, ease of use and fast data access that have been the hallmark
of our handheld devices. The Palm IIIe device is our most affordable, entry-
level product. The Palm IIIe special edition product, the newest addition to
this family, combines the traditional features of the Palm III device with a
new, translucent enclosure and is targeted at the student market. The Palm IIIx
device allows users to upgrade both memory and operating system and includes
application software such as enhanced links to Microsoft Outlook.

  The Palm V product family emphasizes wearability, combining all of the
functions of the Palm III product family with a sleek and stylish form-factor
featuring an anodized aluminum case. It also features advanced display
technology and a rechargeable battery. The Palm Vx device, introduced in the
fall of 1999, has additional pre-bundled software and more memory than the Palm
V device.

  The Palm VII, which integrates wireless communications functionality, is the
first device in our newest product family. The Palm VII device builds on the
features of our other product families by adding wireless access to Internet
content, enterprise data, e-mail, messaging and e-commerce services such as
online shopping, auctions and stock trading. The Palm VII device incorporates
our web-clipping technology, which presents Internet content and enterprise
data in a format optimized for handheld devices. We believe the wireless
connectivity of the Palm VII device makes it particularly well-suited for the
enterprise market as it allows mobile employees to access enterprise data
remotely. In order for users of the Palm VII device to access Internet content,
they currently must subscribe to our Palm.net access service.

  As part of our enterprise market strategy, we have entered into an agreement
with Oracle to bundle OracleLite with our developer kit. This bundled product
allows mobile customers in the enterprise market to use a Palm device to gain
access to enterprise databases while working remotely. Similarly, we support
efforts by companies such as PeopleSoft, Remedy and SAP to enable enterprise
users to access their database information with Palm devices. We are also
developing the Palm Ethernet Cradle for enterprise customers. This product
allows Palm device users to connect directly to an enterprise's local area
network from various locations throughout the enterprise. The Palm Ethernet
Cradle is scheduled to be available in February 2000.

  We also market and resell peripherals and accessories such as modems, leather
cases, colored flip covers and other fashion accessories for our products.

  Palm Platform. Our Palm platform, which integrates a number of components
around the Palm OS operating system, is the foundation for Palm devices as well
as for devices manufactured by our licensees. Our objective is to establish the
Palm platform as the industry standard for handheld computing devices and other
information appliances.

  The Palm platform consists of several components:

  .  the Palm OS operating system;

                                       46
.  the Palm user interface, which enables users to interact with the Palm
     device, and application programming interfaces, which allow developers
     to write applications that run on devices based on the Palm platform;

  .  standard personal information management applications, including
     datebook, address book, to-do list, memo pad, calculator and expense
     management functions;

  .  development tools, including developer kits that enable third party
     developers to develop applications and licensee kits with hardware
     reference designs that enable licensees to design devices around the
     Palm OS operating system;

  .  HotSync data synchronization technology, which enables a handheld device
     to synchronize information with personal computers or enterprise
     databases;

  .  Graffiti script recognition technology, which enables users to input
     script data directly through our pen-based user interface; and

  .  Web-clipping software, which allows content providers to present and
     users to receive Internet or enterprise data in a format optimized for
     handheld computing devices.

  The Palm platform has been optimized for handheld devices where instant
access to information, low power consumption and wireless capabilities are
important. These attributes have important benefits for Palm, our developers
and our licensees.

  The Palm platform offers a variety of benefits to developers of handheld
devices. The Palm platform software code is designed to allow applications to
run quickly and reliably. It minimizes power, processing and memory
requirements without sacrificing performance, which in turn reduces component
costs for manufacturers. These attributes helped us to design the Palm V with
its slim form factor and will allow our licensees, such as Nokia and Sony, to
design products that allocate more processing resources to new applications
rather than to running a complex operating system. In addition, the
architecture of the Palm platform enables the addition of peripheral devices
and software libraries, which broadens the functionality of the device.

  The Palm platform provides application developers with significant design
flexibility. The combination of simpler application programming interfaces and
a modular code architecture enables developers to quickly and easily learn to
program for the Palm platform. In addition, we share select parts of our source
code to enable developers to optimize the interface of their applications with
the Palm platform.

  The modular architecture of our Palm platform also provides benefits for our
licensees. We design separations between our software layers and the underlying
basic code, or kernel, and the hardware reference design specific to our Palm
devices. This separation breaks the Palm platform into easily configurable
components, promoting innovation and broadening its appeal to manufacturers of
different information appliances. This separation allows components of the Palm
platform to be modified and replaced to allow the Palm OS operating system to
run on a variety of handheld hardware devices.

  Significant market acceptance of Palm platform-based devices is attracting an
increasing number of licensees. In October 1998, Symbol Technologies introduced
the first device based on the Palm platform incorporating bar code scanning
capabilities. Symbol has since introduced other products incorporating wireless
local area network access and rugged packaging. These products are targeted as
vertical solutions for retail, transportation, parcel and postal delivery,
manufacturing and healthcare. Other licensees of the Palm platform include
QUALCOMM, a maker of digital mobile phones, which has introduced its pdQ
digital smart phone combining the functionality of the Palm handheld device
with a mobile phone, and Handspring, a maker of handheld devices branded as
Visor which are targeted at consumers.

                                       47
Internet Services and Applications. We have developed two groups of products
and services to address the opportunities created by the emergence of the
Internet: Palm.net and Palm.com.

  In 1999, we introduced Palm.net, a subscription-based wireless access service
that enables Palm users to access web-clipped content on the Internet. We
currently offer pre-paid access packages from $9.99 to $39.99 per month and
charge additional amounts for network usage in excess of the pre-paid package.
The Palm VII device currently comes with nine pre-installed web-clipping
applications. In addition, users receive a CD-ROM which contains an additional
14 web-clipping applications that can be installed on the device. Palm.net is
also the name of Palm's web-clipping destination site, which offers links to
more than 150 additional sites that users can download to their devices as well
as customer support, technical support, coverage maps and account information.
For example, Palm VII users can access Fidelity.com or E*Trade to get real-time
stock quotes, UPS.com to monitor package delivery, ESPN.com to check sports
scores, WSJ.com to get news or business headlines and Travelocity to check
airline flight times and delays.

  Palm.net also serves as a resource for both content publishers and third
party developers. Content publishers can post links to their own websites that
are web-clipping enabled. In addition, developers can post applications on
Palm.net for use on wireless-enabled Palm devices. As wireless and Internet
technologies advance, we intend to expand the geographical coverage of the
Palm.net network, which currently covers over 260 metropolitan areas in the
United States, and expand the content and application offerings available
through Palm.net.

  Palm.com was established as a means to increase our contact with our end
users, customers and third-party developers. Visitors to Palm.com can purchase
Palm devices, accessories and peripherals as well as download Palm software
upgrades and link to third-party software. They can also find product and
customer support information and explore links to other Palm-related websites.
Palm.com also offers important support resources for developers. Developers can
use Palm.com to register with Palm, obtain access to software development tools
and obtain technical support.

Strategic Alliances

  Beginning in 1999, we expanded our strategy of licensing the Palm platform to
manufacturers of other handheld information appliances and working with other
companies to expand the use of applications running on the Palm platform. We
recently announced the following strategic alliances:

  Nokia. In October 1999, we entered into a licensing and joint development
agreement with Nokia to create a new pen-based mobile phone platform that
integrates telephony and data applications with personal information management
applications. The agreement provides that the jointly developed mobile phone
platform will integrate the user and application interface components of the
Palm platform with know-how supplied by Nokia, with the intention that
applications currently available for the Palm platform will be supported by the
new platform. Pursuant to the agreement, Nokia has a non-exclusive royalty-
bearing license to use the jointly developed platform. Concurrent with this
offering, Nokia has agreed to purchase shares of common stock equal to the
lesser of $80 million or 1 1/2% of the Company's capital stock, which
percentage is based on     outstanding common stock as well as options to
purchase       shares which have been granted as of       ,2000.

  Sony. In November 1999, we entered into a licensing and joint development
agreement with Sony Corporation to enable Sony to create new handheld consumer
electronics products with next generation audio-visual functionality. Pursuant
to the agreement, we will develop extensions to the Palm platform that
incorporate Sony's Memory Stick application programming interface technology
for use in the new devices. The agreement also provides us with the right to
license the Memory Stick technology as incorporated in the Palm platform to
third parties.

                                       48
Sun Microsystems. In June 1999, we jointly announced with Sun Microsystems
our intention to integrate Sun's Java technology with the Palm platform. In
addition, we jointly announced with Sun in October 1999 the availability of
Sun's consulting services to help deliver enterprise applications and
capabilities for handheld devices based on the Palm platform through the newly
formed Sun.Com Consulting practice.

  America Online. In December 1999, we entered into a non-binding memorandum of
understanding with America Online pursuant to which the parties intend to
establish a strategic relationship aimed at offering mobile consumer Internet
services for Palm platform-based handheld device users. The memorandum is non-
binding and there can be no assurance that the parties will be able to enter
into a definitive, binding agreement regarding this relationship. Additionally,
concurrent with this offering, America Online has agreed to purchase shares of
common stock equal to the lesser of $80 million or 1 1/2% of our capital stock,
which percentage is based on     outstanding common stock as well as options to
purchase        shares which have been granted as of          , 2000.

  Motorola. In December 1999, we entered into a non-binding memorandum of
understanding with Motorola pursuant to which the parties intend to conclude a
definitive license agreement in which Motorola will license the Palm OS
operating system software to develop wireless products. In addition, the
parties intend to conclude development and license agreements pursuant to which
the capabilities of the Palm OS operating system software would be expanded so
that Motorola could develop new categories of products and enter new markets.
The memorandum is non-binding and there can be no assurance that the parties
will be able to enter into a definitive, binding agreement regarding this
relationship. Additionally, concurrent with this offering, Motorola has agreed
to purchase shares of common stock equal to the lesser of $65 million or 1 1/2%
of the Company's capital stock, which percentage is based on     outstanding
common stock as well as options to purchase         shares which have been
granted as of            , 2000.

Developer Community

  The combination of our large user base and the open architecture of the Palm
platform has attracted a large and growing community of third party developers
who create software applications, peripherals and accessories for Palm devices
and Palm platform-based products. The diverse offerings from this third-party
developer community in turn broaden the user appeal of our devices and other
products based on the Palm platform. As of December 1, 1999, more than 29,000
developers had registered to create applications for the Palm platform. In
addition, over 4,500 applications are currently available in a broad range of
categories, including contact and schedule management, e-mail and Internet
communications, sales force and field automation, personal productivity,
groupware, financial management and games. Developers of several major
applications, such as IBM's Lotus Organizer, Symantec's ACT! and QUALCOMM's
Eudora Internet e-mail software, have enabled these applications to be
synchronized with our devices. We have hosted three developer conferences with
attendance growing from approximately 380 in 1997 to 2,000 in 1999 and have
begun hosting these conferences internationally in Tokyo, London and Munich.

Sales and Marketing

  We sell to our end users primarily through distributors, retailers and
resellers. In the United States, we currently sell directly to six
distributors, 14 retailers and eight regional resellers. We also use our
dedicated enterprise sales force to market Palm products directly to
enterprises which then purchase devices through one of our other sales
channels. We also sell directly to consumers through our Palm.com website.

  In the United States, distributors represent our largest sales channel. These
distributors generally sell to retailers on a national basis and include large
distributors targeting Internet retailers

                                       49
such as Buy.com. The retail channel is our second largest United States
distribution channel and encompasses office supply and consumer electronics
retailers and catalog and mail order companies. Retailers primarily sell Palm
devices to individuals, small businesses, small offices and home offices. This
channel is currently our fastest growing area of distribution.

  In Europe and the Pacific Rim, we currently sell our product exclusively
through distributors. We have approximately 111 international distributors, of
which approximately 88 are in Europe and 23 are in the Pacific Rim. In
addition, 3Com currently resells our products into the Canadian and Latin
American markets.

  We believe there is a significant opportunity to expand the Palm economy by
selling device products through third parties such as IBM and Franklin Covey
that sell customized versions of our products under their own brand. We believe
by developing specialized and customized products that are re-branded and re-
sold by these third parties, we can quickly and cost effectively enter new
geographic and specialized vertical markets, or expand our penetration into
existing markets such as the enterprise. Our strategy is to select established
enterprise companies that have significant market presence or access to new
markets that can be more efficiently developed and managed by these third
parties than by us. For example, IBM sells Palm-based products in the
enterprise market branded as the IBM WorkPad PC Companion in the United States,
Europe, Japan, Latin America and Asia. We have entered into a relationship with
Franklin Covey to provide a series of devices based on the Palm III, V and VII
products sold to both the consumer and enterprise markets based on its popular
time and life management planning concepts. We jointly developed with Supra,
the largest provider of lock boxes for the real-estate industry, an electronic
key embedded in Palm devices for accessing their lock boxes and specialized
realtor productivity software.

  We build awareness of our products and the Palm brand through mass-media
advertising, targeted advertising, public relations efforts, in-store
promotions and merchandising and through our Palm-branded Internet properties.
We also receive extensive feedback from our end users, the third-party
developer community and our channel customers through market research. We use
this feedback to continually refine our product development as well as the
position and assortment of our products in our sales channels.

Customer Service and Support

  We believe that customer service and technical support are essential parts of
the sales process in our industry. In order to provide high levels of customer
service, senior management and assigned account managers work closely with our
distributor, retailer, reseller and enterprise customers. We believe these
relationships enable us to improve customer satisfaction and develop products
to meet specific customer needs. For our enterprise customers we provide a
variety of support offerings including a training program for the enterprise
help-desk, website, e-mail and telephone troubleshooting, as well as a program
to provide refurbished units to enterprises needing replacement devices.
Individual consumers also have access to website, e-mail and telephone support.
We outsource our customer service, technical support and product repairs to
regionally-based third parties.

Product Development and Technology

  Our engineering department consists of a device design group and a separate
Palm platform team. Our product development efforts are focused on both
improving the functionality of our existing products and developing new
products. We believe the industrial 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 customers by introducing new product designs with an emphasis
on innovations in the utility, simplicity, wearability, mobility, style and
ease of use of our products and services.

                                       50
To identify and develop technologies for the next generations of Palm
devices, we use parallel development teams to avoid schedule dependency from
one product to the next. At the same time, 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 to coincide with the summer and winter selling
seasons and introducing new generation products approximately every 12 months.
In addition, our Palm platform software engineering group works both on
refining the Palm platform for our Palm-branded devices and on coordinating
development efforts with our licensees.

  We have four design centers, each of which focuses on different aspects of
our products, such as wireless connectivity, flexibility and wearability. For
example, our design center in Bellevue, Washington developed the technology
that enabled the wireless connectivity of the Palm VII product, and our design
center in Santa Clara, California was responsible for the improvements in
wearability of the Palm V product. We have additional design centers in Rolling
Meadows, Illinois and Montpellier, France.

  We believe that our success will depend, in part, on our ability to develop
and introduce new products and enhancements to our existing products. In the
past we have made, and intend to continue to make, significant investments in
research and development. Our research and development expenditures totaled
approximately $46.0 million in fiscal 1999, $21.9 million in fiscal 1998 and
$13.4 million in fiscal 1997. As of November 26, 1999, we had 250 people
engaged in research and development activities.

Manufacturing and Supply Chain

  We currently outsource all of our manufacturing operations to Manufacturers'
Services Limited and Flextronics. This outsourcing extends from prototyping to
volume manufacturing and includes activities such as material procurement,
final assembly, test, quality control and shipment to our customers.
Manufacturers' Services Limited currently assembles Palm devices for us at its
Utah facility which it recently purchased from 3Com. Flextronics currently
assembles Palm devices at its facilities in Mexico, California and Malaysia.
Our outsourced manufacturing strategy allows us to:

  .  minimize our capital expenditures;

  .  conserve the working capital that would be required to fund inventory;

  .  adjust to manufacturing volumes quickly to meet changes in demand; and

  .  operate without dedicating any space to manufacturing operations.

  We believe that additional assembly line efficiencies are realized due to our
product architecture and our commitment to process design. Although we
generally use standard components for our products and try to maintain
alternative sources of supply, some key components, such as the Motorola
microprocessors we use, are purchased from sole or single source suppliers for
which alternative sources are not currently available in the quantities and at
the prices we require. The components that make up our devices are supplied by
a number of vendors such as Epson, Samsung, Sharp and Philips, who each supply
liquid crystal display panels, AMD, Fujitsu and Toshiba, who each supply DRAM
memory chips, and Motorola, the supplier of our microprocessor.

Competition

  We compete in the handheld device, operating system and Internet services
markets. The markets for these products and services are highly competitive.
Some of our competitors or potential competitors have significantly greater
financial, technical and marketing resources than we do. These competitors may
be able to respond more rapidly than us to new or emerging technologies or

                                       51
changes in customer requirements. They may also devote greater resources to the
development, promotion and sale of their products than we do.

  Our devices compete with a variety of handheld devices, including pen- and
keyboard-based devices, mobile phones and subnotebook personal computers. Our
principal competitors include Casio, Compaq, Hewlett-Packard, Psion and Sharp
as well as licensees of our Palm platform such as Handspring and TRG. We
believe the principal competitive factors impacting the market for our handheld
devices are functionality, features, operating system performance, styling,
availability, brand and price.

  Our Palm platform competes primarily with operating systems such as
Microsoft's Windows CE operating system for handheld personal computers and
Symbian's EPOC operating system for wireless communication devices. We believe
that the principal competitive factors affecting the market for operating
systems are the overall number of end users, technological features and
capabilities of the operating system, number and quality of third-party
applications available for use on the operating system, architecture of the
operating system and relative ease of developing compatible applications. In
our licensing activities, our Palm platform also competes with the proprietary
operating systems of our potential licensees.

  While it currently has no directly analogous competitors, the Palm VII device
and our wireless Internet access service compete with a variety of alternative
technologies and services. Mobile phone manufacturers and service providers
including Nokia, Motorola and Sprint have recently introduced mobile phones
which offer Internet connectivity. We expect that the trend toward integrating
Internet connectivity into a diverse set of devices will continue to accelerate
as industry standards emerge. Our subscription-model access business also
competes indirectly with other providers of Internet access, ranging from
dedicated Internet service providers such as America Online and Earthlink to
local phone companies. In addition, although we currently supply Internet
access to Palm VII subscribers through our Palm.net service, competing Internet
access solutions may be developed to enable connectivity through wireless-
enabled Palm devices outside our Palm.net service.

Intellectual Property

  Our software, hardware and operations rely on and benefit from an extensive
portfolio of intellectual property. We currently have 10 United States patents
issued for our technology and we have 52 United States patent applications
pending. We also have 27 foreign patent applications pending.

  We own a number of trademarks, including Palm, Palm III, Palm V, Palm VII,
Palm OS, Palm Computing, PalmSource, HotSync, Graffiti, Simply Palm and
Palm.net. We are currently engaged in litigation against other parties to
enforce our rights to these trademarks, the protection of which is important to
our reputation and branding. We also own copyrights to the Palm platform and
our software development applications.

  We license a number of 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.

  In addition to our Palm platform, we also license development applications to
third-party developers of compatible products, services and applications to
increase the functionality of devices based on the Palm platform. In addition,
we have licensed software that enables numerous website hosts, including ABC
News, Bank of America, Dow Jones, ESPN, E*Trade, Fidelity.com, Fodor's,
MasterCard, Merriam-Webster, MovieFone, Starbucks, TheStreet.com, UPS, USA
Today, VISA, The Weather Channel and Yahoo!, to make their websites accessible
by devices based on the Palm platform using our web-clipping technology.

                                       52
We rely on a combination of patent, trademark, copyright and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights.

