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Still staring red ink in the face, top handheld vendor



won't be expecting kudos when it reports earnings after the bell on Thursday.

On the bright side, Palm has managed to buck industry trends by showing handset shipment growth in a quarter when worldwide shipments shrank. Yet Wall Street is notably short on enthusiasm after a 73% runup in the stock since the company's June 3 announcement of plans for a merger with



, a boost aided by the momentum of a broad summer tech rally. The stock today is trading up a further $1.65, or 7.8%, to $22.59 from yesterday's close.

"I think tolerance for this company is very low and the stock's had a great run, so it will be tough to come out with an upside surprise that warrants the stock moving higher," says one equity analyst.

Somewhat complicating the outlook, the August quarter will be the last before some sweeping changes at Palm. In October the company is expected to spin off software business PalmSource and complete its merger with Handspring. While the Handspring deal has been generally well-received, the software spin-off will show all the warts in Palm's low-margin hardware business.

Business at Hand

In the August quarter, analysts expect Palm's loss to narrow to 83 cents a share, an improvement from last year's loss of $1.26 a share.

Wall Street is looking for sales of $184 million, near the high end of Palm's guidance for $175 million to $185 million. That would reflect a 7% increase from last year's levels and an 18% drop from the most recent quarter.

But even the anticipated top- and bottom-line improvements don't merit backpats in and of themselves, given that Palm is still losing money. "The expectations here were pretty low for the revenue forecast to be down by about 20%. You'd really have to screw up pretty big" to disappoint, says an analyst.

On top of that, Palm looks a little dog-eared compared to rival

Research In Motion


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The maker of Blackberry handhelds is expected to pull its finances into the black when it reports August-quarter earnings next week and to post 66% year-on-year sales growth, miles above Palm's milquetoast single-digit increase.

In a trend bound to put pressure on Palm, RIM has rolled out some inviting deals, including a Blackberry handheld/cell-phone combination for $299.

Staying on Top

To be sure, Palm can claim impressive sales momentum of its own. Its Zire 71, a $299 model with digital camera and MP3 player (though without a cell phone), ranks as the best-selling PDA on the market, according to Gartner.

And the new line of Treo 600 smartphones from Handspring, expected to begin shipping late this fall, have won glowing reviews.

Indeed, last week Bear Stearns cited potential upside from Treo 600 and three other product launches when it upgraded its rating on Palm from underperform to peer perform. (Other factors were stabilizing demand for handhelds and the strong debuts of the Zire 71 and Tungsten 2.)

Palm managed to boost its second-quarter unit shipments by 15.3% due to strong take-up of the Zire 71 and Tungsten C, according to Gartner. Its shipments grew at the same time worldwide PDA shipments slipped 7.3%, hurt by a weak worldwide economy and particular softness in the Chinese market.

Palm also held onto its global-share lead in the second quarter, at 38% of the market compared to No. 2



with 15.3%, and



with 11%.

As for the third quarter, it's possible handhelds could see somewhat of a lift from the same demand uptick that's pushed up computer sales (with the PC-buying trend once again noted in earnings reports Wednesday from

Best Buy



Circuit City



Yet the most lucrative market for handhelds is not consumers -- the group that's been primarily responsible for strengthening PC sales -- but big companies. And in that corner, the appetite for tech hardware is still muted.

That in mind, it's not surprising that Wall Street analysts have penciled in sales expectations for $262 million in Palm's November quarter, a rate that's still a hair below last year's levels.