PalmSource Reports Fiscal Fourth Quarter and Year-End Results

PalmSource Reports Fiscal Fourth Quarter and Year-End Results
- Fourth quarter revenue of $17.3 million





SUNNYVALE, Calif., June 29  /PRNewswire-FirstCall/ -- PalmSource, Inc.
(NASDAQ:PSRC), today announced results for its fiscal fourth quarter and year
ended June 3, 2005.  Revenue for the fourth quarter of 2005 was $17.3 million,
including an early buyout of a licensee's future minimum royalty commitments
for $1.5 million, as compared to $17.7 million reported in the year ago
quarter.  Gross margin was 93 percent as compared to 91 percent in the year ago
quarter.  GAAP net income was $18.3 million or $1.12 per share, as compared to
a GAAP net loss of ($2.9) million or ($0.23) per share reported in the year ago
quarter.

Non-GAAP net loss for the quarter was ($0.7) million or ($0.04) per share, as
compared to non-GAAP net loss of ($0.6) million or ($0.05) per share in the
year ago quarter. Non-GAAP net loss and loss per share for the fourth quarter
of 2005 excluded the following:

   -- $26.7 million for a gain on the sale of assets (the Company's interest
      in Palm Trademark Holding Company, LLC) to palmOne, Inc.
   -- $2.7 million for restructuring charges related to the reorganization
   -- $2.5 million related to the severance package for the Company's former
      CEO
   -- $2.3 million for stock-based compensation expense
   -- $0.2 million for amortization of purchased intangible assets



GAAP EPS for the fourth quarter of 2005 was calculated using diluted shares
outstanding of 16.3 million, while non-GAAP loss per share was calculated using
basic shares outstanding of 15.9 million shares.  GAAP and non-GAAP loss per
share for the fourth quarter of 2004 were calculated using basic shares
outstanding of 12.6 million shares.

Palm OS licensees reported shipping a total of approximately 1.1 million units
during the quarter, of which 37 percent were smartphones and 63 percent were
PDA's and other mobile handheld devices. This compares to a total of
approximately 1.4 million units shipped in the fourth quarter of fiscal 2004,
of which 18 percent were smartphones and 82 percent were PDA's and other mobile
handheld devices.

"While we still face significant challenges over the next several quarters, we
continue to move forward with our development efforts in the broader mobile
phone market," said Patrick McVeigh, interim CEO.  "We are committed to our
transition to Linux-based platforms that deliver a great user experience."

Full-year Results

For fiscal year 2005, revenues were $71.9 million, as compared to $73.1 million
in the prior year.  GAAP net income for 2005 was $19.5 million or $1.28 per
share, as compared to a net loss of ($15.2) million or ($1.40) per share in the
prior year. Non-GAAP net income was $4.0 million or $0.26 per share, as
compared to non-GAAP net income of $1.2 million or $0.10 in the prior year.
GAAP and non-GAAP EPS for 2005 were calculated on a diluted basis using a
weighted average of approximately 15.2 million shares.  GAAP loss per share for
2004 was calculated using a weighted average of basic shares outstanding of
10.9 million shares.  Non-GAAP EPS for 2004 was calculated on a diluted basis
using a weighted average of 11.6 million shares.

Reorganization of Product Development, Administration and Sales and Marketing

PalmSource today also announced an internal reorganization of the Company's
product development, administrative, marketing and sales organizations.  As
part of this reorganization, the Company plans to reduce its full-time head
count by approximately 16 percent in the U.S. and has taken a $2.7 million
restructuring charge in its fiscal fourth quarter of 2005, primarily related to
employee severance arrangements.  Over half of the head count reductions were
middle and senior management positions, including three senior vice presidents.
 The Company expects annual salary savings of approximately $6.0 million in
fiscal year 2006 related to the reorganization.

"This reorganization reflects the evolution of our business model, as we have
taken action to tighten our focus over the next 12 months," said Jeanne Seeley,
PalmSource's chief financial officer.  "By streamlining our product development
efforts and administrative functions, and combining our sales, marketing and
business development activities, we not only expect to increase internal
synergies between these groups, but we are also aligning our cost structure
with the reality that we are in a new product development period."