Backlog

  We order finished products from our third-party manufacturers based upon our
forecast of worldwide customer demand and in advance of receiving orders from
our customers. Orders are generally placed by our customers on an as-needed
basis and products are usually shipped within one to four weeks after receipt
of an order. Orders generally may be canceled or rescheduled by the customer
without significant penalty. Accordingly, backlog as of any particular date is
not necessarily indicative of our future revenues.

Employees

  As of November 26, 1999, we had a total of approximately 632 employees, of
which approximately 67 were in supply chain and service and support, 250 were
in engineering, 254 were in sales and marketing and 61 were in general and
administrative activities. Our future performance depends, in significant part,
upon our ability to attract new personnel and retain existing personnel in key
areas including engineering, technical support and sales. Competition for
personnel is intense, especially in the San Francisco Bay Area where we are
headquartered, and we cannot be sure that we will be successful in attracting
or retaining personnel in the future. None of our employees is subject to a
collective bargaining agreement. We consider our relationship with our
employees to be good.

Facilities

  We occupy approximately 160,000 square feet of leased space in Santa Clara,
California. The lease of this facility is terminable with six-months notice
beginning in July 2001 and expires in July 2002. In addition to our principal
office space in Santa Clara, California, we also lease research and development
facilities in Bellevue, Washington, Rolling Meadows, Illinois and Montpellier,
France and sales and support offices internationally in Winnersh, United
Kingdom and La Defense, France. We believe that existing facilities are
adequate for our needs through calendar year 2000 and are currently in the
process of locating additional space to meet our expected requirements
thereafter. If we require additional space, we believe that we will be able to
secure such space on commercially reasonable terms without undue operational
disruption.

Legal Proceedings

  On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case is now captioned: Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm
Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The
complaint alleges willful infringement of a Xerox United States patent, issued
on January 21, 1997, relating to computerized interpretation of handwriting.
The complaint further seeks unspecified damages and injunctive relief. Xerox
has asserted that products utilizing Graffiti script recognition software made,
used, offered for sale or sold in the United States, or imported into the
United States since January 21, 1997 infringe its patent. On June 25, 1999, the
Court stayed the action pending reexamination of the patent by the United
States Patent and Trademark Office. The reexamination of the patent is
currently pending. In connection with our separation from 3Com, pursuant to the
terms of the Indemnification and Insurance Matters Agreement, we will indemnify
and hold 3Com harmless for any damages or losses which may arise out of this
litigation. In particular, an adverse determination in the Xerox litigation
could subject us to substantial damages and require us to indemnify our

                                       53
customers and licensees for damages that they may suffer. Moreover, if there is
an adverse determination, a license may be necessary to continue using the
Grafitti script recognition software in our Palm devices and Palm platform. A
license may not be available or on terms acceptable to us. If upon an adverse
determination we were unable to obtain a license on terms acceptable to us, we
could be required to modify our script recognition software or license
alternative script recognition software from third parties for inclusion in our
Palm devices and our Palm platform.

  On July 22, 1999, we filed a copyright infringement action against Olivetti
and CompanionLink in the United States District Court for the Northern District
of California and obtained a preliminiary injunction against further
distribution, sale, import or export of Olivetti Office USA's "Royal daVinci"
handheld device and the daVinci OS Software Development Kit, distributed by
CompanionLink Software, Inc. The injunction is to remain in effect pending the
outcome of the lawsuit. We also initiated a copyright infringement action in
Hong Kong on July 21, 1999, against EchoLink Design Ltd., the company
responsible for developing the operating system software contained in the
daVinci products. The High Court of the Hong Kong Special Administrative Region
issued an order the same day restraining EchoLink from further copying,
distribution, sale, import or export of Palm OS operating system source code or
EchoLink's "NEXUS OS" source code, which we maintain infringes our copyrights.

                                       54
MANAGEMENT

Directors, Executive Officers and Key Employees

  Set forth below is information concerning our directors and executive
officers and their ages as of October 31, 1999.
Name           Age                          Position
          ----           ---                          --------
Directors and Executive
 Officers:
Carl J. Yankowski.......  51 Chief Executive Officer and Director
Eric A. Benhamou........  44 Director
James L. Barksdale......  56 Director
Gordon A. Campbell......  55 Director
Susan G. Swenson........  51 Director
Alan J. Kessler.........  42 President
Judy Bruner.............  41 Senior Vice President and Chief Financial Officer
Stephen Yu..............  34 Vice President, General Counsel and Secretary
Key Employees:
Mark Bercow.............  38 Vice President, Strategic Alliances & Platform Development
Gregory S. Rhine........  41 Vice President, Worldwide Sales
Peng K. Lim.............  36 Vice President, Worldwide Product Engineering
Daniel S. Keller........  43 Vice President, Platform Engineering
Dinesh Raghavan.........  45 Vice President, Global Supply Chain Operations
Charles Yort............  40 Vice President, Enterprise
Byron Connell...........  39 Vice President, Product Marketing
Robert Harvey...........  47 Senior Director, Palm.net Services
Douglas Haslam..........  49 Director, Human Resources
David de Valk...........  30 Director, Global Service and Support
Carl J. Yankowski has been our Chief Executive Officer and one of our
directors since December 1999. From September 1998 to December 1999, Mr.
Yankowski was Executive Vice President of Reebok International Ltd. and
President and Chief Executive Officer of the Reebok Division. From November
1993 to January 1998, Mr. Yankowski was President and Chief Operating Officer
of Sony Electronics Inc., a subsidiary of the Sony Corporation. Mr. Yankowski
holds a Bachelor of Science degree in electrical engineering from the
Massachusetts Institute of Technology as well as a Bachelor of Science degree
in management which he earned concurrently from MIT's Sloan School of
Management. Mr. Yankowski also serves as a director of Safeguard Scientifics
and Avidyne, Inc., and he is a member of the board of advisors of Boston
College Business School.

  Eric A. Benhamou has served as one of our directors since September 1999. Mr.
Benhamou has been 3Com's Chief Executive Officer since September 1990 and also
served as 3Com's President from April 1990 through August 1998. Mr. Benhamou
has been 3Com's Chairman of the Board of Directors since July 1994. Mr.
Benhamou served as 3Com's Chief Operating Officer from April 1990 through
September 1990. From October 1987 through April 1990, Mr. Benhamou held various
general management positions within 3Com. Mr. Benhamou also serves as Chairman
of the Board of Cypress Semiconductor, Inc. and as a director of Legato
Systems, Inc. Mr. Benhamou is a member of President Clinton's Information
Technology Advisory Council.

  James L. Barksdale has served as one of our directors since September 1999.
Mr. Barksdale has been a managing partner at The Barksdale Group since he
founded it in April 1999. Prior to that, he served as President, Chief
Executive Officer and a director of Netscape Communications Corporation, an
Internet browser company, from January 1995 to April 1999. Previously,

                                       55
Mr. Barksdale had been President and Chief Executive Officer of AT&T Wireless
Services since September 1994. From 1992 to September 1994, Mr. Barksdale had
been employed as President and Chief Operating Officer of McCaw Cellular
Communications, Inc., and from 1979 to 1992 by Federal Express Corporation. Mr.
Barksdale also serves as a director of Robert Mondavi Corporation, Sun
Microsystems, Inc., America Online, Inc., Liberate Technologies,
Homegrocer.com, Inc. and Respond.com, Inc.

  Gordon A. Campbell has served as one of our directors since September 1999.
Mr. Campbell is the founder and, since 1993, has been President and Chairman of
the Board of Techfarm, Inc., a company formed to launch technology-based start-
up companies. Mr. Campbell was the founder of CHIPS and Technologies, Inc., a
company that designs and distributes very large scale integrated circuit
products, and served as its President and Chief Executive Officer from December
1984 until November 1993, and as its Chairman of the Board from December 1984
until November 1995. Mr. Campbell also serves as a director of Bell
Microproducts, Inc., Chairman of the Board of 3D/Fx Interactive Inc. and
Chairman of the Board of Cobalt Networks, Inc.

  Susan G. Swenson has served as one of our directors since October 1999. Ms.
Swenson is President and Chief Operating Officer of Leap Wireless
International, Inc. and Chief Executive Officer of Cricket Communications, Inc.
since July 1999. Ms. Swenson has also been a director of Leap since July 1999.
From March 1994 to July 1999, Ms. Swenson served as President and Chief
Executive Officer for Cellular One, a joint venture between AirTouch/Vodafone
and AT&T Wireless. Ms. Swenson is also a director of Wells Fargo Bank, General
Magic and Working Assets.

  Alan J. Kessler has been President of Palm since June 1999. From April 1998
to June 1999, Mr. Kessler was Senior Vice President of Global Customer Service
for 3Com. From July 1997 to April 1998, Mr. Kessler was Senior Vice President
of Worldwide Enterprise Sales and Service for 3Com. From October 1985 to July
1997, Mr. Kessler held a variety of sales and marketing management positions at
3Com, including Vice President of 3Com's North America System Sales, Vice
President and General Manager of 3Com's Internetworking Product Group and a
Director of Marketing with responsibility for key network communication product
lines. Mr. Kessler holds a Master of Business Administration degree from the
University of California, Berkeley and a Bachelor of Science degree in
business, with honors, from San Jose State University.

  Judy Bruner has served as Senior Vice President and Chief Financial Officer
of Palm since September 1999. From April 1998 to September 1999, Ms. Bruner was
Vice President and Corporate Controller at 3Com. From October 1996 to April
1998, Ms. Bruner was the Vice President, Finance for 3Com's Enterprise Systems
Business Unit. From June 1995 to October 1996, she served as 3Com's Vice
President and Corporate Treasurer. From April 1988 to June 1995 Ms. Bruner
served in a variety of 3Com financial management positions including Corporate
Treasurer. Prior to joining 3Com, Ms. Bruner most recently served as the Vice
President and Chief Financial Officer for Ridge Computers Inc., a privately
held company that designed and manufactured computer systems. She was with
Ridge Computers Inc. from December 1984 until April 1988. From July 1980 to
December 1984, Ms. Bruner held a variety of accounting and finance positions at
Hewlett-Packard Company. Ms. Bruner holds a Bachelor of Arts degree in
Economics from the University of California, Los Angeles and a Master of
Business Administration degree from Santa Clara University.

  Stephen Yu has served as Vice President, General Counsel and Secretary since
September 1999. From November 1994 to September 1999, Mr. Yu held various
positions within the 3Com legal department, most recently serving as 3Com's
Legal Director, Business Development and West Coast Product Operations. From
September 1990 to November 1994, Mr. Yu was an associate attorney with Gray
Cary Ware & Freidenrich, a law firm located in Palo Alto, California. Mr. Yu
received a Juris Doctor degree cum laude from Georgetown University Law Center
and a Bachelor of Science degree in electrical engineering from Purdue
University.

                                       56
Mark Bercow has been Palm's Vice President, Strategic Alliances and Platform
Development since July 1997. Prior to joining Palm, from January 1997 to July
1997, he was Director of Marketing for the Cable Access Products Division of
3Com. From September 1995 to September 1996, Mr. Bercow was Vice President,
Marketing and Business Development at FirstFloor Software, Inc. From September
1994 to September 1995 he was the General Manager of the David Systems
subsidiary of Chipcom Corporation and from September 1993 to September 1994, he
was Acting Vice President, Marketing at Chipcom Corporation. Prior to joining
Chipcom, Mr. Bercow was Group Manager, Marketing at Sun Microsystems, Inc. He
holds a Bachelor of Science degree in business administration from California
State University, Northridge.

  Gregory S. Rhine has served as Palm's Vice President of Worldwide Sales since
June 1999. From October 1997 to May 1999, Mr. Rhine served as Vice President
and General Manager for VeriFone, Inc., a division of Hewlett-Packard Company.
From January 1997 to September 1997, Mr. Rhine was Vice President of American
Channel Development and Sales at Apple. From May 1988 to December 1996, Mr.
Rhine held a variety of sales and management positions at Apple, including
Senior Director U.S. Distribution Sales, Director, Value Added Reseller (VAR)
sales, and Regional Sales Manager. Prior to Apple, from July 1979 to April
1988, Mr. Rhine worked for Olin Corporation in various areas of responsibility
including business development and marketing. Mr. Rhine holds a degree in
Business Administration from the University of Missouri and has completed
graduate work at West Coast University and executive management programs at The
Kellogg School of Business in Evanston, Illinois.

  Peng K. Lim has served as Vice President, Worldwide Product Engineering of
Palm since April 1999. From June 1997 to March 1999, Mr. Lim served as Vice
President, Engineering at Fujitsu Personal Systems Inc. From July 1996 to June
1997, he was Engineering Platform Director for Texas Instruments Incorporated.
Mr. Lim was Director of Engineering for Zenith Data Systems Corporation from
September 1993 to June 1996. Prior to that, Mr. Lim was Director of Engineering
at Dauphin Technology, Inc. Mr. Lim received his Bachelor of Science degree and
Master of Science degree in electrical engineering from University of Windsor
in Canada and Master of Engineering Management from Northwestern University.
Mr. Lim completed the executive management program at Stanford University.

  Daniel S. Keller has been Palm's Vice President of Platform Engineering since
August 1999. From June 1998 to July 1999, Mr. Keller was Director, Product
Engineering and from November 1997 to May 1998, he was Director, Corporate
Solutions Engineering. Prior to joining Palm, from April 1996 to September
1997, Mr. Keller was Vice President of Product Development for Power Agent,
Inc., an Internet company creating a large-scale, Internet system for bringing
buyers and sellers together. From November 1991 to March 1996 he was Director
of Development System Products at Taligent, Inc. From November 1980 to October
1991, Mr. Keller was at Apple Computer, Inc., where he held various positions
in the development of Apple's system software, graphical human interface,
development systems, and Japanese products. Prior to Apple, from June 1978 to
October 1980, he worked in operating system engineering at Hewlett-Packard
Company. Mr. Keller received his Bachelor of Science degree in Computer
Engineering with high honors from the University of California, San Diego.

  Dinesh Raghavan joined Palm in October 1998 as Vice President, Global Supply
Chain Operations. Prior to joining Palm, from May 1997 to September 1998.
Mr. Raghavan held the position of Director of Manufacturing Operations for the
European Paging Subscriber Division of Motorola, Inc. based in Dublin, Ireland.
From August 1977 to April 1997, Mr. Raghavan held various positions of
increasing responsibility in development engineering and manufacturing
management with Motorola. He holds a Bachelor of Technology degree in
electrical engineering from the Indian Institute of Technology in Kanpur, India
and a Masters in Business Administration degree from Nova University in Fort
Lauderdale, Florida.

                                       57
Charles Yort has been Vice President, Enterprise for Palm since November
1999. From September 1998 to November 1999, Mr. Yort was the Senior Director of
Palm Computing's enterprise sales team. Prior to joining Palm, from December
1996 to August 1998, Mr. Yort was the Director of Small Business Operations for
3Com. From September 1995 to November 1996, Mr. Yort was Director of Market
Development for 3Com. Prior to joining 3Com, from June 1993 to August 1995, Mr.
Yort was Marketing Manager for the PC Division of Inmac Corporation, a reseller
of computer related products. From August 1981 to June 1993, Mr. Yort worked in
various marketing, business development and engineering roles for Hewlett-
Packard Company. Mr. Yort holds a Masters in Business Administration degree
from Stanford University's Graduate School of Business, with concentrations in
Strategic Management and Finance. He earned a Bachelor of Science in
Engineering and Bachelor of Arts in Economics from Princeton University.

  Byron Connell has been Vice President, Marketing since July 1999. From
September 1998 to December 1999, Mr. Connell was Senior Director of Product
Marketing for Palm and from July 1997 to August 1998, he was Director of
Product Marketing. From December 1994 to July 1997, Mr. Connell was the Group
Manager of Product Marketing for the Home Products Division of Hewlett- Packard
Company. From February 1993 to December 1994, Mr. Connell was the Group Manager
of Customer Requirements for Apple Computer, Inc. and from July 1988 to January
1993, he worked in a variety of sales, channel, and marketing management
positions for Apple Computer, Inc. Mr. Connell holds a Bachelor of Science
degree in Business Administration from the University of Southern California
and a Master of Management degree in marketing, international business and
management policy from the J.L. Kellogg Graduate School of Management at
Northwestern University. As an international exchange student, Mr. Connell also
studied at the Rotterdam School of Management Master of Business Administration
program at Erasmus University, Netherlands.

 Robert Harvey has served as Director, Palm.net since December 1997. From
November 1983 to November 1997, Mr. Harvey held a variety of manufacturing and
operations positions at Apple Computer, Inc., including Director of Mobile
Computing Operations from May 1995 to November 1997. From October 1973 to
October 1983, Mr. Harvey worked with the Palo Alto Police Department, most
recently serving as Captain, Uniform Division. Mr. Harvey holds a Bachelor of
Science degree in Sociology from the University of Santa Clara and a Masters of
Public Administration from California State University, Hayward.

  Doug Haslam has been Director, Human Resources for Palm since January 1997.
From January to December 1996, Mr. Haslam led Human Resources for the DDS
Division of Xerox Corporation. From September 1991 to September 1995, Mr.
Haslam was Director, Human Resources for Kenetech Windpower Corporation, and
from January 1988 to September 1991, he was Principal of his own Human
Resources consulting practice. From January 1985 to January 1988, Mr. Haslam
was Director, Human Resources for EOS, Inc., and from April 1981 to January
1985, he was Human Resources Manager for EOS, Inc. He has a Bachelor of Arts
degree in Political Science from Ohio University and a Masters in Public
Administration degree from University of California, Los Angeles.

  David de Valk has been Director of Customer Service since October 1999. From
September 1998 to October 1999, Mr. de Valk served as Director, e-Business
Strategy and Architecture for 3Com Global Customer Service. From June 1997 to
September 1998, Mr. de Valk held several senior service positions in 3Com
Global Customer Service, most recently Director, Network Solutions Services.
From September 1991 to June 1997, Mr. de Valk worked in various Technical
Support positions including Manager, Applications Engineering for U.S. Robotics
Corporation. Mr. de Valk attended Eureka College.

                                       58
Board Structure and Compensation

  Our board of directors is divided into three classes serving staggered three-
year terms. Mr. Yankowski's initial term will expire in 2000. Mr. Campbell's
and Ms. Swenson's initial terms will expire in 2001. Messrs. Benhamou's and
Barksdale's initial terms will expire in 2002.

  Non-employee directors will be paid an annual retainer equal to $20,000 and
be eligible for stock option grants under the Director Plan at such times and
in such amounts as are set forth in the Director Plan.

 Audit Committee

  Mr. Campbell and Ms. Swenson are members of our audit committee. Our audit
committee reviews our auditing, accounting, financial reporting and internal
control functions and makes recommendations to the board of directors for the
selection of independent accountants. In addition, the committee monitors the
quality of our accounting principles and financial reporting, our compliance
with foreign trade regulations as well as the independence of and the non-audit
services provided by our independent accountants. In discharging its duties,
the audit committee:

  .  reviews and approves the scope of the annual audit and the independent
     accountant's fees;

  .  meets independently with our internal auditing staff, our independent
     accountants and our senior management; and

  .  reviews the general scope of our accounting, financial reporting, annual
     audit and internal audit program, matters relating to internal control
     systems as well as the results of the annual audit.

Compensation Committee

  Messrs. Barksdale and Campbell are members of our compensation committee. Our
compensation committee determines, approves and reports to the board on all
elements of compensation for our elected officers including targeted total cash
compensation and long-term equity based incentives.

Stock Ownership of Directors and Executive Officers

  All of our common stock is currently owned by 3Com, and thus none of our
officers, directors or director nominees own any of our common stock. To the
extent our directors and officers own shares of 3Com common stock at the time
of the distribution, they will participate in the distribution on the same
terms as other holders of 3Com common stock.

