Q: After the distribution, how do I determine my cost basis in my palmOne shares and my PalmSource shares and my gain or loss for U.S. federal income tax purposes if I dispose of either my palmOne shares or my PalmSource shares?

Your tax basis for the PalmSource common stock received in the spin-off will be determined based on your tax basis in the Palm common stock with respect to which your distribution of PalmSource common stock was made. Following the spin-off, your aggregate tax basis in your shares of palmOne common stock and PalmSource common stock, including any fractional shares sold for cash, will be the same as your tax basis in your shares of Palm common stock immediately prior to the spin-off. The aggregate tax basis in your shares of Palm common stock immediately prior to the spin-off will be allocated between your PalmSource common stock and palmOne common stock in proportion to the fair market value of your shares of PalmSource common stock and palmOne common stock on the distribution date. Since you will receive approximately 0.31 shares of PalmSource stock for every share of palmOne stock, the allocation of basis between your palmOne shares and your PalmSource shares, including any fractional PalmSource shares sold for cash, should reflect the value of a share of palmOne stock and the product of approximately 0.31 multiplied by the value of a share of PalmSource stock.

For purposes of the basis allocation calculation, these values may be based on the average of the high and low prices of palmOne (PLMO) and PalmSource (PSRC) on October 29, 2003, the first day of trading after the distribution. The high PLMO price was $19.05 and the low PLMO price was $15.12, for an average of $17.09. The high PSRC price was $39.78 and the low PSRC price was $28.41, for an average of $34.10. Based on these prices, approximately 61.80% of a stockholder’s basis would be allocated to palmOne stock and approximately 38.20% of a stockholder’s basis would be allocated to PalmSource stock.

The basis calculation should be done separately for each block of shares.

A stockholder’s gain or loss on the subsequent sale or other disposition of palmOne or PalmSource shares would be equal to the difference between the proceeds received and such stockholder’s allocated basis in such shares. Assuming the palmOne and PalmSource shares are held as capital assets, gain or loss would be capital gain or loss and would be long-term capital gain or loss if the stockholder’s holding period exceeds one year. The stockholder’s holding period for the palmOne and PalmSource stock will include the stockholder’s holding period for the underlying Palm stock.

Please note that there is no rule directly on point which sets forth how to determine the value of the palmOne and PalmSource stock on the distribution date. Please contact your tax advisor for more information on this and other tax matters. In addition, an information statement containing additional discussion of these and other matters will be sent to stockholders subsequent to the distribution date.

An example illustrating the above results follows:

Basis allocation. If a stockholder’s basis in a block of 20 Palm shares equaled $100 prior to the distribution, the stockholder’s basis in 20 shares of palmOne stock would equal $61.80 after the distribution and the stockholder’s basis in 6.2 shares of PalmSource stock would equal $38.20 after the distribution, based on the opening prices of palmOne and PalmSource.

Fractional shares. $36.97 would be allocated to the stockholder’s basis in the 6 whole shares of PalmSource stock and $1.23 would be allocated to the stockholder’s basis in the fractional 0.2 share of PalmSource stock. The stockholder would receive cash in lieu of the fractional 0.2 share of PalmSource stock, based on the price at which EquiServe sells the aggregated fractional shares of PalmSource stock in the open market shortly after the distribution. If EquiServe sells the aggregated fractional shares for an amount equal to the average of the high and low prices of PalmSource stock on the first trading day after the distribution, which would equal $34.10 for one share of PalmSource stock or $6.82 for a fractional 0.2 share of PalmSource stock, the stockholder would recognize gain equal to $5.59 in respect of the fractional 0.2 share of PalmSource stock. Please see the discussion under the immediately following question for more information on fractional shares.

Subsequent sale. If, for example, the stockholder later sold the palmOne stock from that block for $60, the stockholder would recognize a loss of $1.80. If the stockholder later sold the PalmSource stock for $60, the stockholder would recognize a gain of $23.03. In each case, the stockholder’s gain or loss would be capital gain or loss and would be long-term capital gain or loss assuming that the stockholder’s holding period exceeded one year.