Business Outlook

For its fiscal first quarter ending September 2, 2005, the Company expects
revenue in the range of $14.3 million to $14.8 million with a GAAP loss per
share in the range of ($0.23) to ($0.26).  First quarter GAAP EPS includes
approximately $0.10 per share for stock-based compensation and $0.01 per share
for amortization of purchased intangible assets that should be excluded when
calculating non-GAAP EPS.  GAAP and Non-GAAP loss per share should be
calculated using 16.3 million basic shares outstanding. Investor Conference
Call / Webcast Details The Company will hold a conference call on Wednesday,
June 29, 2005 at 2:00 p.m. PDT to review its results. It will be broadcast live
and archived on the web at http://www.palmsource.com/about/ir.html .  A replay
of the call will be available for 7 days beginning at 3:00 p.m., PDT. The
replay number is 800-642-1687, and the passcode is 7015745.

About PalmSource

PalmSource, Inc., the company behind Palm OS(R), a leading operating system
powering smart mobile devices, is a leading developer of software for mobile
phones and other mobile devices. Its products include a wide range of software
for mobile phones at all price points. More than 39 million mobile phones,
handhelds, and other mobile devices run PalmSource software.  Palm OS has given
rise to a large community of users, enterprises, developers and manufacturers,
who together make up the Palm Powered(TM) Economy. More information about
PalmSource is available at http://www.palmsource.com/,
http://www.palmsource.co.uk/, http://www.palmsource.fr/,
http://www.palmsource.de/, http://www.palmsource.com/es and
http://www.palmsource.com.cn/.

Cautionary Note Regarding Forward-Looking Statements: This press release
contains forward-looking statements that involve risks and uncertainties, as
well as assumptions that if they never materialize or prove incorrect, could
cause our results to differ materially from those expressed or implied by such
forward-looking statements. Such forward-looking statements include, without
limitation, statements regarding our strategy, financial results, and internal
reorganization. The risks and uncertainties that could cause our results to
differ materially from those expressed or implied by such forward-looking
statements include, without limitation, are ability to successfully execute our
strategy; our ability to transition to Linux-based platforms in a timely manner
that our accepted by licensees and end users; our ability to continue to grow
and maintain the Palm Powered Economy; our ability to successfully implement
our planned reorganization, achieve the anticipated savings, and to retain the
resulting work force; our ability to successfully streamline our product
development process and combine our sales, marketing and business development
activities; realization of the anticipated growth in the mobile phone market;
the ability of our existing and new licenses to introduce new products in a
timely manner that meet end user demands; our ability to work successfully with
our Palm Powered(TM) Mobile World partners to create broader adoption of Palm
Powered products by end users, developers and carriers; and other risks and
uncertainties contained in our public announcements, reports to stockholders
and other documents filed with and furnished to the Securities and Exchange
Commission, including our Annual Report on Form 10-K for the period ended May
28, 2004 and our Quarterly Reports on Form 10-Q for the periods ended August
27, 2004, November 26, 2004 and February 25, 2005. All forward-looking
statements in this press release are based on information available to us as of
the date hereof, and we assume no obligation to update these forward-looking
statements.

NOTE:  PalmSource, Palm OS, Palm Powered and certain other trademarks and logos
are trademarks which are either owned by PalmSource, Inc. or its affiliates or
are licensed by PalmSource, Inc. from Palm Trademark Holding Company, LLC and
which may be registered in the United States, France, Germany, Japan, the
United Kingdom, and other countries.

   PalmSource, Inc.
   Condensed Consolidated Balance Sheets
   (In thousands)
   (Unaudited)
                                                   June 3,          May 28,
   ASSETS                                           2005              2004
   Current assets:
      Cash and cash equivalents                   $22,228           $27,144
      Short-term investments                       35,088            43,057
      Accounts receivable, net                     11,526             6,038
      Prepaids and other                            8,342             2,124
         Total current assets                      77,184            78,363

      Restricted investments                          121             1,680
      Property and equipment, net                   6,950             2,281
      Goodwill                                     72,759            52,845
      Intangibles assets, net                       2,359               111
      Long-term investments                        14,418            16,733
      Other assets                                 14,073               779
         Total assets                            $187,864          $152,792

   LIABILITIES AND STOCKHOLDERS' EQUITY
   Current liabilities:
      Accounts payable                             $2,866            $2,494
      Deferred revenue                              7,010             8,296
      Accrued restructuring                         2,718                --
      Other accrued liabilities                     9,019             7,625
         Total current liabilities                 21,613            18,415
   Non-current liabilities:
      Deferred revenue and other                   11,586            10,386
      Long-term convertible subordinated note          --            15,000