                                       59
The following table sets forth the number of shares of 3Com common stock
beneficially owned on October 31, 1999 by each director, each of the executive
officers named in the Summary Compensation Table in the "--Executive
Compensation" section below, and all of our directors, director nominees and
executive officers as a group. Except as otherwise noted, the individual
director or executive officer or their family members had sole voting and
investment power with respect to such securities. The total number of shares of
3Com common stock outstanding as of October 31, 1999 was 341,225,466.
Shares of 3Com
                                                        Beneficially Owned
                                                       -------------------- ---
   Name of Beneficial Owner                             Number   Percentage
   ------------------------                            --------- ----------
Carl J. Yankowski..................................       --       *
   Eric A. Benhamou(1)................................ 1,788,817      *
   James L. Barksdale(2)..............................   120,000      *
   Gordon A. Campbell(3)..............................    52,875      *
   Susan G. Swenson...................................       --       *
   Alan J. Kessler(4).................................   179,716      *
   Judy Bruner(5).....................................    76,402      *
   Stephen Yu(6)......................................    10,903      *
   All directors and executive officers as a group.... 2,228,713      *
--------
 *  Represents holdings of less than one percent.

(1) Includes 1,377,505 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999.

(2) Includes 60,000 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999 and 60,000 shares are held by Mr.
    Barksdale and his spouse.

(3) Includes 52,875 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999.

(4) Includes 179,716 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999.

(5) Includes 74,381 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999.

(6) Includes 10,164 shares issuable upon the exercise of options exercisable
    within 60 days of October 31, 1999.

                                       60
Executive Compensation

  The following table sets forth compensation information for the chief
executive officer and the three other executive officers of Palm who, based on
salary and bonus compensation from 3Com and its subsidiaries, were the most
highly compensated for the year ended May 28, 1999. All information set forth
in this table reflects compensation earned by these individuals for services
with 3Com and its subsidiaries for the fiscal year ended May 28, 1999.

                           Summary Compensation Table
Long-Term
                                                      Compensation
                                          Annual      ------------
                                       Compensation      Awards
                                     ---------------- ------------
                                                       Securities   All Other
                                               Bonus   Underlying  Compensation
    Name and Principal Position      Salary($) ($)(1)  Options(#)     ($)(2)
    ---------------------------      --------- ------ ------------ ------------
Eric A. Benhamou, Chief Executive
 Officer and Director(3)...........   750,000      --   273,425       12,092
Alan J. Kessler, President.........   400,000      --    83,500       10,466
Judy Bruner, Senior Vice President
 and Chief Financial Officer.......   204,967  16,504    35,000        5,480
Stephen Yu, Vice President, General
 Counsel and Secretary.............   130,242   7,946    10,950        3,564
--------
(1) The amounts shown in this column reflect payments made under 3Com's
    company-wide profit-sharing plan. 3Com distributed these amounts at six-
    month intervals to all employees worldwide, other than those who are paid
    commissions, including executive officers, with the individual payments
    determined pro rata based on salary level.
(2) All other compensation includes group term life insurance premiums,
    payments made to reimburse a spouse's travel costs to 3Com events and
    401(k) matching payments.
(3) Mr. Benhamou ceased serving as our Chief Executive Officer in December
    1999.

Grants of Stock Options

  The following table shows all grants of options to acquire shares of 3Com
common stock to the executive officers named in the Summary Compensation Table
in the fiscal year ended May 28, 1999.
Potential Realizable
                                                                                     Value at Assumed
                                              % of Total                           Annual Rates of Stock
                             Number of      Options Granted                          Appreciation for
                             Securities         to 3Com     Exercise or               Option Term(4)
                         Underlying Options  Employees in   Base Price  Expiration ---------------------
Name                       Granted(#)(1)    Fiscal Year(2)   ($/Sh)(3)     Date      5%($)      10%($)
----                     ------------------ --------------- ----------- ---------- ---------- ----------
Eric A. Benhamou........      175,000               *         24.0000      6/1/08  $2,641,357 $6,693,718
                               54,675               *         25.5000      9/1/08     876,813  2,222,016
                               43,750               *         38.6875    11/30/08   1,064,453  2,697,534
Alan J. Kessler.........       52,500               *         24.0000      6/1/08     792,407  2,008,116
                               17,875               *         25.5000      9/1/08     286,658    726,448
                               13,125               *         38.6875    11/30/08     319,336    809,260
Judy Bruner.............       20,000               *         28.0625     7/22/08     352,967    894,488
                                8,000               *         20.4375     4/19/09     102,824    260,577
                                4,000               *         20.4375     4/19/09      51,412    130,288
Stephen Yu..............        6,000               *         28.0625     7/22/08     105,890    268,346
                                4,000               *         20.4375     4/19/09      51,412    130,288
                                  950               *         28.5000     5/19/09      17,027     43,151
--------
 *Less than one percent.

                                       61
(1) All of the above options are subject to the terms of 3Com's 1983 Stock
    Option Plan or 1994 Stock Option Plan and are exercisable only as they
    vest. The options granted to each executive officer vest and become
    exercisable in equal annual increments over a four year period provided the
    optionee continues to be employed by us.

(2) Based on a total of 18,938,977 shares granted to all 3Com employees in
    fiscal 1999.

(3) All options were granted at an exercise price equal to the fair market
    value of 3Com's common stock on the date of grant.

(4) Potential realizable values are net of exercise price, but before deduction
    of taxes associated with exercise. These amounts represent certain assumed
    rates of appreciation only, based on the Securities and Exchange Commission
    rules, and do not represent our estimate of future stock prices. No gain to
    an optionee is possible without an increase in stock price, which will
    benefit all stockholders commensurately. A zero percent gain in stock price
    will result in zero dollars for the optionee. Actual realizable values, if
    any, on stock option exercises are dependent on the future performance of
    our common stock, overall market conditions and the option holders'
    continued employment through the vesting period.

Exercises of Stock Options

  The following table shows aggregate exercises of options to purchase 3Com
common stock in the fiscal year ended May 28, 1999 by the executive officers
named in the Summary Compensation Table in the "--Executive Compensation"
section above.
Number of Securities          Value of Unexercised In-
                                                    Underlying Unexercised           The-Money Options at
                           Shares                Options at Fiscal Year-End(#)      Fiscal Year-End ($)(1)
                         Acquired on    Value    --------------------------------  -------------------------
          Name           Exercise(#) Realized($)  Exercisable      Unexercisable   Exercisable Unexercisable
          ----           ----------- -----------  -----------     ---------------  ----------- -------------
Eric A. Benhamou........   200,000   $8,625,498         1,162,398          516,175 $15,530,295   $678,786
Alan J. Kessler.........    30,000      810,894            98,840          187,500         --     206,305
Judy Bruner.............    10,000      185,625            63,151           51,585     433,874    302,344
Stephen Yu..............     3,200       79,400             7,186           16,679      20,438     81,750
--------
(1) Based on fair market value of $27.3125 per share as of May 28, 1999, the
    closing sale price of 3Com's common stock on that date as reported by the
    Nasdaq National Market System.

Employment Arrangements

  Mr. Yankowski serves as our Chief Executive Officer and as a director. Under
the terms of his employment, Mr. Yankowski's annual base compensation is
$600,000 and he is eligible for a target cash bonus of $600,000 per year. In
addition, subject to board approval, Mr. Yankowski will receive an employee
stock option grant equivalent in value to $48 million based on the price per
share in this offering or no more than 2% of the shares outstanding at the time
of this offering. This option will vest 25% per year over a period of four
years and is subject to the terms and conditions of the 1999 Stock Plan. In the
event that Mr. Yankowski is terminated for any reason other than cause during
the first two years of his employment, he is entitled to receive continued
salary payments and continued vesting of his stock option for a two-year period
if the termination occurs within the first six months of his employment, an 18-
month period if the termination occurs within the second six months, or a 12-
month period if the termination occurs within the second year. Pursuant to a
management retention agreement, Mr. Yankowski is entitled to severance benefits
in the event that, within 24 months following a change of control, his
employment is terminated involuntarily other than for cause, death or
disability or by Mr. Yankowski voluntarily for good reason. These severance
benefits include a severance payment of 200% of his salary and target bonus,
continued employee benefits, pro-rated bonus payment, and full acceleration of
vesting on Mr. Yankowski's stock options.

                                       62
Treatment of 3Com Options

  We intend to assume substantially all of the 3Com options held by our
employees on the distribution date. As of October 31, 1999, our employees held
options to purchase 2,610,815 shares of 3Com common stock at a weighted average
exercise price per share of $28.02. The price of 3Com common stock on that date
was $29.00. These assumed options are expected to convert at the distribution
into options to purchase our common stock. The number of shares and the
exercise price of 3Com options that convert into our options are expected to be
adjusted using a conversion formula. The conversion formula is expected to be
based on the opening per share price of our common stock on the first trading
day after the distribution relative to the closing per share price of 3Com
common stock on the last trading day before the distribution. The resulting
options are expected to maintain the original vesting provisions and option
periods.

Treatment of 3Com Restricted Stock

  Under the 3Com Restricted Stock Plan, some of our key employees were granted
restricted stock awards. As of October 31, 1999, our employees held 24,000
unvested 3Com restricted shares. The unvested 3Com restricted shares held by
our employees are expected to be forfeited on the distribution. We intend to
provide our employees who forfeit 3Com restricted shares with replacement
restricted shares of our common stock granted at the time of the distribution.
The replacement restricted shares are expected to have substantially the same
vesting provisions as the forfeited 3Com restricted shares.

Incentive Plans

  1999 Stock Plan

  Our board of directors adopted the 1999 Stock Plan, referred to as the "1999
Plan," in November 1999, and our stockholder initially approved our 1999 Plan
in November 1999. Our 1999 Plan provides for the grant of incentive stock
options to our employees, and for the grant of nonstatutory stock options and
stock purchase rights to our employees, directors and consultants.

  Number of Shares of Common Stock Available under the 1999 Plan. As of     ,
1999, a total of            shares of our common stock were reserved for
issuance pursuant to the 1999 Plan. No options to acquire shares of our common
stock were issued and outstanding as of that date. Our 1999 Plan provides for
annual increases in the number of shares available for issuance on the first
day of each fiscal year, beginning with our 2001 fiscal year, equal to the
lesser of 5% of our outstanding shares of common stock on that date,
shares or a lesser amount determined by our board.

  Administration of the 1999 Plan. Our board of directors or a committee of our
board administers the 1999 Plan. In the case of options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the committee will consist of two or more "outside directors" within the
meaning of Section 162(m) of the Code. The administrator has the power to
determine the terms of the options or stock purchase rights granted, including
the exercise price, the number of shares subject to each option or stock
purchase right, the exercisability of the options and the form of consideration
payable upon exercise.

  Options. The administrator determines the exercise price of options granted
under the 1999 Plan, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code and all incentive stock options, the exercise price must at
least be equal to the fair market value of our common stock on the grant date.
The term of an incentive stock option may not exceed ten years, except that
with respect to any participant who owns 10% of the voting power of all classes
of our outstanding capital stock, the term

                                       63
must not exceed five years and the exercise price must at least equal 110% of
the fair market value on the grant date. The administrator determines the term
of all other options.

  No optionee may be granted an option to purchase more than         shares in
any fiscal year, except that in connection with his or her initial service, an
optionee may be granted an additional option to purchase up to          shares.

  After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for 3 months. However, an option may never be
exercised later than the expiration of its term.

  Stock Purchase Rights. The administrator determines the exercise price of
stock purchase rights granted under our 1999 Plan. Unless the administrator
determines otherwise, the restricted stock purchase agreement will grant us a
repurchase option that we may exercise upon the voluntary or involuntary
termination of the purchaser's service with us for any reason, including death
or disability. The purchase price for shares we repurchase will generally be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The administrator determines the rate at
which our repurchase option will lapse.

  Transferability of Options and Stock Purchase Rights. Our 1999 Plan generally
doesn't allow for the transfer of options or stock purchase rights and only the
optionee may exercise an option or stock purchase right during his or her
lifetime.

  Adjustments upon Merger or Asset Sale. Our 1999 Plan provides that in the
event of our merger with or into another corporation or a sale of substantially
all of our assets, the successor corporation will assume or substitute an
equivalent award for each option or stock purchase right. If following such an
assumption or substitution, the holder of an option or stock purchase right is
terminated without cause, then the vesting and exercisability of 50% of the
then unvested shares subject to his or her option or stock purchase right shall
accelerate. If the outstanding options or stock purchase rights are not assumed
or substituted for in connection with a merger or sale of assets, the
administrator will provide notice to the optionee that he or she has the right
to exercise the option or stock purchase right as to all of the shares subject
to the option or stock purchase right, including shares which would not
otherwise be exercisable, for a period of 15 days from the date of the notice.
The option or stock purchase right will terminate upon the expiration of the
15-day period.

  Amendment and Termination of our 1999 Plan. Our 1999 Plan will automatically
terminate in 2009, unless we terminate it sooner. In addition, our board of
directors has the authority to amend, suspend or terminate the 1999 Plan,
provided it does not adversely affect any option previously granted under our
1999 Plan.

1999 Employee Stock Purchase Plan

  Concurrently with this offering, we intend to establish an Employee Stock
Purchase Plan, referred to as the "Purchase Plan."

  Number of Shares of Common Stock Available under the Purchase Plan. A total
of         shares of our common stock will be made available for sale. In
addition, our Purchase Plan provides for annual increases in the number of
shares available for issuance on the first day of each fiscal year, beginning
with our 2001 fiscal year, equal to the lesser of 2% of the outstanding shares
of our common stock on the first day of the fiscal year,         shares, or a
lesser amount as may be determined by our board of directors.

                                       64
Administration of the Purchase Plan. Our board of directors or a committee of
our board administers the Purchase Plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the
Purchase Plan and determine eligibility.

  Eligibility to Participate. All of our employees are eligible to participate
if they are customarily employed by us or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year.
However, an employee may not be granted an option to purchase stock under the
Purchase Plan if:

  .  immediately after grant the employee owns stock possessing 5% or more of
     the total combined voting power or value of all classes of our capital
     stock, or

  .  the employee's rights to purchase stock under all of our employee stock
     purchase plans accrues at a rate that exceeds $25,000 worth of stock for
     each calendar year.

  Offering Periods and Contributions. Our Purchase Plan is intended to qualify
under Section 423 of the Code and contains consecutive and overlapping 24-month
offering periods. Each offering period includes four 6-month purchase periods.
The offering periods generally start on the first trading day on or after April
1 and October 1 of each year, except for the first such offering period which
will commence on the first trading day on or after the effective date of this
offering and will end on the last trading day on or before March 31, 2002.

  Our Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 10% of their eligible compensation, which includes
a participant's base salary, and commission but excludes all other compensation
paid to the participant. A participant may purchase a maximum of     shares
during a 6-month purchase period.

  Purchase of Shares. Amounts deducted and accumulated by the participant are
used to purchase shares of our common stock at the end of each six-month
purchase period. The price is 85% of the lower of the fair market value of our
common stock at either the beginning or end of an offering period. If the fair
market value at the end of a purchase period is less than the fair market value
at the beginning of the offering period, participants will be withdrawn from
the current offering period following their purchase of shares on the purchase
date and will be automatically re-enrolled in a new offering period.
Participants may end their participation at any time during an offering period,
and will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.

  Transferability of Rights. A participant may not transfer rights granted
under the Purchase Plan other than by will, the laws of descent and
distribution or designation of a beneficiary as provided under the Purchase
Plan.

  Adjustments upon Merger or Asset Sale. In the event of our merger with or
into another corporation or a sale of all or substantially all of our assets, a
successor corporation may assume or substitute for each outstanding option. If
the successor corporation refuses to assume or substitute for the outstanding
options, the offering periods then in progress will be shortened, and a new
exercise date will be set prior to the merger or sale of assets.

  Amendment and Termination of the Purchase Plan. Our Purchase Plan will
terminate in 2009. However, our board of directors has the authority to amend
or earlier terminate our Purchase Plan, except that, subject to exceptions
described in the Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under our Purchase Plan.

1999 Director Option Plan

  Our board of directors adopted the 1999 Director Option Plan, referred to as
the "Director Plan", in November 1999, and our stockholder initially approved
the Director Plan in November 1999. The

                                       65
Director Plan provides for the periodic grant of nonstatutory stock options to
our non-employee directors.

  Number of Shares Available under the Director Plan. As of     , 1999, a total
of          shares were reserved for issuance under the Director Plan. No
options to acquire shares were issued and outstanding as of this date. Our
Director Plan provides for annual increases in the number of shares of common
stock available for issuance on the first day of each fiscal year, beginning
with our 2001 fiscal year, equal to          shares or a lesser amount
determined by our board.

  Options. All grants of options to our non-employee directors under the
Director Plan are automatic. We will grant each non-employee director an option
to purchase      shares upon the later of the effective date of the Director
Plan and the date when such person first becomes a non-employee director,
except for those directors who became non-employee directors by ceasing to be
employee directors. In addition, all non-employee directors who have served for
at least 6 months receive an option to purchase         shares on the date of
each annual meeting of our stockholders at which the non-employee director is
re-elected to our board of directors.

  All options granted under our Director Plan have a term of ten years and an
exercise price equal to the fair market value of our common stock on the date
of grant. Each      share option becomes exercisable as to 33% of the shares
subject to the option on each anniversary of the date of grant, and each
    share option, becomes exercisable as to 100% of the shares subject to the
option on the first anniversary of the date of grant, provided in each case the
non-employee director remains a director on those dates.

  After termination as a non-employee director, an optionee must exercise his
or her option at the time set forth in his or her option agreement. If
termination is due to death or disability, the option will generally remain
exercisable for 12 months. In all other cases, the option will generally remain
exercisable for a period of 3 months. However, an option may never be exercised
later than the expiration of its term.

  Transferability of Options. A non-employee director may not transfer options
granted to him or her under our Director Plan other than by will or the laws of
descent and distribution. Only the non-employee director may exercise his or
her options during his or her lifetime.

  Adjustments upon Change of Control. In the event of our merger with or into
another corporation in which our stockholders before such transaction do not
continue to hold at least 50% of the successor or resulting entity, a sale of
substantially all of our assets and other transactions set forth in the
Director Plan, the exercisability of each option granted under the Director
Plan shall accelerate as to all of the shares subject to the option. The option
will terminate following the change of control transaction.

  Amendment and Termination of the Director Plan. Unless terminated sooner, our
Director Plan will automatically terminate in 2009. Our board of directors has
the authority to amend, alter, suspend, or discontinue the Director Plan, but
none of those actions may adversely affect any grant made under the Director
Plan.

                                       66
ARRANGEMENTS BETWEEN PALM AND 3COM

  We have provided below a summary description of the executed master
separation and distribution agreement, along with the key related agreements,
which we expect to be executed prior to the completion of this offering. This
description, which summarizes the material terms of the agreements, is not
complete. You should read the full text of these agreements, which have been
filed with the Securities and Exchange Commission as exhibits to the
registration statement of which this prospectus is a part.

Master Separation and Distribution Agreement

  The master separation and distribution agreement contains the key provisions
relating to our separation from 3Com, this offering and the distribution of our
shares to 3Com stockholders.

  The Separation. The separation is scheduled to occur on or around February
26, 2000. The separation agreement will provide for the transfer to us of
assets and liabilities from 3Com related to our business as described in this
prospectus, effective on the separation date. The various ancillary agreements
that are exhibits to the separation agreement and which detail the separation
and various interim and ongoing relationships between 3Com and us following the
separation date include:

  .  a general assignment and assumption agreement;

  .  technology, patent, and trademark ownership and license agreements;

  .  an employee matters agreement;

  .  a tax sharing agreement;

  .  a transitional services agreement

  .  a real estate matters agreement;

  .  a confidential disclosure agreement; and

  .  an indemnification and insurance matters agreement.

