Updated from 5:18 p.m. EDT

Palm ( PALM) trounced Wall Street expectations on sales and earnings for the final quarter of its fiscal year, though it remains in the red. The company also guided for a sequential decline in sales, reflecting typically slow demand in the summer.

In after-hours trading, Palm shares jumped $1.25 or 8% to $16.95. Tuesday shares had closed down 57 cents, losing 3.5%.

The handheld-computer maker posted sales of $225.8 million, 3% above last year's levels and 20% higher the Street consensus estimate for $187.7 million.

On the bottom line, too, it beat expectations with a loss of $15 million or 51 cents a share, according to generally accepted accounting principles.

The Street was expecting a loss of 93 cents.

The loss includes a restructuring charge of $2 million, amortization of intangible assets of $0.4 million, and expenses of $3.8 million associated with the pending spin-off of its operating system, PalmSource. It compares to last year's loss of $27.5 million or 95 cents a share in the same quarter.

Palm said sales of its handhelds rose 5%, reversing six straight quarters of decline.

On the conference call, chairman and interim CEO Eric Benhamou said the latest sales offer more evidence that the handheld industry is showing a "pattern of progressive recovery." In the preceding quarters, sales had slipped respectively 20%, 12%, and 8% before turning positive in the just-ended quarter. The gradual strengthening, said Benhamou, suggests his prediction the industry will see positive unit growth this year will come true.

"We're now looking to FY04 and we're more optimistic than we have been in a long time in terms of both the economy looking a tad better and that we have a lot more confidence in our road map, the partnerships we have and the teams in place," said Behhamou.

Palm's gross margins remain well below last year's levels, at 32.5% compared to 40.9%. However, it's managed to bring down operating expenses by nearly 29% in the twelve-month period period. The company has also boosted inventory turns from 12 to 26 and brought down its inventory to $22.7 million from $55 million.

As for the quarter now underway, CFO Judy Bruner said Palm's revenues are likely to decline to $175 to $185 million, reflecting what she called "typical summer seasonality." That compares to revenues of $172 million for sales in the same quarter last year. "The summer August quarter tends to be probably the weakest given the especially slow summer seasonality in the European region," she said.

Palm guided for a non-GAAP operating loss of $20 million to $25 million, an improvement from $32 million in the first fiscal quarter last year. On a GAAP basis the operating loss should be $5 million to $10 million higher, reflecting restructuring costs.

Palm announced in early June that it would acquire Handspring ( HAND), with the deal slated to take place after its spinoff of PalmSource is completed sometime this fall. Palm said it would be filing more details on the acquisition with the Securities and Exchange Commission next month.

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