   Stockholders' equity:
      Common stock                                     17                15
      Additional paid-in capital                  189,619           165,835
      Accumulated other comprehensive
       income (loss)                                  287               259
      Unearned stock-based compensation            (3,376)           (5,754)
      Accumulated deficit                         (31,882)          (51,364)
         Total stockholders' equity               154,665           108,991
   Total liabilities and stockholders' equity    $187,864          $152,792


   PalmSource, Inc.
   Condensed Consolidated Statements of Operations
   (In thousands, except per share data)
   (Unaudited)
                                             Three             Twelve
                                          Months Ended      Months Ended
                                             June 3            June 3
                                         2005     2004     2005      2004

  Revenue:
    Related party license and royalty       $67   $1,339   $2,025   $24,927
    Third party license and royalty      16,118   14,580   65,461    42,563
      Total license and royalty          16,185   15,919   67,486    67,490
    Related party support and service        74      105      345       605
    Third party support and service       1,073    1,620    4,080     5,022
      Total support and service           1,147    1,725    4,425     5,627
      Total revenue                      17,332   17,644   71,911    73,117
  Cost of revenue:
    License and royalty                     782      936    2,922     4,038
    Support and service                     419      704    1,867     2,136
      Total cost of revenue               1,201    1,640    4,789     6,174
        Gross margin                     16,131   16,004   67,122    66,943

  Operating expenses:
    Research and development              7,685    8,089   30,296    33,158
    Sales and marketing                   4,919    4,307   18,264    17,508
    General and administrative            4,670    3,547   15,732    12,667
    Stock-based compensation              2,281    2,754    7,032     9,379
    Restructuring                         2,718       --    3,234        --
    Executive severance                   2,527       --    2,527        --
    Amortization of intangibles             185       --      261       163
    Separation costs                         --     (406)      17     6,867
      Total operating expenses           24,985   18,291   77,363    79,742
        Operating income (loss)          (8,854)  (2,287) (10,241)  (12,799)
  Interest expense                           --     (188)     (31)     (654)
  Other income (expense), net               472     (197)   1,187      (264)
  Gain on sale of assets                 26,693       --   26,693        --
  Gain on early extinguishment of debt       --       --    1,875        --
        Income (loss) before income tax  18,311   (2,672)  19,483   (13,717)
  Income tax provision                        1      261        1     1,530
        Net income (loss)               $18,310  $(2,933) $19,482  $(15,247)

  Basic earnings (loss) per share         $1.15   $(0.23)   $1.30    $(1.40)
  Shares used in computing basic
   earnings (loss) per share             15,901   12,618   14,980    10,878

  Diluted earnings (loss) per share       $1.12   $(0.23)   $1.28    $(1.40)
  Shares used in computing diluted
   earnings (loss) per share             16,284   12,618   15,214    10,878


  Reconciliation between GAAP and non-
   GAAP Net income (loss):
  GAAP net income (loss)                $18,310  $(2,933) $19,482  $(15,247)
    Stock-based compensation              2,281    2,754    7,032     9,379
    Amortization of intangibles             185       --      261       163
    Restructuring                         2,718       --    3,234        --
    Executive severance                   2,527       --    2,527        --
    Separation costs                         --     (406)      17     6,867
    Gain on sale of assets              (26,693)      --  (26,693)       --
    Gain on early extinguishment of debt     --       --   (1,875)       --
  Non-GAAP net income (loss)              $(672)   $(585)  $3,985    $1,162

  Non-GAAP basic net income (loss) per
   share                                 $(0.04)  $(0.05)   $0.27     $0.11
  Shares used in computing non-GAAP
   basic net income (loss) per share     15,901   12,618   14,980    10,878

  Non-GAAP diluted earnings (loss) per
   share                                 $(0.04)  $(0.05)   $0.26     $0.10
  Shares used in computing non-GAAP
   diluted earnings (loss) per share     15,901   12,618   15,214    11,627


DATASOURCE: PalmSource, Inc.



CONTACT:  Brian Siegel (investors), [phone], or

, or Maureen O'Connell (media),

[phone], or , both of PalmSource, Inc.



Web site:  http://www.palmsource.com/ 

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