To the extent that the terms of any of these ancillary agreements conflict with
the separation agreement, the terms of these agreements will govern. These
agreements are described more fully below.

  The Initial Public Offering. Under the terms of the separation agreement 3Com
will own at least   % of our outstanding common stock following this offering
and the private placements to America Online, Motorola and Nokia. We are
obligated to use our reasonable commercial efforts to satisfy the following
conditions to the consummation of this offering, any of which may be waived by
3Com:

  .  the registration statement containing this prospectus must be effective;

  .  United States securities and blue sky laws must be satisfied;

  .  our common stock must be listed on the New York Stock Exchange or the
     Nasdaq Stock Market;

  .  all our obligations under the underwriting agreement must be met or
     waived by the underwriters;

  .  3Com must own at least   % of our stock and must be satisfied that the
     distribution will be tax-free to its United States stockholders;

  .  no legal restraints must exist preventing the separation or this
     offering;

                                       67
.  the separation must have occurred; and

  .  the separation agreement must not have been terminated.

  The Distribution. 3Com intends to, following consummation of this offering,
distribute by December 1, 2000 the remaining shares of our common stock that
3Com holds to 3Com stockholders on a pro rata basis. We will prepare an
information statement with 3Com and send it to 3Com stockholders before the
distribution becomes effective. The information statement will inform the
stockholders of the distribution and its specifics. 3Com may, in its sole
discretion, change the distribution date. 3Com intends to consummate the
distribution only if the following conditions are met, any of which may be
waived by 3Com:

  .  the Internal Revenue Service must issue a ruling that the distribution
     of Palm common stock will be tax-free to 3Com stockholders and that the
     transaction will qualify as a reorganization for United States federal
     income tax purposes;

  .  all required government approvals must be in effect;

  .  no legal restraints must exist preventing this distribution; and

  .  nothing must have happened in the intervening time between this offering
     and the distribution that makes the distribution harmful to 3Com or its
     stockholders.

  Covenants Between 3Com and Palm. In addition to signing documents that
transfer control and ownership of various assets and liabilities of 3Com
relating to our business, we have agreed with 3Com to enter into additional
transitional service agreements, exchange information, engage in auditing
practices and resolve disputes in particular ways.

  Additional Transitional Service Agreements. 3Com and we will enter into
transitional service agreements covering the provision of various transitional
services, including financial, legal, accounting, customer service, human
resources administration, supply chain, product order administration,
facilities and information technology services by 3Com to us. These services
will generally be provided for a fee equal to direct and indirect costs of
providing the services plus 5%. The transitional service agreements will
generally have a term of one year or less from the date of separation.

  Information Exchange. Both 3Com and we have agreed to share information with
each other, for a variety of purposes, unless the sharing would be commercially
detrimental. In furtherance of this, both 3Com and we have agreed as follows:

  .  Each party has agreed to maintain adequate internal accounting to allow
     the other party to satisfy its own reporting obligations and prepare its
     own financial statements.

  .  Each party will retain records beneficial to the other party for a
     specified period of time. If the records are going to be destroyed, the
     destroying party will give the other party an opportunity to retrieve
     all relevant information from the records, unless the records are
     destroyed in accordance with adopted record retention policies.

  .  Each party will use commercially reasonable efforts to provide the other
     party with directors, officers, employees, other personnel and agents
     who may be used as witnesses in and books, records and other documents
     which may reasonably be required in connection with legal,
     administrative or other proceedings.

  Auditing Practices. So long as 3Com is required to consolidate our results of
operations and financial position, we have agreed to:

  .  not select a different independent accounting firm from that used by
     3Com without 3Com's consent;

                                       68
.  use reasonable commercial efforts to enable our auditors to date their
     opinion on our audited annual financial statements on the same date as
     3Com's auditors date their opinion on 3Com's financial statements;

  .  exchange all relevant information needed to prepare financial
     statements;

  .  grant each other's internal auditors access to each other's records; and

  .  notify each other of any change in accounting principles.

  Dispute Resolution. If problems arise between us and 3Com, we have agreed to
the following procedures:

  .  The parties will make a good faith effort to first resolve the dispute
     through negotiation.

  .  If negotiations fail, the parties agree to attempt to resolve the
     dispute through non-binding mediation.

  .  If mediation fails, the parties can resort to binding arbitration. In
     addition, nothing prevents either party acting in good faith from
     initiating litigation at any time if failure to do so would cause
     serious and irreparable injury to one of the parties or to others.

  No Representations and Warranties. Neither party is making any promises to
the other regarding:

  .  the value of any asset that 3Com is transferring;

  .  whether there is a lien or encumbrance on any asset 3Com is
     transferring; or

  .  the legal sufficiency of any conveyance of title to any asset 3Com is
     transferring.

  No Solicitation. Each party has agreed not to directly solicit or recruit
employees of the other party without the other party's consent for two years
after the distribution date. However, this prohibition does not apply to
general recruitment efforts carried out through public or general solicitation
or where the solicitation is employee-initiated.

  Expenses. All of the costs and expenses related to this offering as well as
the costs and expenses related to the separation and distribution will be
allocated between us and 3Com. We will each bear our own internal costs
incurred in consummating these transactions.

  Termination of the Agreement. 3Com in its sole discretion can terminate the
separation agreement and all ancillary agreements and abandon the distribution
at any time prior to the closing of this offering. Both 3Com and Palm must
agree to terminate the separation agreement and all ancillary agreements at any
time between the closing of this offering and the distribution.

General Assignment and Assumption Agreement

  The general assignment and assumption agreement identifies the assets 3Com
will transfer to us and the liabilities we will assume from 3Com in the
separation. The agreement also describes when and how these transfers and
assumptions will occur.

  Asset Transfer. Effective on the separation date, 3Com will transfer the
following assets to us, to the extent that the assets were, prior to the
separation date, 3Com assets and except as provided in an ancillary agreement
or other agreement:

  .  assets reflected on our balance sheet as of August 27, 1999, minus any
     assets disposed of after August 27, 1999;

  .  written off, expensed or fully depreciated assets that would have
     appeared on our balance sheet as of August 27, 1999, if we had not
     written off, expensed or fully depreciated them;

                                       69
.  assets that 3Com acquired after August 27, 1999, that would have
     appeared in our financial statements as of the separation date if we
     prepared such financial statements using the same principles we used in
     preparing our balance sheet dated August 27, 1999;

  .  assets that our business primarily uses as of the separation date but
     are not reflected in our balance sheet as of August 27, 1999 due to
     mistake or omission;

  .  contingent gains related primarily to our business;

  .  contracts that relate primarily to our business entered into in our
     name;

  .  specified rights under existing insurance policies; and

  .  other specified assets.

  Excluded Assets. The general assignment and assumption agreement also
provides that 3Com will not transfer selected assets to us, including most
accounts receivable.

  Assumption of Liabilities. Effective on the separation date, we will assume
the following liabilities from 3Com, to the extent that the liabilities were,
prior to the separation date, 3Com liabilities and except as provided in an
ancillary or other agreement:

  .  liabilities reflected as liabilities on our balance sheet as of August
     27, 1999, minus any liabilities that were discharged after such date of
     the balance sheet;

  .  liabilities of 3Com that arise after August 27, 1999 that would have
     appeared in our financial statements as of the separation date if we
     prepared such financial statements using the same principles we used in
     preparing our balance sheet dated August 27, 1999;

  .  liabilities that are primarily related primarily of our business at the
     separation date but are not reflected in our balance sheet as of August
     27, 1999 due to mistake or omission;

  .  contingent liabilities primarily related to our business;

  .  liabilities other than taxes primarily resulting from the operation of
     our business, or resulting from any asset that 3Com transferred to us;

  .  liabilities arising out of specified terminated, divested or
     discontinued businesses and operations; and

  .  other specified liabilities.

  Excluded Liabilities. The general assignment and assumption agreement also
provides that we will not assume specified liabilities, including:

  .  most accounts payable;

  .  any liabilities that would otherwise be allocated to us but which are
     covered by 3Com's insurance policies, unless we are a named insured
     under such policies; and

  .  other specified liabilities.

  The Non-United States Plan. The transfer of international assets and
assumption of international liabilities will be accomplished through agreements
entered into between international subsidiaries. The agreement acknowledges
that circumstances in jurisdictions outside of the United States may require
the timing of the international separation to be delayed past the separation
date.

  Delayed Transfers. If it is not practicable to transfer specified assets and
liabilities on the separation date, the agreement provides that these assets
and liabilities will be transferred after the separation date.

                                       70
Terms of Other Ancillary Agreements Govern. If another ancillary agreement
expressly provides for the transfer of an asset or an assumption of a
liability, the terms of the other ancillary agreement will determine the manner
of the transfer and assumption.

  Obtaining Approvals and Consents. The parties agree to use all reasonable
efforts to obtain any required consents, substitutions or amendments required
to novate or assign all rights and obligations under any contracts that will be
transferred in the separation.

  Nonrecurring Costs and Expenses. Any nonrecurring costs and expenses that are
not allocated in the separation agreement or any other ancillary agreement
shall be the responsibility of the party that incurs the costs and expenses.

Master Technology Ownership and License Agreement

  The master technology ownership and license agreement, or the master
technology agreement, allocates rights in technology other than patents, patent
applications and invention disclosures. In the master technology agreement,
3Com will confirm that we own all technology developed by us and, to the extent
that any technology is registered in 3Com's name or 3Com otherwise has any
ownership rights in that technology, 3Com will assign it to us. In addition,
specified manufacturing technology will be jointly owned. 3Com will not
restrict our right to use the assigned or jointly owned technology. We will
commit to license our operating system to 3Com on favorable terms pursuant to a
separate agreement that we will negotiate.

  In the event of an acquisition of either party, the acquired party may assign
the master technology agreement, except that 3Com may not assign the commitment
to license the operating system.

Master Patent Ownership and License Agreement

  The master patent ownership and license agreement, or the master patent
agreement, allocates rights relating to patents, patent applications and
invention disclosures. In the master patent agreement, 3Com will confirm that
we own patents, patent applications and invention disclosures which were
developed by us and, to the extent that any of these patents or patent
applications are recorded in 3Com's name, 3Com will assign them to us. The
specific patents, patent applications and invention disclosures being assigned
are identified in a database. 3Com will not restrict our rights to practice the
assigned patents. 3Com will retain ownership of jointly developed patents,
patent applications and invention disclosures, but will grant us a license to
jointly developed patents, patent applications and invention disclosures that
have resulted or in the future result from our joint development with 3Com in
the wireless connectivity area. The license is non-exclusive and royalty-free
and will permit us to make, have made, use, lease, sell, offer for sale, and
import current and future Palm products and services. The license continues for
the life of the licensed patents. 3Com will not be restricted from licensing
these wireless connectivity patents for defensive purposes, but for purposes
other than for defensive purposes, 3Com will be restricted from licensing these
wireless connectivity patents in the field of lightweight handheld mobile
computing devices and operating systems for such devices.

  In addition, each party will covenant not to sue the other party or the other
party's customers or suppliers for infringement of its patents that exist as of
the separation date or that are based on applications or invention disclosures
that exist as of the separation date. The products and services that are
covered by the covenant are the products and services of each party's business
as it exists as of the separation date.

  In the event of an acquisition of either party, the acquired party may assign
the master patent agreement except that the licenses and covenants not to sue
may not be assigned. In addition, in the event a sale of a subsidiary or
business unit of either party, the licenses and covenants not to sue may not be
assigned. However, the non-acquired party is obligated to enter into licenses
or

                                       71
covenants not to sue, as applicable, with a transferee acquiring a party or a
subsidiary or business unit of a party, subject to certain reductions in the
scope of the licenses and covenants not to sue and subject to the agreement of
the acquiring party to grant a license or covenant not to sue back to the non-
acquired party.

  The master patent agreement will also provide that 3Com and we will assist
each other in specified ways for a period of five years after the separation
date in the event either party is subject to patent litigation.

Master Trademark Ownership and License Agreement

  The master trademark ownership and license agreement, or the master trademark
agreement, will allocate rights relating to trademarks, service marks and trade
names. In the master trademark agreement, 3Com will confirm that we own our
trademarks, service marks and trade names that we use in connection with our
business and, to the extent that any of our marks are registered in 3Com's name
or 3Com otherwise has any rights in those marks, 3Com will assign them to us.
In addition, 3Com will grant us a royalty-free license to mark our existing
products with, and advertise and promote these products using, specified 3Com
trademarks. The term of this license is two years after the separation date. We
may allow authorized dealers to use the trademarks in the advertisement and
promotion of our existing products. During the first two years from the
separation date, 3Com will agree not to license the trademarks it licenses to
us to third parties for use in connection with products or services that
compete with our products shipping as of the distribution date, other than any
licenses that may have previously been granted.

  3Com may terminate the license under the master trademark agreement only with
regard to products that fail to meet required quality standards, subject to a
notice and cure period.

Employee Matters Agreement

  We will enter into an employee matters agreement with 3Com to allocate
assets, liabilities, and responsibilities relating to current and former
employees of Palm and their participation in the benefits plans, including
stock plans, that 3Com currently sponsors and maintains.

  All eligible Palm employees will continue to participate in the 3Com benefits
plans on comparable terms and conditions to those for 3Com employees until the
distribution date or until we establish benefit plans for our employees, or
elect not to establish comparable plans, if it is not legally or financially
practical. We intend to establish our own benefit program no later than the
time of the distribution.

  Once we establish our own benefits plans, we may modify or terminate each
plan in accordance with the terms of that plan and our policies. No Palm
benefit plan will provide benefits that overlap benefits under the
corresponding 3Com benefit plan at the time of the distribution. Each Palm
benefit plan will provide that all service, compensation and other benefit
determinations that, as of the distribution, were recognized under the
corresponding 3Com benefits plan will be taken into account under that Palm
benefit plan.

  Assets relating to the employee liabilities will be transferred to Palm or
the related Palm plans and trusts from trusts and other funding vehicles
associated with 3Com's benefits plans.

  Options. We will establish a replacement stock plan for eligible Palm
employees on or before the distribution. We will assume all 3Com options held
by Palm employees. These options will convert at the distribution into options
to purchase our common stock. The number of shares and the exercise price of
3Com options that convert into Palm options will be adjusted using a conversion
formula. The conversion formula will be based on the opening per-share price of
our common stock on the first trading day after the distribution relative to
the closing per-share price of 3Com common stock on the last trading day before
the distribution. The resulting Palm options will maintain the original vesting
provisions and option period.

                                       72
Restricted Stock. On or before the distribution, 3Com restricted stock
granted under incentive stock plans and held by Palm employees is expected to
be forfeited. Each Palm employee who forfeits 3Com restricted stock will
receive Palm restricted stock in replacement of his or her forfeited 3Com
restricted stock.

  Stock Purchase Plan. We anticipate that Palm employees will continue to
participate in the 3Com stock purchase plan through the date of this offering.
After that time, we will sponsor a stock purchase plan for the benefit of Palm
employees that is comparable to the 3Com stock purchase plan.

Tax Sharing Agreement

  We will enter into a tax sharing agreement with 3Com that will allocate
responsibilities for tax matters between Palm and 3Com. The agreement will
require us to pay 3Com for the incremental tax costs of our inclusion in
consolidated, combined or unitary tax returns with affiliated corporations. In
determining these incremental costs, the agreement will take into account not
only the group's incremental tax payments to the Internal Revenue Service or
other taxing authorities, but also the incremental use of tax losses of
affiliates to offset our taxable income, and the incremental use of tax credits
of affiliates to offset the tax on our income. The agreement will also provide
for compensation or reimbursement as appropriate to reflect redeterminations of
our tax liability for periods during which we joined in filing consolidated,
combined or unitary tax returns.

  The tax sharing agreement also requires us to indemnify 3Com for certain
taxes and similar obligations, including:

  .  sales taxes on the sale of products purchased from us by 3Com before the
     distribution;

  .  customs duties or harbor maintenance fees on products exported or
     imported by 3Com on our behalf;

  .  the additional taxes that would result if an acquisition of a
     controlling interest in our stock after the distribution causes the
     distribution not to qualify for tax-free treatment to 3Com; and

  .  any taxes resulting from transactions undertaken in preparation for the
     distribution.

  Our indemnity obligations include any interest and penalties on taxes, duties
or fees for which we must indemnify 3Com.

  Each member of a consolidated group for United States federal income tax
purposes is jointly and severally liable for the group's federal income tax
liability. Accordingly, we could be required to pay a deficiency in the group's
federal income tax liability for a period during which we were a member of the
group even if the tax sharing agreement allocates that liability to 3Com or
another member.

  The tax sharing agreement will also assign responsibilities for
administrative matters such as the filing of returns, payment of taxes due,
retention of records and conduct of audits, examinations or similar
proceedings.

Master Transitional Services Agreement

  The master transitional services agreement governs the provision of
transitional services by 3Com and us to each other, on an interim basis, until
one year after the separation date, unless extended for specific services or
otherwise indicated in the agreement. The services include data processing and
telecommunications services, such as voice telecommunications and data
transmission, and information technology support services, for functions
including accounting, financial management, tax, payroll, stockholder and
public relations, legal, procurement, and other administrative functions.
Services are generally cost plus 5%, but may increase to cost plus 10% if the
services extend beyond the one year period. The master transitional services
agreement also will cover the provision of additional transitional services
identified from time to time after the separation date that were inadvertently
or unintentionally omitted from the specified services, or that are essential
to effectuate an orderly transition under the separation agreement, so long as
the provision of such services would not significantly disrupt 3Com's
operations or significantly increase the scope of its responsibility under the
agreement.

                                       73
Real Estate Matters Agreement

  The real estate matters agreement addresses real estate matters relating to
the 3Com leased and owned properties that 3Com will transfer to or share with
us. The agreement describes the manner in which 3Com will transfer to or share
with us various leased and owned properties, including the following types of
transactions:

  .  leases to us of portions of specified properties that 3Com owns;

  .  assignments to us of 3Com's leases for specified leased properties;

  .  subleases to us of portions of specified properties leased by 3Com; and

  .  short term licenses between 3Com and us permitting short term occupancy
     of selected leased and owned sites.

  The real estate matters agreement includes a description of each property to
be transferred to or shared with us for each type of transaction. The standard
forms of the proposed transfer documents, such as lease, sublease and license,
are contained in schedules.

  The real estate matters agreement also requires both parties to use
reasonable efforts to obtain any landlord consents required for the proposed
transfers of leased sites, including 3Com paying commercially reasonable
consent fees, if required by the landlords, and us agreeing to provide the
security required under the applicable leases.

  The real estate matters agreement further provides that we will be required
to accept the transfer of all sites allocated to us, even if a site has been
damaged by a casualty before the separation date. Transfers with respect to
leased sites where the underlying lease is terminated due to casualty or action
by the landlord prior to the separation date will not be made, and neither
party will have any liability related thereto.

  The real estate matters agreement also gives the parties the right to change
the allocation and terms of specified sites by mutual agreement based on
changes in the requirements of the parties. The real estate matters agreement
provides that all reasonable costs required to effect the transfers, including
landlord consent fees and landlord attorneys' fees, will be paid by 3Com.

Master Confidential Disclosure Agreement

  The master confidential disclosure agreement provides that both parties agree
not to disclose confidential information of the other party except in specific
circumstances. 3Com and we also agree not to use this information in violation
of any use restrictions in one of the other written agreements between us.

Indemnification and Insurance Matters Agreement

  General Release of Pre-Separation Claims. Effective as of the separation
date, subject to specified exceptions, we will release 3Com and its affiliates,
agents, successors and assigns, and 3Com will release us, and our affiliates,
agents, successors and assigns, from any liabilities arising from events
occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation, this offering and
the distribution. This provision will not impair a party from enforcing the
separation agreement, any ancillary agreement or any arrangement specified in
any of these agreements.

  Indemnification. The indemnification and insurance matters agreement also
contains provisions governing indemnification. In general, we have agreed to
indemnify 3Com and its affiliates, agents, successors and assigns from all
liabilities arising from:

  .  our business, any of our liabilities or any of our contracts; and

  .  any breach by us of the separation agreement or any ancillary agreement.

                                       74
3Com has agreed to indemnify us and our affiliates, agents, successors and
assigns from all liabilities arising from:

  .  3Com's business other than the Palm business; and

  .  any breach by 3Com of the separation agreement or any ancillary
     agreement.

  These indemnification provisions do not apply to amounts collected from
insurance. The agreement also contains provisions governing notice and
indemnification procedures.

  Liability Arising From This Prospectus. We will bear any liability arising
from any untrue statement of a material fact or any omission of a material fact
in this prospectus.

  Insurance Matters. The agreement also contains provisions governing our
insurance coverage from the separation date until the distribution date. In
general, we agree to reimburse 3Com for premium expenses related to insurance
coverage during this period. Prior to the distribution, 3Com will maintain
insurance policies on our behalf. We will work with 3Com to secure additional
insurance if desired and cost effective.

  Environmental Matters. 3Com has agreed to indemnity us and our affiliates,
agents, successors and assigns from all liabilities arising from environmental
conditions existing as of the separation date at facilities transferred to us,
or which arise out of operations occurring before the separation date at these
facilities. Further, 3Com has agreed to indemnify us and our affiliates,
agents, successors and assigns from all liabilities arising from environmental
conditions caused by operations occurring at any time, whether before or after
the separation date, at any 3Com facility.

  We have agreed to indemnify 3Com and its affiliates, agents, successors and
assigns from all liabilities arising from environmental conditions caused by
operations after the separation date at any of the facilities transferred to
us, and from environmental conditions at our facilities arising from an event
that occurs on or after the separation date.

  Each party will be responsible for all liabilities associated with any
environmental contamination caused by that party post-separation.

  Assignment. The indemnification and insurance matters agreement is not
assignable by either party without prior written consent.

                                       75
PRINCIPAL STOCKHOLDER

  Prior to this offering and the private placements to America Online, Motorola
and Nokia, all of the outstanding shares of our common stock will be owned by
3Com. After this offering and the private placements to America Online,
Motorola and Nokia, 3Com will own about   %, or about   % if the underwriters
fully exercise their option to purchase additional shares of our outstanding
common stock. Except for 3Com, we are not aware of any person or group that
will beneficially own more than 5% of the outstanding shares of our common
stock following this offering.

                                       76
DESCRIPTION OF CAPITAL STOCK

General

  Upon the completion of this offering and the private placements to America
Online, Motorola and Nokia, we will be authorized to issue
shares of common stock, $0.001 par value, and                shares of
undesignated preferred stock, $0.001 par value. The following description of
our capital stock is subject to our certificate of incorporation and bylaws,
which are included as exhibits to the registration statement of which this
prospectus forms a part, and by the provisions of applicable Delaware law.

Common Stock

  Prior to this offering and the private placements to America Online, Motorola
and Nokia, there were                shares of common stock outstanding, all of
which were held of record by 3Com.

  The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of our common
stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by our board of directors out of funds legally
available for that purpose. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, the holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. The holders of our common stock have no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to our common stock.

Preferred Stock

  Our board of directors has the authority, without action by the stockholders,
to designate and issue preferred stock in one or more series and to designate
the rights, preferences and privileges of each series, which may be greater
than the rights of our common stock. It is not possible to state the actual
effect of the issuance of any shares of preferred stock upon the rights of
holders of our common stock until our board of directors determines the
specific rights of the holders of the preferred stock. However, the effects
might include, among other things:

  .  restricting dividends on our common stock;

  .  diluting the voting power of our common stock;

  .  impairing the liquidation rights of our common stock; or

  .  delaying or preventing a change in control of us without further action
     by the stockholders.

  At the closing of this offering and the private placements to America Online,
Motorola and Nokia, no shares of preferred stock will be outstanding, and we
have no present plans to issue any shares of preferred stock.

Anti-Takeover Effects of Our Certificate and Bylaws and Delaware Law

  Some provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:

  .  acquisition of us by means of a tender offer;

  .  acquisition of us by means of a proxy contest or otherwise; or

  .  removal of our incumbent officers and directors.

  These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to

                                       77
acquire control of us to first negotiate with our board of directors. We
believe that the benefits of increased protection give us the potential ability
to negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us and outweigh the disadvantages of discouraging those
proposals because negotiation of those proposals could result in an improvement
of their terms.

  Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term,
one class being elected each year by our stockholders. See "Management--
Directors and Executive Officers." This system of electing and removing
directors may discourage a third party from making a tender offer or otherwise
attempting to obtain control of us because it generally makes it more difficult
for stockholders to replace a majority of the directors.

  Stockholder Meetings. Under our bylaws, only our board of directors, the
chairman of our board of directors, and until 3Com owns less than 50% of our
common stock, 3Com, may call special meetings of stockholders.

  Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of our board of
directors or a committee of our board of directors.

  Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders. 3Com is an "interested stockholder" for this purpose.

  Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation eliminates the right of stockholders other than 3Com to act by
written consent without a meeting. 3Com will lose this right once it owns less
than 50% of our common stock.

  Elimination of Cumulative Voting. Our certificate of incorporation and bylaws
do not provide for cumulative voting in the election of directors.

  Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to change control of us. These and other provisions may have the effect
of deferring hostile takeovers or delaying changes in control or management of
us.

  Amendment of Charter Provisions. The amendment of any of the above provisions
would require approval by holders of at least 80% of our outstanding common
stock.

Transfer Agent and Registrar

  The transfer agent and registrar for our common stock is EquiServe.

                                       78
UNDERWRITING

  Palm and the underwriters named below (the "Underwriters") have entered into
an underwriting agreement with respect to the shares being offered. Subject to
some conditions, each Underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., Morgan
Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
and BancBoston Robertson Stephens Inc. are the representatives of the
Underwriters.
Underwriters                         Number of Shares
                           ------------                         ----------------
Goldman, Sachs & Co.........................................
   Morgan Stanley & Co. Incorporated...........................
   Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
   BancBoston Robertson Stephens Inc...........................
                                                                 -------------
     Total.....................................................
                                                                 =============
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
           shares from Palm to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
Underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

  The following tables show the per share and total underwriting discounts and
commissions to be paid to the Underwriters by Palm. Such amounts are shown
assuming both no exercise and full exercise of the Underwriters' option to
purchase           additional shares.
Paid by the Company
                                                       -------------------------
                                                       No Exercise Full Exercise
                                                       ----------- -------------
Per Share.......................................... $            $
   Total.............................................. $            $
Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the Underwriters to securities dealers may be sold at a
discount of up to $         per share from the initial public offering price.
Any such securities dealers may resell any shares purchased from the
Underwriters to selected other brokers or dealers at a discount of up to
$         per share from the initial public offering price. If all the shares
are not sold at the initial offering price, the representatives may change the
offering price and the other selling terms.

  Palm, 3Com and Palm's directors and officers have agreed with the
Underwriters not to dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 180 days after the
date of this prospectus, except with the prior written consent of the
representatives. This agreement does not apply to any grants under Palm's
existing employee benefit plans. See "Shares Eligible For Future Sale" for a
discussion of transfer restrictions. America Online, Motorola and Nokia have
agreed with Palm, for the benefit of the Underwriters, not to dispose of or
hedge any of their common stock during the period from the date of the
consummation of this offering continuing through the date 180 days after the
date of this prospectus.

                                       79
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Palm and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Palm's historical performance, estimates of the business
potential and earnings prospects of Palm, an assessment of Palm's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.

  At our request, the Underwriters have reserved up to six percent of the
shares of common stock to be issued by Palm and offered in this offering for
sale, at the initial public offering price, to persons with preexisting
strategic or other relationships with Palm. The number of shares available for
sale to the general public will be reduced to the extent that such persons
purchase such reserved shares. Any reserved shares which are not so purchased
will be offered by the Underwriters to the general public on the same basis as
the other shares of common stock offered by this prospectus.

  We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol "PALM".

  In connection with the offering, the Underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.

  The Underwriters also may impose a penalty bid. This occurs when a particular
Underwriter repays to the Underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such Underwriter in stabilizing or short covering
transactions.

  These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

  The Underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.

  Palm estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$      .

  Palm has agreed to indemnify the several Underwriters against specified
liabilities, including liabilities under the Securities Act of 1933.

                                       80
SHARES ELIGIBLE FOR FUTURE SALE

  All of the shares of our common stock sold in this offering will be freely
tradable without restriction under the Securities Act, except for any shares
which be may acquired by an affiliate of Palm, as that term is defined in Rule
144 under the Securities Act. Persons who may be deemed to be affiliates
generally include individuals or entities that control, are controlled by, or
are under common control with, Palm and may include directors and officers of
Palm as well as significant stockholders of Palm, if any.

  3Com currently plans to complete its divestiture of Palm approximately six
months following this offering by distributing all of the shares of Palm common
stock owned by 3Com to the holders of 3Com's common stock. Shares of our common
stock distributed to 3Com stockholders in the distribution generally will be
freely transferable, except for shares of common stock received by persons who
may be deemed to be affiliates. Persons who are affiliates will be permitted to
sell the shares of common stock that are issued in this offering or that they
receive in the distribution only through registration under the Securities Act,
or under an exemption from registration, such as the one provided by Rule 144.

  The shares of our common stock held by 3Com before distribution and the
shares of our common stock purchased in the America Online, Motorola and Nokia
private placements are deemed "restricted securities" as defined in Rule 144,
and may not be sold other than through registration under the Securities Act or
under an exemption from registration, such as the one provided by Rule 144.
3Com, our directors and officers and we have agreed not to offer or sell any
shares of our common stock, subject to exceptions, for a period of 180 days
after the date of this prospectus, without the prior written consent of the
underwriters. America Online, Motorola and Nokia have agreed with Palm not to
dispose of or hedge any of their common stock during the period from the date
of this prospectus continuing through the date 180 days after the date of this
prospectus.

  We will grant shares of our common stock pursuant to the 1999 Stock Plan
subject to restrictions. See "Management--Incentive Plans--1999 Stock Plan." We
currently expect to file a registration statement under the Securities Act to
register shares reserved for issuance under the 1999 Stock Plan and 1999
Employee Stock Purchase Plan. Shares issued pursuant to awards after the
effective date of the registration statement, other than shares issued to
affiliates, generally will be freely tradable without further registration
under the Securities Act. Shares issued pursuant to any vested and exercisable
options of 3Com converted into our options will also be freely tradable without
registration under the Securities Act after the effective date of the
registration statement. See "Management--Treatment of 3Com Options."

                            VALIDITY OF COMMON STOCK

  The validity of the common stock offered hereby and other legal matters will
be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. The validity of the common stock offered
hereby will be passed upon for the underwriters by Sullivan & Cromwell, Los
Angeles, California.

                                    EXPERTS

  The consolidated financial statements as of May 31, 1998 and May 28, 1999 and
for each of the three years in the period ended May 28, 1999 included in this
prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and are included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.

                                       81
WHERE YOU CAN FIND MORE INFORMATION

  We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules to the registration statement. Some items are omitted in
accordance with the rules and regulations of the SEC. For further information
about Palm and its common stock, reference is made to the registration
statement and the exhibits and any schedules to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance,
if the contract or document is filed as an exhibit, reference is made to the
copy of the contract or other documents filed as an exhibit to the registration
statement, each statement being qualified in all respects by such reference. A
copy of the registration statement, including the exhibits and schedules to the
registration statement, may be read and copied at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at 1-
800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov, from which interested persons can electronically access the
registration statement, including the exhibits and any schedules to the
registration statement.

  As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to those requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain Internet
sites at http://www.palm.net and http://www.palm.com. Our websites and the
information contained therein or connected thereto shall not be deemed to be
incorporated into this prospectus or the registration statement of which it
forms a part.

                                       82
PALM, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
                                                                           ----
Audited Consolidated Financial Statements:

  Independent Auditors' Report............................................ F-2

  Consolidated Balance Sheets at May 31, 1998, May 28, 1999, and August
   27, 1999 (unaudited)................................................... F-3

  Consolidated Statements of Operations for the Years Ended May 25, 1997,
   May 31, 1998, May 28, 1999 and Three Months Ended August 28, 1998 and
   August 27, 1999 (unaudited)............................................ F-4

  Consolidated Statements of Stockholder's Net Investment for the Years
   Ended May 25, 1997, May 31, 1998, May 28, 1999 and Three Months ended
   August 27, 1999 (unaudited)............................................ F-5

  Consolidated Statements of Cash Flows for the Years Ended May 25, 1997,
   May 31, 1998, May 28, 1999 and Three Months Ended August 28, 1998 and
   August 27, 1999 (unaudited)............................................ F-6

  Notes to Consolidated Financial Statements.............................. F-7
F-1
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholder of Palm, Inc.:

  We have audited the consolidated balance sheets of Palm, Inc. and its
subsidiary ("Palm" or "the Company") as of May 31, 1998 and May 28, 1999, and
the related consolidated statements of operations, stockholder's net
investment, and cash flows for each of the three years in the period ended May
28, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

  In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Palm, Inc. and its subsidiary at
May 31, 1998 and May 28, 1999, and the results of their operations and their
cash flows for each of the three years in the period ended May 28, 1999 in
conformity with generally accepted accounting principles.

San Jose, California
November 29, 1999
(November 30, 1999 as to the first paragraph and
        , 2000 as to the second paragraph of Note 15)

                                ---------------

  The accompanying consolidated financial statements included herein reflect
the reincorporation of the Company in Delaware and prior to the initial public
offering will reflect a stock split of Palm's common stock as described in Note
15 to the consolidated financial statements. The above opinion is in the form
that will be signed by Deloitte & Touche LLP upon the effectiveness of such
events assuming that from November 29, 1999 to the effective date of such
events, no other events shall have occurred that would affect the accompanying
consolidated financial statements or notes thereto.

DELOITTE & TOUCHE LLP

San Jose, California
November 29, 1999

                                      F-2
PALM, INC.

                          CONSOLIDATED BALANCE SHEETS
                  (In thousands, except par and share amounts)
Pro Forma
                                      May 31,  May 28,   August 27,  August 27,
                                        1998     1999       1999        1999
                                      -------- --------  ----------- -----------
                                                         (Unaudited) (Unaudited)
ASSETS
Current assets:
  Cash and cash equivalents.........  $     -- $    478   $ 37,138      $
  Accounts receivable, net of
   allowance for doubtful accounts
   of $4,451, $3,817 and $3,287.....    80,985   95,839     86,216
  Inventories.......................    13,769   12,186     31,230
  Deferred income taxes.............     8,092   20,688     23,412
  Prepaids and other................       192    1,038      1,129
                                      -------- --------   --------      ----
    Total current assets............   103,038  130,229    179,125
Property and equipment, net.........     9,121    8,136      9,160
Goodwill, intangibles and other
 assets.............................       175   13,829     13,009
Deferred income taxes...............     3,025       53         52
                                      -------- --------   --------      ----
      Total assets..................  $115,359 $152,247   $201,346      $
                                      ======== ========   ========      ====
   LIABILITIES AND STOCKHOLDER'S
           NET INVESTMENT
Current liabilities:
  Accounts payable..................  $ 15,792 $ 35,577   $ 51,095      $
  Payable to 3Com Corporation.......        --       --         --
  Other accrued liabilities.........    18,275   40,793     35,838
  Notes payable.....................        --    1,350      1,118
                                      -------- --------   --------      ----
    Total current liabilities.......    34,067   77,720     88,051
                                      -------- --------   --------      ----
Commitments and contingencies (Notes
 7 and 13)
Stockholder's net investment:
  Preferred stock,      par value,
              shares authorized pro
   forma; none outstanding pro
   forma............................        --       --         --        --
  Common stock,      par value,
             shares authorized pro
   forma;          shares
   outstanding pro forma............        --       --         --        --
  3Com Corporation equity...........    81,292   74,660    113,413
  Accumulated other comprehensive
   income (loss)....................        --     (133)      (118)
                                      -------- --------   --------      ----
    Total stockholder's net
     investment.....................    81,292   74,527    113,295
                                      -------- --------   --------      ----
      Total liabilities and
       stockholder's net
       investment...................  $115,359 $152,247   $201,346      $
                                      ======== ========   ========      ====
See notes to consolidated financial statements.

                                      F-3
PALM, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
Years Ended             Three Months Ended
                            ----------------------------  ---------------------
                            May 25,   May 31,   May 28,   August 28, August 27,
                              1997      1998      1999       1998       1999
                            --------  --------  --------  ---------- ----------
                                                               (Unaudited)
Revenues..................  $114,157  $272,137  $563,525   $116,069   $176,505
Cost of revenues..........    77,685   157,749   315,616     62,998     98,324
                            --------  --------  --------   --------   --------
  Gross profit............    36,472   114,388   247,909     53,071     78,181
                            --------  --------  --------   --------   --------
Operating expenses:
  Sales and marketing.....    30,305    70,765   127,726     23,969     42,648
  Research and
   development............    13,442    21,863    46,027      9,738     12,507
  General and
   administrative.........     6,238    15,299    23,692      6,233      7,160
  Purchased in-process
   technology.............        --        --     2,125         --         --
                            --------  --------  --------   --------   --------
    Total operating
     expenses.............    49,985   107,927   199,570     39,940     62,315
                            --------  --------  --------   --------   --------
Operating income (loss)...   (13,513)    6,461    48,339     13,131     15,866
Interest and other
 expense, net.............      (515)      (56)     (223)       (25)       (63)
                            --------  --------  --------   --------   --------
Income (loss) before
 income taxes.............   (14,028)    6,405    48,116     13,106     15,803
Income tax provision
 (credit).................    (6,166)    2,234    18,488      5,036      6,145
                            --------  --------  --------   --------   --------
Net income (loss).........  $ (7,862) $  4,171  $ 29,628   $  8,070   $  9,658
                            ========  ========  ========   ========   ========
Unaudited pro forma net
 income per share:
  Basic...................                      $                     $
                                                ========              ========
  Diluted.................                      $                     $
                                                ========              ========
Shares used in computing
 unaudited pro forma net
 income per share amounts:
  Basic...................
                                                ========              ========
  Diluted.................
                                                ========              ========
Supplemental unaudited pro
 forma net income per
 share:
  Basic...................                      $                     $
                                                ========              ========
  Diluted.................                      $                     $
                                                ========              ========
Shares used in computing
 supplemental unaudited
 pro forma net income per
 share amounts:
  Basic...................
                                                ========              ========
  Diluted.................
                                                ========              ========
See notes to consolidated financial statements.

                                      F-4
PALM, INC.

            CONSOLIDATED STATEMENTS OF STOCKHOLDER'S NET INVESTMENT
                                 (In thousands)
Accumulated
                                                3Com         Other
                                             Corporation Comprehensive
                                               Equity    Income (Loss)  Total
                                             ----------- ------------- --------
Balances, May 27, 1996......................  $  7,218       $  --     $  7,218
Net loss....................................    (7,862)         --       (7,862)
Net transfers from 3Com Corporation.........    36,301          --       36,301
                                              --------       -----     --------
Balances, May 25, 1997......................    35,657          --       35,657
Net income..................................     4,171          --        4,171
Net transfers from 3Com Corporation.........    41,464          --       41,464
                                              --------       -----     --------
Balances, May 31, 1998......................    81,292          --       81,292
Components of comprehensive income:
  Net income................................    29,628          --       29,628
  Accumulated translation adjustments.......        --        (133)        (133)
                                                                       --------
    Total comprehensive income..............                             29,495
Net transfers to 3Com Corporation...........   (36,260)         --      (36,260)
                                              --------       -----     --------
Balances, May 28, 1999......................    74,660        (133)      74,527
Components of comprehensive income:
  Net income*...............................     9,658          --        9,658
  Accumulated translation adjustments*......        --          15           15
                                                                       --------
    Total comprehensive income*.............                              9,673
Net transfers from 3Com Corporation*........    29,095          --       29,095
                                              --------       -----     --------
Balances, August 27, 1999*..................  $113,413       $(118)    $113,295
                                              ========       =====     ========
--------
* Unaudited

                See notes to consolidated financial statements.

                                      F-5
PALM, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
Years Ended             Three Months Ended
                            ----------------------------  ---------------------
                            May 25,   May 31,   May 28,   August 28, August 27,
                              1997      1998      1999       1998       1999
                            --------  --------  --------  ---------- ----------
                                                               (Unaudited)
Cash flows from operating
 activities:
 Net income (loss)......... $ (7,862) $  4,171  $ 29,628   $ 8,070    $  9,658
 Adjustments to reconcile
  net income (loss) to net
  cash provided by (used
  in) operating activities:
  Depreciation and
   amortization............      685     2,029     4,565       615       2,085
  Loss on disposal of
   property and equipment..       36       145     2,567       889          --
  Deferred income taxes....   (3,344)   (5,361)   (8,880)   (2,406)     (2,723)
  Purchased in-process
   technology..............       --        --     2,125        --          --
  Changes in assets and
   liabilities:
   Accounts receivable.....  (18,842)  (56,783)  (13,307)   (5,862)      9,623
   Inventories.............  (13,269)     (397)    1,650     5,072     (19,044)
   Prepaids and other......     (142)     (176)     (805)     (378)        (91)
   Accounts payable........    4,710    10,874    19,437    (5,864)     15,518
   Other accrued
    liabilities............    3,217    12,854    22,133     1,784      (4,955)
                            --------  --------  --------   -------    --------
    Net cash provided by
     (used in) operating
     activities............  (34,811)  (32,644)   59,113     1,920      10,071
                            --------  --------  --------   -------    --------
Cash flows from investing
 activities:
 Purchases of property and
  equipment................   (2,543)   (8,833)   (5,347)   (1,284)     (2,289)
 Business acquired in
  purchase transaction, net
  of cash acquired.........       --        --   (16,831)       --          --
 Other, net................       27        --        97        --          --
                            --------  --------  --------   -------    --------
    Net cash used in
     investing activities..   (2,516)   (8,833)  (22,081)   (1,284)     (2,289)
                            --------  --------  --------   -------    --------
Cash flows from financing
 activities:
 Net transfers (to) from
  3Com Corporation.........   36,301    41,464   (36,260)     (636)     29,095
 Other, net................       --        13      (294)       --        (217)
                            --------  --------  --------   -------    --------
    Net cash provided by
     (used in) financing
     activities............   36,301    41,477   (36,554)     (636)     28,878
                            --------  --------  --------   -------    --------
Change in cash and
 equivalents...............   (1,026)       --       478        --      36,660
Cash and equivalents,
 beginning of period.......    1,026        --        --        --         478
                            --------  --------  --------   -------    --------
Cash and equivalents, end
 of period................. $     --  $     --  $    478   $    --    $ 37,138
                            ========  ========  ========   =======    ========
Other cash flow
 information:
 Interest paid............. $     --  $     --  $     10   $    --    $      9
                            ========  ========  ========   =======    ========
 Notes payable assumed in
  purchase transaction..... $     --  $     --  $  1,481   $    --    $     --
                            ========  ========  ========   =======    ========
See notes to consolidated financial statements.

                                      F-6
PALM, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

1. Background and Basis of Presentation

  On September 13, 1999, 3Com Corporation ("3Com") announced its plan to create
an independent publicly-traded company, Palm, Inc. ("Palm" or "the Company"),
comprised of 3Com's handheld computing business. After completion of Palm's
initial public offering, 3Com will own at least 80.1% of Palm's outstanding
common stock. 3Com currently intends, subject to the satisfactory resolution of
certain conditions, to distribute all of the shares of Palm's common stock that
3Com owns to 3Com's stockholders approximately six months ("the distribution
date") after Palm's initial public offering.

  Palm develops, markets and sells a family of handheld computing device
products, licenses the Palm operating system to other device and information
appliance manufacturers and offers a wireless Internet access service. Palm
Computing, Inc. was originally incorporated in California in 1992 and was
acquired by U.S. Robotics Corporation (USR) in a pooling of interests
transaction in September 1995. Subsequent to 3Com's acquisition of USR in a
pooling of interests transaction in June 1997, Palm Computing, Inc. became a
wholly-owned subsidiary of 3Com. The accompanying consolidated financial
statements report the operations that comprised the handheld computing business
of 3Com, including Palm Computing, Inc.

  3Com and Palm have entered into a Master Separation and Distribution
Agreement (see Note 14 to the consolidated financial statements). In accordance
with our separation agreement, 3Com will transfer to us the 3Com-owned assets
and liabilities which relate to our business prior to the date of our
separation from 3Com ("the separation date"), except for most of our accounts
receivable and accounts payable.

  The consolidated financial statements of Palm reflect the historical results
of operations and cash flows of the handheld computing business of 3Com during
each respective period. The consolidated financial statements have been
prepared using 3Com's historical bases in the assets and liabilities and the
historical results of operations of Palm. Changes in stockholder's net
investment represent 3Com's transfer of its net investment in Palm, after
giving effect to the net income (loss) of Palm plus net cash transfers and
other transfers to and from 3Com.

  The consolidated financial statements include allocations of certain 3Com
expenses, including centralized legal, accounting, treasury, real estate,
information technology, distribution, customer service, sales, marketing,
engineering, and other 3Com corporate services and infrastructure costs. The
expense allocations have been determined on the bases that 3Com and Palm
considered to be reasonable reflections of the utilization of services provided
or the benefit received by Palm. However, the financial information included
herein may not reflect the consolidated financial position, operating results,
changes in stockholder's net investment and cash flows of Palm in the future or
what they would have been had Palm been a separate, stand-alone entity during
the periods presented.

2. Significant Accounting Policies

 Fiscal Year

  Prior to June 1, 1998, our 52-53 week fiscal year ended on the Sunday nearest
to May 31. Effective June 1, 1998, we changed our fiscal year to a 52-53 week
fiscal year ending on the Friday

                                      F-7
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

nearest to May 31. These changes did not have a significant effect on our
consolidated financial statements. Fiscal 1997, 1998 and 1999 contained 52
weeks, whereas fiscal 2000 will contain 53 weeks. For fiscal 2000, the first
three quarters will contain 13 weeks, whereas the fourth quarter will contain
14 weeks.

 Use of Estimates in the Preparation of Consolidated Financial Statements

  The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.

 Interim Financial Information

  The financial information as of August 27, 1999 and for the three months
ended August 28, 1998 and August 27, 1999 is unaudited and includes all
adjustments, consisting only of normal and recurring accruals, that management
considers necessary for a fair presentation of its consolidated financial
position, operating results and cash flows. Results for the three months ended
August 27, 1999 are not necessarily indicative of results to be expected for
the full fiscal year 2000 or for any future period.

 Principles of Consolidation

  The consolidated financial statements include the accounts of Palm and its
subsidiary. All significant intercompany balances and transactions are
eliminated in consolidation.

 Cash and Cash Equivalents

  Cash equivalents are highly liquid debt investments acquired with a remaining
maturity of three months or less. Historically, 3Com has managed cash and cash
equivalents on a centralized basis. Cash receipts associated with Palm's
business have been transferred to 3Com on a periodic basis and 3Com has funded
Palm's disbursements.

 Concentration of Credit Risk

  Financial instruments which potentially subject Palm to concentrations of
credit risk consist principally of accounts receivable. Palm sells the majority
of its products through distributors, retailers and resellers. Credit risk with
respect to accounts receivable is generally diversified due to the number of
entities comprising Palm's customer base and their dispersion across different
geographies. Palm generally sells on open account and performs periodic credit
evaluations of its customers' financial condition.

                                      F-8
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

  The following individual customers accounted for 10% or more of total
revenue:
Years Ended        Three Months Ended
                                   ----------------------- ---------------------
                                   May 25, May 31, May 28, August 28, August 27,
                                    1997    1998    1999      1998       1999
                                   ------- ------- ------- ---------- ----------
                                                                (Unaudited)
Company A.........................    28%     22%     24%      23%        35%
Company B.........................    --      --      14%      12%        --
Company C.........................    11%     --      --       --         --
The following individual customers accounted for 10% or more of total
accounts receivable:
May 31, May 28, August 27,
                                                      1998    1999      1999
                                                     ------- ------- -----------
                                                                     (Unaudited)
Company A...........................................    28%     24%       37%
Company B...........................................    --      17%       --
Company C...........................................    --      --        --
Inventories

  Inventories are stated at the lower of standard cost (which approximates
first-in, first-out cost) or market.

 Property and Equipment

  Property and equipment are stated at cost. Depreciation and amortization are
computed over the shorter of the estimated useful lives, lease or license terms
on a straight-line basis--generally three to five years.

 Long-Lived Assets

  Palm evaluates the carrying value of long-lived assets, including goodwill,
whenever events or changes in circumstances indicate that the carrying value of
the asset may be impaired. An impairment loss is recognized when estimated
future cash flows expected to result from the use of the asset, including
disposition, is less than the carrying value of the asset. Purchased technology
and goodwill are included in other assets and are amortized over their
estimated useful lives, generally two to six years.

 Software Development Costs

  Costs for the development of new software and substantial enhancements to
existing software are expensed as incurred until technological feasibility has
been established, at which time any additional development costs would be
capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, Computer Software To Be Sold, Leased, or Otherwise Marketed. We
believe our current process for developing software is essentially completed
concurrently with the establishment of technological feasibility; accordingly,
no costs have been capitalized to date.

                                      F-9
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

 3Com Corporation Equity

  3Com Corporation equity represents 3Com's net investment in and advances to
Palm. No intercompany interest income or expense has been allocated to, or
included in, the accompanying financial statements.

 Revenue Recognition

  Revenue is recognized when earned. Revenue from product sales is recorded
when related products are shipped, risk of loss has passed to the customer and
collection of the resulting receivable is deemed probable. In fiscal 1997, 1998
and 1999 and for the three months ended August 28, 1998 and August 27, 1999
(unaudited), product sales accounted for substantially all of our revenue.
Revenues from software license agreements are recognized on a per-unit royalty
basis or as specified in the agreement in accordance with applicable accounting
guidance, including American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 97-2, Software Revenue Recognition, and SOP 98-9,
Modification of SOP 97-2, with Respect to Certain Transactions. Related
maintenance and support revenue is recognized ratably over the term of the
agreement. Revenue from subscriptions to our wireless Internet access service
is recognized over the service period.

  Provisions are recorded at the time of sale for estimated product returns,
warranty, royalties and post-contract support obligations. Provisions for price
protection are recorded at the time a price reduction decision is made. Palm
provides a 12-month limited warranty for its products.

 Advertising

  Advertising costs are expensed as incurred. Cooperative advertising and
marketing development obligations for channel customers are expensed at the
time the related revenue is recognized.

 Income Taxes

  Palm's operating results historically have been included in 3Com's
consolidated U.S. and state income tax returns and in tax returns of certain
3Com foreign subsidiaries. The provision for income taxes in Palm's
consolidated financial statements has been determined on a separate-return
basis. Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.

 Foreign Currency Translation

  The majority of Palm's revenue is denominated in U.S. dollars. For foreign
operations with the local currency as the functional currency, assets and
liabilities are translated at year-end exchange rates, and statements of
operations are translated at the average exchange rates during the year. Gains
or losses resulting from foreign currency translation are included as a
component of other comprehensive income (loss).

  For Palm entities with the U.S. dollar as the functional currency, foreign
currency denominated assets and liabilities are translated at the year-end
exchange rates except for inventories, prepaid

                                      F-10
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

expenses, and property and equipment, which are translated at historical
exchange rates. Gains or losses resulting from foreign currency translation are
included in interest and other expense, net in the consolidated statements of
operations and were not significant for any period presented.

 Stock-Based Compensation

  Palm accounts for employee stock plans under the intrinsic value method
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees.

 Earnings Per Share

  Historical Earnings Per Share

  The historical capital structure of Palm Computing, Inc. is not
representative of the future capital structure of Palm. In addition, the
accompanying consolidated financial statements report the operations that
comprised the 3Com handheld computing business, which included operations in
addition to Palm Computing, Inc. and its subsidiary. Accordingly, the
historical net income (loss) per share and weighted average number of common
shares outstanding are not shown for any of the periods presented.

  Unaudited Pro Forma Net Income Per Share

  All of the outstanding Palm common stock is owned by 3Com. As discussed in
Note 15 to the consolidated financial statements, Palm effected a stock split
resulting in     common shares outstanding prior to the initial public
offering. Unaudited pro forma basic net income per share amounts are computed
by dividing the net income for the period by the pro forma common shares
outstanding of             shares after giving effect to such stock split.
Unaudited pro forma diluted net income per share amounts are computed by also
including the estimated effect of dilutive stock options, which totaled
          shares for the year ended May 28, 1999 and           shares for the
three months ended August 27, 1999. The effect of dilutive stock options was
computed using the treasury stock method assuming an initial public offering
price of $       per share.

  The estimated number of dilutive stock options assumes that all of the
outstanding 3Com stock options held by Palm employees are converted into Palm
stock options. The actual number of 3Com stock options to be converted into
Palm stock options will not be determined until the individual employee options
are converted into Palm stock options at the distribution date. See Note 8 to
the consolidated financial statements for a description of how 3Com stock
options will be converted into Palm stock options.

  Supplemental Unaudited Pro Forma Net Income Per Share

  As discussed in Note 15 to the consolidated financial statements, Palm
declared a dividend equal to 3Com's tax basis in Palm in the amount of $
million and intends to pay such dividend to 3Com using a portion of the
proceeds from the initial public offering. Supplemental unaudited pro forma
basic net income per share amounts include the effect of such dividend and are
calculated using pro forma common shares outstanding of         shares plus the
         shares of common stock whose proceeds will be used to pay the
dividend, assuming an initial public offering price of $       per share,
reduced by estimated per share offering costs. Supplemental unaudited pro forma
diluted net income per share has been computed by also including the estimated
dilutive effect of stock options.

                                      F-11
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

 Unaudited Pro Forma Balance Sheet

  The unaudited pro forma balance sheet as of August 27, 1999 gives retroactive
effect to the dividend discussed in Note 15 to the consolidated financial
statements, as though it had been declared as of that date. The unaudited pro
forma balance sheet also gives effect to the authorizations of preferred and
common stock and the stock split to increase the outstanding amount of our
common stock as discussed in Note 15, the reclassification of approximately $49
million from 3Com Corporation equity to an intercompany payable to 3Com at
August 27, 1999 which we intend to repay using a portion of the proceeds from
the initial public offering, as well as the retention of most of our accounts
receivable and accounts payable by 3Com at the time of our separation, as
described in Note 14 to the consolidated financial statements, as though such
retention had occurred as of August 27, 1999.

 Comprehensive Income (Loss)

  On June 1, 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income.
Accumulated other comprehensive income (loss) presented in the accompanying
consolidated balance sheets consists of accumulated foreign translation
adjustments.

 Effects of Recent Accounting Pronouncements

  In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities
and SFAS 137, Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133. These statements
require companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133 will be
effective for Palm's fiscal year ending May 31, 2002. We believe that the
adoption of these statements will not have a significant impact on our
financial results.

  In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires that entities capitalize certain costs related to internal-use
software once certain criteria have been met. We adopted SOP 98-1 in the first
quarter of fiscal 2000. The adoption of this statement did not have a
significant impact on our financial results.

3. Business Combination

  The acquisition of Smartcode Technologie SARL ("Smartcode") on February 8,
1999 was accounted for as a purchase, and the consolidated statements of
operations include the operating results of the acquired company from the
acquisition date. Acquired assets and liabilities were recorded at their
estimated fair values at the date of acquisition, and the aggregate purchase
price plus costs directly attributable to the completion of the acquisition
have been allocated to the assets and liabilities acquired. No significant
adjustments were required to conform the accounting policies of the acquired
company.

  Palm acquired Smartcode for an aggregate purchase price of $17.4 million in
cash including $200,000 of costs directly attributable to the completion of the
acquisition. Approximately $2.1 million of

                                      F-12
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

the total purchase price represented purchased in-process technology that had
not yet reached technological feasibility, had no alternative future use and
was charged to operations in the third quarter of fiscal 1999. This purchase
resulted in approximately $14.4 million of goodwill and other intangible assets
that are being amortized over their estimated useful lives. Smartcode was a
provider of wireless data communications and Internet access software
technology and is based in France.

  Unaudited pro forma statement of operations information has not been
presented because the effect of this acquisition was not material.

4. Inventories

  Inventories consist of the following (in thousands):
May 31, May 28, August 27,
                                                      1998    1999      1999
                                                     ------- ------- -----------
                                                                     (Unaudited)
Finished goods...................................... $ 8,809 $ 5,900   $22,439
Work in process.....................................   1,089   4,011     8,651
Purchased components................................   3,871   2,275       140
                                                     ------- -------   -------
  Total............................................. $13,769 $12,186   $31,230
                                                     ======= =======   =======
5. Property and Equipment, Net

  Property and equipment, net consists of the following (in thousands):
May 31,  May 28,  August 27,
                                                    1998     1999       1999
                                                   -------  -------  -----------
                                                                     (Unaudited)
Equipment......................................... $ 7,945  $11,971    $13,995
Leasehold improvements............................   4,372    1,398      1,576
Furniture and fixtures............................      60      685        786
                                                   -------  -------    -------
  Total...........................................  12,377   14,054     16,357
Accumulated depreciation and amortization.........  (3,256)  (5,918)    (7,197)
                                                   -------  -------    -------
  Property and equipment, net..................... $ 9,121  $ 8,136    $ 9,160
                                                   =======  =======    =======
6. Other Accrued Liabilities

  Other accrued liabilities consist of the following (in thousands):
May 31, May 28, August 27,
                                                    1998    1999      1999
                                                   ------- ------- -----------
                                                                   (Unaudited)
Accrued payroll and related expenses.............. $ 3,217 $ 4,871   $ 5,097
Accrued product warranty..........................   4,112  11,329    12,097
Accrued cooperative advertising and marketing
 development expenses.............................   3,403   7,195     6,881
Accrued price protection..........................     224   6,994     1,642
Deferred revenue..................................   3,845     948     1,918
Other.............................................   3,474   9,456     8,203
                                                   ------- -------   -------
  Other accrued liabilities....................... $18,275 $40,793   $35,838
                                                   ======= =======   =======
F-13
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

7. Borrowing Arrangements and Commitments

  Certain of our facilities are leased from third parties under operating
leases. Leases expire at various dates from November 1999 through May 2005, and
certain facility leases have renewal options with rentals based upon changes in
the Consumer Price Index or the fair market rental value of the property. At
the separation date, Palm intends to lease certain facilities from 3Com for up
to 29 months with annual increases of approximately 3%. See Note 14 to the
consolidated financial statements for further discussion of the Real Estate
Matters Agreement between Palm and 3Com.

  Future operating lease commitments are as follows (in thousands):
Third
     Fiscal Year                                                 Parties  3Com
     -----------                                                 ------- -------
2000...................................................... $  820  $ 2,170
      2001......................................................    856    9,532
      2002......................................................    775   10,596
      2003......................................................    794    1,804
      2004......................................................    813       --
      Thereafter................................................    509       --
                                                                 ------  -------
        Total................................................... $4,567  $24,102
                                                                 ======  =======
Rent expense was $2.7 million, $2.3 million, and $3.0 million for fiscal
1997, 1998 and 1999.

  As of May 28, 1999, Palm had $1.4 million of debt acquired in the Smartcode
acquisition, and the interest rate on these obligations ranged from
approximately 6% to 9%. These obligations were repaid during the second quarter
of fiscal 2000.

  On November 27, 1999, 3Com sold to a third party the manufacturing plant that
produces the majority of Palm's products. Concurrently, Palm entered into a
two-year supply agreement with the buyer of the manufacturing plant which
commits Palm to purchase a minimum of 450,000 units of Palm products per
quarter. Any overage in purchase of products of no more than 20% that occurs
during any quarter may be credited towards the subsequent quarterly period
commitment. Any deficit in purchase of products of no more than 20% in any
quarter may be made up in the next quarter to the extent there is not a deficit
in such subsequent quarter. Failure by Palm to meet the minimum commitment is
subject to a 90-day notice and cure period. In addition, any failure of the
manufacturer to make the minimum commitment available to Palm in accordance
with Palm's orders in any quarter relieves Palm of its obligation to reach its
minimum commitment in such quarter to the extent of the manufacturer's
shortfall.

  Palm purchases product components from a vendor with which 3Com has agreed to
certain minimum purchase goals over a five-year period. 3Com's agreement with
the vendor provides for an incremental payment to be made to the vendor by 3Com
for any calendar year in which the minimum purchase goal is not met. In
connection with their separation, 3Com and Palm have agreed that Palm will
assume responsibility for 25% of the minimum purchase goal and 3Com will retain
responsibility for the remainder. In the event that Palm does not purchase its
share of the minimum annual purchase goal from the vendor in any of the five
calendar years, Palm will make an incremental payment to 3Com for the
applicable calendar year. In the event that Palm purchases none of its

                                      F-14
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

share of the minimum annual purchase goal in each year, it would be required to
make payments up to a maximum of the following payments: $1.3 million for 1999,
$1.9 million for 2000, $2.8 million for 2001, $3.7 million for 2002 and $4.9
million for 2003. The aggregate of such incremental payments in no event will
exceed $14.6 million.

8. Employee Stock Plans

 Employee Stock Purchase Plan

  Under the 3Com employee stock purchase plan, eligible Palm employees have
generally been able to contribute up to 10% of their compensation, as defined,
to the purchase of shares of 3Com's common stock at a price of 85% of the lower
of the fair market value as of the beginning or the end of the offering period.
Effective on or before the initial public offering of Palm common stock, Palm
intends to sponsor an employee stock purchase plan which is comparable to the
3Com plan.

 Employee Stock Option Plans

  3Com has stock option plans under which Palm employees and directors may be
granted options to purchase common stock. Options are generally granted at not
less than the fair market value at grant date, vest over a two- to five-year
period and expire five to ten years after the grant date.

  Prior to the distribution date, Palm intends to establish a stock option plan
for eligible Palm employees. 3Com options held by Palm employees are expected
to be converted into Palm stock options at the distribution date. The number of
shares and the exercise price of the 3Com options that convert into Palm
options will be adjusted using a conversion formula. The conversion of 3Com
options into Palm options will be done in such a manner that (1) the aggregate
intrinsic value of the options immediately before and after the exchange are
the same, (2) the ratio of the exercise price per option to the market value
per share is not reduced, and (3) the vesting provisions and option period of
the replacement Palm options are the same as the original vesting terms and
option period of the 3Com options. It is currently unknown how many 3Com
options held by Palm employees will be converted into Palm options.

 Restricted Stock Plan

  3Com has a restricted stock plan, under which shares of common stock are
reserved for issuance at no cost to key employees. Compensation expense, equal
to the fair market value on the date of the grant, is recognized as the granted
shares vest over a one- to four-year period. Certain Palm employees participate
in the 3Com restricted stock plan and the unvested portion of their grants will
be forfeited at the distribution date. Each Palm employee who forfeits 3Com
restricted stock will receive Palm restricted stock.

 Director Stock Plan

  3Com has a director stock plan, under which shares of common stock are issued
to members of its Board of Directors at an exercise price equal to the fair
market value on the date of grant and have historically vested over 24-month
increments. Grants made after July 21, 1999 were fully vested at the grant
date. Effective on or before the initial public offering of Palm common stock,
Palm also intends to

                                      F-15
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

sponsor a director option plan. For 3Com board members who resign from the 3Com
board and join the Palm Board of Directors, their unvested 3Com options will
expire 90 days after resignation.

 Accounting for Stock-Based Compensation

  As permitted under SFAS 123, Palm has elected to follow APB 25 and related
interpretations in accounting for stock-based awards to employees. Under APB
25, Palm generally recognizes no compensation expense with respect to such
awards.

  Pro forma information regarding net income (loss) and earnings per share is
required by SFAS 123. This information is required to be determined as if Palm
had accounted for stock-based awards to its employees, including employee stock
options and shares issued under the Employee Stock Purchase Plan, collectively
called "options", granted subsequent to May 31, 1995 under the fair value
method of that Statement. The fair value of the options granted in fiscal 1997,
1998 and 1999 reported below has been estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
Employee Stock    Employee Stock
                                              Option Plans     Purchase Plan
                                             ----------------  ----------------
                                             1997  1998  1999  1997  1998  1999
                                             ----  ----  ----  ----  ----  ----
Risk-free interest rate.....................  6.1%  5.5%  5.3%  5.4%  5.5%  4.9%
Volatility.................................. 54.0% 56.0% 62.0% 54.0% 56.0% 62.0%
Dividend yield..............................  0.0%  0.0%  0.0%  0.0%  0.0%  0.0%
As of May 25, 1997, the expected life of options under the Employee Stock
Option Plan was estimated at approximately one year after the vesting date for
directors and nondirectors. As of May 31, 1998, the expected lives of options
under the Employee Stock Option Plan were estimated at approximately three
years after the vesting date for directors and approximately one year after the
vesting date for nondirectors. As of May 28, 1999, the expected lives of
options under the Employee Stock Option Plan were estimated at three and one-
half years after the vesting date for directors and approximately two years
after the vesting date for nondirectors. As of May 25, 1997, May 31, 1998 and
May 28, 1999, the expected life of options under the Employee Stock Purchase
Plan was estimated at six months.

  The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
The weighted average estimated fair value of 3Com employee stock options
granted during fiscal 1997, 1998 and 1999 was $22.61, $13.30 and $15.53 per
share, respectively. The weighted average estimated fair value of shares
granted under the Employee Stock Purchase Plan during fiscal 1997, 1998 and
1999 was $11.24, $12.47 and $9.02 per share, respectively. Because 3Com options
held by Palm employees and directors have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of these options.

                                      F-16
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

  For purposes of pro forma disclosures under SFAS 123, the estimated fair
value of the options is assumed to be amortized to expense over the options'
vesting period. Pro forma information related to the 3Com options held by Palm
employees and directors follows (in thousands, except per share amounts):
Years Ended
                                                    ---------------------------
                                                    May 25,   May 31,   May 28,
                                                      1997      1998     1999
                                                    --------  --------  -------
Net income (loss):
  As reported...................................... $ (7,862) $  4,171  $29,628
  Pro forma........................................ $(22,162) $(10,235) $15,664

Net income (loss) per share:
  As reported...................................... $         $         $
  Pro forma........................................ $         $         $

  As reported--diluted............................. $         $         $
  Pro forma--diluted............................... $         $         $
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is applicable only to options granted subsequent to May 31,
1995, the full effect on pro forma net income and earnings per share was not
reflected for periods prior to fiscal 1999.

9. Financial Instruments

  The following summary disclosures are made in accordance with the provisions
of SFAS No. 107, Disclosures About Fair Value of Financial Instruments, which
requires the disclosure of fair value information about both on- and off-
balance sheet financial instruments where it is practicable to estimate the
value. Fair value is defined in SFAS 107 as the amount at which an instrument
could be exchanged in a current transaction between willing parties, rather
than in a forced or liquidation sale, which is not Palm's intent.

  Because SFAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements, any aggregation of the fair value
amounts presented would not represent the underlying value to Palm. Financial
instruments consist of cash and cash equivalents and notes payable. The
estimated fair value of cash and cash equivalents as of May 28, 1999 and August
27, 1999 (unaudited) approximates the carrying amount. The difference between
the fair value of the notes payable and their carrying value is not significant
based on current market rates.

                                      F-17
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

10. Income Taxes

The provision (credit) for income taxes consists of (in thousands):
Years Ended
                                                      -------------------------
                                                      May 25,  May 31,  May 28,
                                                       1997     1998     1999
                                                      -------  -------  -------
Current:
  Federal............................................ $(2,125) $ 6,421  $22,938
  State..............................................    (697)   1,173    5,174
                                                      -------  -------  -------
    Total current....................................  (2,822)   7,594   28,112
                                                      -------  -------  -------
Deferred:
  Federal............................................  (2,679)  (4,526)  (7,825)
  State..............................................    (665)    (834)  (1,799)
                                                      -------  -------  -------
    Total deferred...................................  (3,344)  (5,360)  (9,624)
                                                      -------  -------  -------
Total................................................ $(6,166) $ 2,234  $18,488
                                                      =======  =======  =======
The components of net deferred tax assets consist of (in thousands):
May 31, May 28,
                                                                 1998    1999
                                                                ------- -------
Deferred tax assets:
  Reserves not recognized for tax purposes..................... $ 7,828 $18,352
  Tax credit carryforwards.....................................   2,966   2,024
  Other........................................................     323     365
                                                                ------- -------
    Deferred tax assets........................................ $11,117 $20,741
                                                                ======= =======
The provision (credit) for income taxes differs from the amount computed by
applying the federal statutory income tax rate to income (loss) before income
taxes as follows:
Years Ended
                                                        ------------------------
                                                        May 25,  May 31, May 28,
                                                         1997     1998    1999
                                                        -------  ------- -------
Tax computed at federal statutory rate.................  (35.0)%  35.0%   35.0%
State income taxes, net of federal effect..............   (6.3)    3.4     4.5
Research tax credits...................................   (2.7)   (4.7)   (1.2)
Other..................................................     --     1.2     0.1
                                                         -----    ----    ----
  Total................................................  (44.0)%  34.9%   38.4%
                                                         =====    ====    ====
Palm has federal research credit carryforwards of approximately $2 million
available as a result of its consolidated federal tax filing with 3Com. These
carryforwards expire through the year 2014.

  See Note 14 to the consolidated financial statements for discussion of the
Tax Sharing Agreement between Palm and 3Com.

                                      F-18
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

11. Business Segment Information

  Palm operates in one reportable segment, handheld computing.

 Geographic Information

  Palm's headquarters and most of its operations are located in the United
States. Palm conducts its sales, marketing and customer service activities
throughout the world and also has a research and development facility in
France. Geographic revenue information is based on the location of the end
customer. Geographic long-lived assets information is based on the physical
location of the assets at the end of each period. Revenues from unaffiliated
customers and long-lived assets by geographic region are as follows (in
thousands):
Years Ended          Three Months Ended
                                -------------------------- ---------------------
                                May 25,  May 31,  May 28,  August 28, August 27,
                                  1997     1998     1999      1998       1999
                                -------- -------- -------- ---------- ----------
                                                                (Unaudited)
Revenues:
  United States................ $ 96,280 $198,630 $400,168  $ 91,462   $121,480
  Other........................   17,877   73,507  163,357    24,607     55,025
                                -------- -------- --------  --------   --------
    Total...................... $114,157 $272,137 $563,525  $116,069   $176,505
                                ======== ======== ========  ========   ========
For fiscal 1997, 1998, 1999 and the three months ended August 28, 1998 and
August 27, 1999 (unaudited) no single country outside the United States
accounted for 10% or more of total revenues.
May 31, May 28, August 27,
                                                      1998    1999      1999
                                                     ------- ------- -----------
                                                                     (Unaudited)
Long-lived assets:
  United States..................................... $8,231  $7,247    $8,031
  United Kingdom....................................    827     811     1,017
  Other.............................................     63      78       112
                                                     ------  ------    ------
    Total........................................... $9,121  $8,136    $9,160
                                                     ======  ======    ======
At May 31, 1998, May 28, 1999 and August 27, 1999 (unaudited), no other
individual country had long-lived assets of 10% or more of total long-lived
assets.

12. Employee Benefit Plan

 401(k) Plan

  Palm's eligible U.S. employees may participate in a plan known as the 3Com
401(k) Plan ("the Plan") which was adopted to provide retirement benefits to
its employees. As allowed under Section 401(k) of the Internal Revenue Code,
the Plan provides tax-deferred salary deductions for eligible employees.
Participants may elect to contribute from 1% to 22% of their annual
compensation to the Plan each calendar year, limited to a maximum annual amount
as set periodically by the Internal Revenue Service. In addition, the Plan
provides for company matching contributions as determined by

                                      F-19
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

the Board of Directors. 3Com matches 50% for each dollar on the first 6% of
target income contributed by the employee. Employees become vested in 3Com
matching contributions according to a three year vesting schedule based on
initial date of hire. Palm's expense related to matching contributions to the
401(k) was $171,000 in fiscal 1997, $178,000 in fiscal 1998 and $508,000 in
fiscal 1999.

  On or about the distribution date, Palm intends to establish a separate
401(k) plan for its employees.

13. Litigation

  We are a party to lawsuits in the normal course of our business. Litigation
in general, and intellectual property and securities litigation in particular,
can be expensive and disruptive to normal business operations. Moreover, the
results of complex legal proceedings are difficult to predict. We believe that
we have defenses to the case set forth below and are vigorously contesting this
matter. An unfavorable resolution of this lawsuit could adversely affect our
business, results of operations or financial condition.

  On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case is now captioned: Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp, Palm
Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The
complaint alleges willful infringement of a United States patent relating to
computerized interpretation of handwriting. The complaint further seeks
unspecified damages and injunctive relief. Xerox has asserted that products
utilizing Graffiti script recognition software made, used, offered for sale or
sold in the United States, or imported into the United States since January 21,
1997, infringe its patent. On June 25, 1999, the court stayed the action
pending reexamination of the patent by the United States Patent and Trademark
Office. The reexamination of the patent is currently pending. In connection
with our separation from 3Com, pursuant to the terms of the Indemnification and
Insurance Matters Agreement, Palm will indemnify and hold 3Com harmless for any
damages or losses which may arise out of this litigation. In particular, an
adverse determination in the Xerox litigation could subject Palm to substantial
damages and require it to indemnify its customers and licensees for damages
that they may suffer. Moreover, if there is an adverse determination, a license
may be necessary to continue using the Grafitti script recognition software in
Palm devices and the Palm platform. A license may not be available or on terms
acceptable to Palm. If upon an adverse determination Palm was unable to obtain
a license on terms acceptable to it, it could be required to modify its script
recognition software or license alternative script recognition software from
third parties for inclusion in Palm devices and the Palm platform.

  We also file suits against others to protect our intellectual property, such
as the matters described below.

  On July 22, 1999, Palm filed a copyright infringement action against Olivetti
and CompanionLink in the United States District Court for the Northern District
of California and obtained a preliminary injunction against further
distribution, sale, import or export of Olivetti Office USA's "Royal daVinci"
handheld device and the daVinci OS Software Development Kit, distributed by
CompanionLink Software, Inc. The injunction is to remain in effect pending the
outcome of the lawsuit. Palm also initiated a copyright infringement action in
Hong Kong on July 21, 1999, against EchoLink Design

                                      F-20
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

Ltd., the company responsible for developing the operating system software
contained in the daVinci products. The High Court of the Hong Kong Special
Administrative Region issued an order the same day restraining EchoLink from
further copying, distribution, sale, import or export of Palm OS operating
system source code or EchoLink's "NEXUS OS" source code, which Palm maintains
infringes its copyrights.

14. Transactions with 3Com Corporation

  Palm's costs and expenses include allocations from 3Com for centralized
legal, accounting treasury, real estate, information technology, distribution,
customer service, sales, marketing, engineering, and other 3Com corporate
services and infrastructure costs. These allocations have been determined on
bases that 3Com and Palm considered to be reasonable reflections of the
utilization of services provided or the benefit received by Palm. The
allocation methods include relative revenues, headcount or square footage.
Allocated costs included in the accompanying consolidated statements of
operations follow (in thousands).
Years Ended        Three Months Ended
                                  ----------------------- ---------------------
                                  May 25, May 31, May 28, August 28, August 27,
                                   1997    1998    1999      1998       1999
                                  ------- ------- ------- ---------- ----------
                                                               (Unaudited)
Cost of revenues................. $4,374  $3,694  $ 9,238   $1,770     $2,920
Sales and marketing..............  1,144   7,023   16,625    3,100      5,446
Research and development.........  1,573     845    3,437      528      1,647
General and administrative.......  2,574   5,212   14,085    2,485      3,952
Other income and expense, net....    523      25      218       25         63
Historically, Palm has outsourced all of its product manufacturing to 3Com
and other third parties.

  For purposes of governing certain of the ongoing relationships between Palm
and 3Com at and after the separation date and to provide for an orderly
transition, Palm and 3Com have entered or will enter into various agreements. A
brief description of each of the agreements follows.

 Master Separation and Distribution Agreement

  The Master Separation and Distribution Agreement contains the key provisions
relating to the separation, initial public offering and the distribution. The
agreement lists the documents and items that the parties must deliver in order
to accomplish the transfer of assets and liabilities from 3Com to Palm,
effective on the separation date. The agreement also contains conditions that
must occur prior to the initial public offering and the distribution. The
parties also entered into both short-term and long-term covenants, including
covenants to enter into transitional services agreements, exchange information,
engage in certain auditing practices and resolve disputes in particular ways.

 General Assignment and Assumption Agreement

  The General Assignment and Assumption Agreement identifies the assets that
3Com will transfer to Palm and the liabilities that Palm will assume from 3Com
in the separation. The agreement also describes when and how these transfers
and assumptions will occur. In general, the

                                      F-21
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

assets that will be transferred and the liabilities that will be assumed are
included in those that appear on the consolidated balance sheet, after
adjustment for certain assets and liabilities that will be retained by 3Com,
such as most of our accounts receivable and accounts payable, and for activity
that occurs between the balance sheet date and the separation date.

 Intellectual Property Agreements

  The Master Technology Ownership and License Agreement, the Master Patent
Ownership and License Agreement, the Master Trademark Ownership and License
Agreement and the Master Confidential Disclosure Agreement together are
referred to as the Intellectual Property Agreements. Under the Intellectual
Property Agreements, 3Com will confirm that Palm owns or will transfer to Palm
its rights in specified patents, patent applications, invention disclosures,
specified trademarks and other intellectual property related to Palm's current
business and research and development efforts. Neither 3Com nor Palm will sue
the other for claims of infringement related to existing patents. 3Com will
grant a license to Palm under certain patents owned by 3Com which were jointly
developed with Palm. Palm will commit to license its operating system to 3Com
on favorable terms pursuant to a separate agreement that the two parties will
negotiate. Both 3Com and Palm have agreed not to disclose confidential
information of the other party except in specific circumstances.

 Employee Matters Agreement

  The Employee Matters Agreement outlines how 3Com and Palm plan to allocate
assets, liabilities and responsibilities relating to current and former
employees of Palm and their participation in the benefits plans, including
stock plans, that 3Com currently sponsors and maintains. The agreement also
contains provisions describing some of Palm's employee benefit and employee
stock plans.

  All eligible Palm employees will continue to participate in the 3Com benefits
plans on comparable terms and conditions to those for 3Com employees until the
distribution date or until Palm establishes benefit plans for its employees, or
elects not to establish comparable plans if it is not legally or financially
practical. Palm intends to establish its own benefit program no later than the
time of the distribution.

  Once Palm establishes its own benefits plans, it may modify or terminate each
plan in accordance with the terms of that plan and its policies. No Palm
benefit plan will provide benefits that overlap benefits under the
corresponding 3Com benefit plan at the time of the distribution. Each Palm
benefit plan will provide that all service, compensation and other benefit
determinations that, as of the distribution, were recognized under the
corresponding 3Com benefits plan will be taken into account under that Palm
benefit plan.

  Following the date of 3Com's distribution of its Palm common stock to its
stockholders, Palm will be under no obligation to maintain these plans in the
form in which they were established or at all. The transfer to Palm of
employees at certain of 3Com's international operations, and of certain
employee benefit plans, may not take place until Palm receives consents or
approvals or has satisfied other applicable requirements.

                                      F-22
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

 Tax Sharing Agreement

  The Tax Sharing Agreement allocates 3Com's and Palm's responsibilities for
certain tax matters. The agreement requires Palm to pay 3Com for the
incremental tax costs of Palm's inclusion in consolidated, combined or unitary
tax returns with affiliated corporations. In determining these incremental
costs, the agreement takes into account not only the group's incremental tax
payments to the Internal Revenue Service or other taxing authorities, but also
the incremental use of tax losses of affiliates to offset Palm's taxable
income, and the incremental use of tax credits of affiliates to offset the tax
on Palm's income. The agreement also provides for compensation or reimbursement
as appropriate to reflect redeterminations of Palm's tax liability for periods
during which Palm joined in filing consolidated, combined or unitary tax
returns.

  The tax sharing agreement also requires Palm to indemnify 3Com for certain
taxes and similar obligations, including (a) sales taxes on the sale of
products purchased by 3Com from Palm before the distribution, (b) customs
duties or harbor maintenance fees on products exported or imported by 3Com on
behalf of Palm, (c) the additional taxes that would result if an acquisition of
a controlling interest in Palm's stock after the distribution causes the
distribution not to qualify for tax-free treatment to 3Com, and (d) any taxes
resulting from transactions undertaken in preparation for the distribution.

  Palm's indemnity obligations include any interest and penalties on taxes,
duties or fees for which Palm must indemnify 3Com.

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

  The agreement also assigns responsibilities for certain administrative
matters such as the filing of returns, payment of taxes due, retention of
records, and the conduct of audits, examinations or similar proceedings.

 Master Transitional Services Agreement

  The Master Transitional Services Agreement governs the provision of
information technology services by 3Com and Palm to each other, on an interim
basis, for one year from the date of separation, unless extended for specific
services or otherwise indicated in the agreement. The services include data
processing and telecommunications services, such as voice telecommunications
and data transmission, and information technology support services, for
functions including accounting, financial management, tax, payroll, stockholder
and public relations, legal, procurement, and other administrative functions.
Specified charges for such services are generally intended to allow the
providing company to recover the direct and indirect costs of providing the
services, plus 5% for one year, and plus 10% for an extension of the agreements
beyond one year. The Master Transitional Services Agreement also will cover the
provision of certain additional transitional services identified from time to
time after the separation date that were inadvertently or unintentionally
omitted from the specified services, or that are essential to effectuate an
orderly transition under the separation agreement, so long as the provision of
such services would not significantly disrupt 3Com's operations or
significantly increase the scope of its responsibility under the agreement.

                                      F-23
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

  In addition, the Master Transitional Services Agreement will provide for the
replication of some computer systems, including hardware, software, data
storage or maintenance and support components. Generally, the party needing the
replicated system will bear the costs and expenses of replication. Generally,
the party purchasing new hardware or licensing new software will bear the costs
and expenses of purchasing the new hardware or obtaining the new software
licenses.

 Real Estate Matters Agreement

  The Real Estate Matters Agreement addresses real estate matters relating to
the 3Com leased and owned properties that 3Com will transfer to or share with
Palm. The agreement describes the manner in which 3Com will transfer to or
share with Palm various leased and owned properties. The Real Estate Matters
Agreement provides that Palm will be required to accept the transfer of all
sites allocated to Palm, even if a site has been damaged by a casualty before
the separation date. The Real Estate Matters Agreement also provides that all
reasonable costs required to effect the transfers, including landlord consent
fees and landlord attorneys' fees will be paid by 3Com.

 Indemnification and Insurance Matters Agreement

  Effective as of the separation date, subject to specified expections, Palm
and 3Com will each release the other from any liabilities arising from events
occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation, the initial public
offering and the distribution. The agreement also contains provisions governing
indemnification. In general, Palm and 3Com will each indemnify the other from
all liabilities arising from their respective businesses or contracts, as well
as liabilities arising from a breach of the separation agreement or any
ancillary agreement. In addition, 3Com and Palm will each indemnify the other
against liability for specified environmental conditions. Palm will reimburse
3Com for the cost of any insurance coverage from the separation date to the
distribution date.

15. Subsequent Events

  On November 30, 1999, Palm's Board of Directors and sole stockholder
  approved the following:

  . The 1999 Stock Plan. The 1999 Stock Plan becomes effective upon the
    closing of the initial public offering. A total of    shares will be
    reserved for issuance under the 1999 Plan. In addition, the number of
    shares reserved under the plan will automatically increase on the first
    day of each fiscal year, beginning with our fiscal year 2001, in an
    amount equal to the lesser of (a)    shares, or (b) 5% of the shares
    outstanding on the first day of the fiscal year, or (c) a lesser amount
    determined by Palm's Board of Directors. The 1999 Stock Plan provides for
    issuance of incentive stock options, nonstatutory stock options and stock
    purchase rights to employees, directors and consultants.

  . The 1999 Director Option Plan. The 1999 Director Option Plan becomes
    effective upon the closing of the initial public offering. Under the 1999
    Director Option Plan, a total of     shares of common stock will be
    reserved for the grant of nonstatutory stock options to non-employee
    directors of Palm. In addition, the number of shares reserved under this
    plan will automatically increase on the first day of each fiscal year,
    beginning in fiscal year 2001, in an amount equal to       shares or a
    lesser amount determined by Palm's Board of Directors. The initial
    options granted under the 1999 Director Option Plan shall vest over three
    years and any subsequent annual stock option grants will vest over one
    year and expire ten years from the date of grant.

                                      F-24
PALM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Years Ended May 25, 1997, May 31, 1998 and May 28, 1999 and
             Three Months Ended August 28, 1998 and August 27, 1999

  . The 1999 Employee Stock Purchase Plan. The 1999 Employee Stock Purchase
    Plan becomes effective upon the closing of the initial public offering.
    Under the Purchase Plan, eligible employees may purchase common stock
    through payroll deductions, which may not exceed 10% of any employee's
    compensation nor more than       shares in any one purchase period. A
    total of    shares of common stock will be reserved for issuance under
    the 1999 Employee Stock Purchase Plan. The number of shares reserved for
    issuance under the 1999 Employee Stock Purchase Plan will automatically
    increase annually, beginning with our fiscal year 2001, by an amount
    equal to the lesser of (a)    shares, or (b) 2% of the common shares
    outstanding on the first day of the fiscal year, or (c) another amount as
    may be determined by Palm's Board of Directors.

  On      , 2000, Palm's Board of Directors and sole stockholder approved the
following:

  . The reincorporation of Palm Computing, Inc. in the state of Delaware as
    Palm, Inc.

  . An increase in the authorized number of shares of common stock to
                shares and creation of newly undesignated preferred stock
    totaling             shares, contingent upon the approval of the
    reincorporation of Palm in Delaware and the closing of the initial public
    offering.

  . A     -for-one stock split of the outstanding shares of common stock. The
    stock split was effected on            , 2000. All shares and per share
    amounts in these financial statements have been adjusted to give effect
    to the stock split.

  . The payment of a dividend of $   million to 3Com.

                                   * * * * *

                                      F-25
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  No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.

                                --------------

                               TABLE OF CONTENTS
Page
                                                                          ----
Prospectus Summary.......................................................   3
Risk Factors.............................................................   7
Our Separation From 3Com.................................................  23
Special Note Regarding Forward-Looking Statements........................  22
Use of Proceeds..........................................................  25
Dividend Policy..........................................................  25
Capitalization...........................................................  26
Dilution.................................................................  27
Selected Consolidated Financial Data.....................................  29
Management's Discussion and Analysis of Financial Condition and Results
 of Operations ..........................................................  30
Business.................................................................  42
Management...............................................................  55
Arrangements Between Palm and 3Com.......................................  67
Principal Stockholders...................................................  76
Description of Capital Stock ............................................  77
Underwriting.............................................................  79
Shares Eligible for Future Sale..........................................  81
Validity of Common Stock.................................................  81
Experts..................................................................  81
Where You Can Find More Information......................................  82
Index to Consolidated Financial Statements............................... F-1
--------------

  Through and including       , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.

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                                       Shares

                                  Palm, Inc.

                                 Common Stock

                                --------------

                                    [LOGO]
                        [PALM, INC. LOGO APPEARS HERE]

                                --------------

                             Goldman, Sachs & Co.

                          Morgan Stanley Dean Witter

                              Merrill Lynch & Co.

                              Robertson Stephens

                      Representatives of the Underwriters

-------------------------------------------------------------------------------
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PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

  The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission registration fee and the
registration fee. Palm has agreed to pay these costs and expenses.
Item                                 Amount
                                   ----                                 -------
Securities and Exchange Commission registration fee................. $26,400
   NASD registration fee...............................................  10,500
   Nasdaq Stock Market original and continued listing fees.............    *
   Blue Sky qualification fees and expenses............................  12,000
   Legal fees and expenses.............................................    *
   Accounting fees and expenses........................................    *
   Transfer agent and registrar fees...................................    *
   Printing and engraving expenses.....................................    *
   Miscellaneous expenses..............................................    *
                                                                        -------
     Total............................................................. $
                                                                        =======
--------
*To be filed by amendment.

Item 14. Indemnification of Directors and Officers

  Palm is incorporated under the laws of the State of Delaware. Section 145
("Section 145") of the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended (the "General Corporation Law"), inter
alia, provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director, employee
or agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the corporation's best interests and, with respect
to any criminal action or proceeding, had no reasonable cause to believe that
his conduct was illegal.

  Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him in
any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.

  Palm's Certificate of Incorporation and Bylaws provide for the
indemnification of officers and directors to the fullest extent permitted by
the General Corporation Law.

  All of Palm's directors and officers will be covered by insurance policies
maintained by Palm against specified liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act of 1933, as
amended. In addition, Palm has entered into indemnity agreements with its
directors and executive officers (a form of which is filed as Exhibit 10.9 to
this Registration Statement) that obligate Palm to indemnify such directors and
executive officers to the fullest extent permitted by the General Corporation
Law.

                                      II-1
Item 15. Exhibits and Financial Statement Schedules

(a) Exhibits.
Exhibit
 Number  Description
 ------- -----------
1.1*   Form of Underwriting Agreement.
  2.1    Master Separation and Distribution Agreement between 3Com and the
         registrant effective as of December 13, 1999.
  2.2    Form of General Assignment and Assumption Agreement between 3Com and
         the registrant.
  2.3    Form of Master Technology Ownership and License Agreement between 3Com
         and the registrant.
  2.4    Form of Master Patent Ownership and License Agreement between 3Com and
         the registrant.
  2.5    Form of Master Trademark Ownership and License Agreement between 3Com
         and the registrant.
  2.6    Form of Employee Matters Agreement between 3Com and the registrant.
  2.7    Form of Tax Sharing Agreement between 3Com and the registrant.
  2.8    Form of Master Transitional Services Agreement between 3Com and the
         registrant.
  2.9    Form of Real Estate Matters Agreement between 3Com and the registrant.
  2.10   Form of Master Confidential Disclosure Agreement between 3Com and the
         registrant.
  2.11   Form of Indemnification and Insurance Matters Agreement between 3Com
         and the registrant.
  2.12   Form of Non-U.S. Plan.
  3.1*   Certificate of Incorporation.
  3.2*   Bylaws.
  5.1*   Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
 10.1*   1999 Stock Plan.
 10.2*   1999 Stock Plan Agreements.
 10.3*   1999 Employee Stock Purchase Plan.
 10.4*   1999 Employee Stock Purchase Plan Agreements.
 10.5*   1999 Director Option Plan.
 10.6*   1999 Director Option Plan Agreements.
 10.7    Management Retention Agreement dated as of December 1, 1999 by and
         between Carl J. Yankowski and the registrant.
 10.8*   Form of Indemnification Agreement entered into by the registrant with
         each of its directors and executive officers.
 10.9*   RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement
         between RAM Mobile Data USA Limited Partnership and the registrant.
 10.10*  Supply Agreement between Manufacturers' Services Salt Lake City
         Operations, Inc. and the registrant.
 10.11*  Common Stock Purchase Agreement between America Online and the
         registrant.
 10.12*  Common Stock Purchase Agreement between Motorola and the registrant.
 10.13*  Common Stock Purchase Agreement Between Nokia and the registrant.
 21.1*   Subsidiaries of Palm.
 23.1*   Independent Auditors' Consent and Report on Schedule
 23.2*   Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
 24.1    Power of Attorney (contained on page II-4).
 27.1    Financial Data Schedule.
--------
*  To be filed by amendment.

                                      II-2
(b)Financial Statement Schedules.
Valuation and Qualifying Accounts and Reserves........................... S-1
Item 16. Undertakings

  The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

  Insofar as the indemnification for liabilities arising under the Securities
Act of 1933 may be permitted as to directors, officers and controlling persons
of the Registrant pursuant to the provisions described in Item 14, or
otherwise, the Registrant has been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payments by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

  The undersigned Registrant hereby undertakes that:

    (1) for purposes of determining any liability under the Securities Act of
  1933, the information omitted from the form of prospectus filed as part of
  this registration statement in reliance upon Rule 430A and contained in a
  form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
  (4) or 497(h) under the Securities Act shall be deemed to be part of this
  registration statement as of the time it was declared effective; and

    (2) for the purpose of determining any liability under the Securities Act
  of 1933, each post-effective amendment that contains a form of prospectus
  shall be deemed to be a new registration statement relating to the
  securities offered therein, and this offering of such securities at that
  time shall be deemed to be the initial bona fide offering thereof.

                                      II-3
SIGNATURES

  Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on December 13, 1999.

                                                  /s/ Carl J. Yankowski
                                          _____________________________________
                                                     Carl J. Yankowski
                                                Chief Executive Officer and
                                                          Director

                               POWER OF ATTORNEY

  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl J. Yankowski, Judy Bruner and Stephen Yu,
and each of them, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective
statements), and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof. This Power of Attorney may be signed in several counterparts.
Signature                           Title                    Date
              ---------                           -----                    ----
/s/ Carl J. Yankowski           Chief Executive Officer and   December 13, 1999
______________________________________  Director (Principal
          Carl J. Yankowski             Executive Officer)

          /s/ Judy Bruner              Senior Vice President and     December 13, 1999
______________________________________  Chief Financial Officer
             Judy Bruner                (Principal Financial and
                                        Accounting Officer)

       /s/ Eric A. Benhamou            Director                      December 13, 1999
______________________________________
           Eric A. Benhamou

      /s/ James L. Barksdale           Director                      December 13, 1999
______________________________________
          James L. Barksdale

      /s/ Gordon A. Campbell           Director                      December 13, 1999
______________________________________
          Gordon A. Campbell

       /s/ Susan G. Swenson            Director                      December 13, 1999
______________________________________
           Susan G. Swenson
II-4
PALM, INC.

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

            Years Ended May 25, 1997, May 31, 1998 and May 28, 1999
                                 (In thousands)
Additions
                                     Balance at Charged to            Balance at
                                     Beginning  Costs and               End of
            Description              of Period   Expenses  Deductions   Period
            -----------              ---------- ---------- ---------- ----------
Year ended May 25, 1997:
  Allowance for doubtful accounts...   $   39     $  567    $     (5)  $   601
  Product return reserve............      651     10,637      (4,042)    7,246
  Accrued product warranty..........       58      5,507      (3,912)    1,653

Year ended May 31, 1998:
  Allowance for doubtful accounts...   $  601     $3,893    $    (43)  $ 4,451
  Product return reserve............    7,246      8,982     (10,576)    5,652
  Accrued product warranty..........    1,653     17,527     (15,068)    4,112

Year ended May 28, 1999:
  Allowance for doubtful accounts...   $4,451     $4,271    $ (4,905)  $ 3,817
  Product return reserve............    5,652     24,145     (12,254)   17,543
  Accrued product warranty..........    4,112     25,949     (18,732)   11,329
S-1
INDEX OF EXHIBITS
Exhibit
 Number  Description
 ------- -----------
1.1*   Form of Underwriting Agreement.
  2.1    Master Separation and Distribution Agreement between 3Com and the
         registrant effective as of December 13, 1999.
  2.2    Form of General Assignment and Assumption Agreement between 3Com and
         the registrant.
  2.3    Form of Master Technology Ownership and License Agreement between 3Com
         and the registrant.
  2.4    Form of Master Patent Ownership and License Agreement between 3Com and
         the registrant.
  2.5    Form of Master Trademark Ownership and License Agreement between 3Com
         and the registrant.
  2.6    Form of Employee Matters Agreement between 3Com and the registrant.
  2.7    Form of Tax Sharing Agreement between 3Com and the registrant.
  2.8    Form of Master Transitional Services Agreement between 3Com and the
         registrant.
  2.9    Form of Real Estate Matters Agreement between 3Com and the registrant.
  2.10   Form of Master Confidential Disclosure Agreement between 3Com and the
         registrant.
  2.11   Form of Indemnification and Insurance Matters Agreement between 3Com
         and the registrant.
  2.12   Form of Non-U.S. Plan.
  3.1*   Certificate of Incorporation.
  3.2*   Bylaws.
  5.1*   Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
 10.1*   1999 Stock Plan.
 10.2*   1999 Stock Plan Agreements.
 10.3*   1999 Employee Stock Purchase Plan.
 10.4*   1999 Employee Stock Purchase Plan Agreements.
 10.5*   1999 Director Option Plan.
 10.6*   1999 Director Option Plan Agreements.
 10.7    Management Retention Agreement dated as of December 1, 1999 by and
         between Carl J. Yankowski and the registrant.
 10.8*   Form of Indemnification Agreement entered into by the registrant with
         each of its directors and executive officers.
 10.9*   RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement
         between RAM Mobile Data USA Limited Partnership and the registrant.
 10.10*  Supply Agreement between Manufacturers' Services Salt Lake City
         Operations, Inc. and the registrant.
 10.11*  Common Stock Purchase Agreement between America Online and the
         registrant.
 10.12*  Common Stock Purchase Agreement between Motorola and the registrant.
 10.13*  Common Stock Purchase Agreement Between Nokia and the registrant.
 21.1*   Subsidiaries of Palm.
 23.1*   Independent Auditors' Consent and Report on Schedule
 23.2*   Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
 24.1    Power of Attorney (contained on page II-4).
 27.1    Financial Data Schedule.
--------
 * To be filed by amendment.