##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K



---

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended June 28,
    2003                                                     
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from          to                                                  

Commission File No. 0-30719

Handspring, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 77-0490705                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification Number)

189 Bernardo Avenue

Mountain View, CA 94043


(Address of Principal Executive Offices,
including Zip Code)


(650) 230-5000

(Registrants telephone number, including
Area Code)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $0.001 par value per
share


Stock Purchase Rights, $0.001 par value per
share


Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports) and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein and will not be contained, to the best of
the Registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this
Form 10-K.     o

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes þ          No o

The aggregate market value of voting stock held
by non-affiliates of the Registrant was approximately
$85,667,000 as of the last business day of the Registrants
most recently completed second fiscal quarter (December 28,
2002), based upon the closing price on the Nasdaq National
Market reported for such date. The Registrant has not issued any
non-voting stock.

On July 26, 2003, approximately 148,642,451
shares of the Registrants common stock, $0.001 par value,
were outstanding

DOCUMENTS INCORPORATED BY REFERENCE

None.



---






---

TABLE OF CONTENTS



|              |                                                                                                         |  |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                                       
|              | Item 2. Properties                                                                                     
|              | Item 3. Legal Proceedings                                                                              
|              | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|              | Item 6. Selected Financial Data                                                                        
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|              | Item 8. Financial Statements and Supplementary Data                                                    
|              | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure           
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                            
|              | Directors                                                                                              
|              | Item 11. Executive Compensation                                                                        
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | Item 13. Certain Relationships and Related Transactions                                                
|              | Item 14. Controls and Procedures                                                                       
|              | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



---



##### Table of Contents



HANDSPRING, INC.

2003 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

|           |  |                                                                                                    |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                                    |    | Page
|           |  |                                                                                                    |    |     
|PART I    
|Item 1.    |  | Business                                                                                           |    |      | 2  | 
|Item 2.    |  | Properties                                                                                         |    |      | 7  | 
|Item 3.    |  | Legal Proceedings                                                                                  |    |      | 7  | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                            |    |      | 9  | 
|PART II   
|Item 5.    |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |    |      | 9  | 
|Item 6.    |  | Selected Financial Data                                                                            |    |      | 10 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |    |      | 11 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |    |      | 31 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                                        |    |      | 31 | 
|Item 9.    |  | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure           |    |      | 31 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                 |    |      | 32 | 
|Item 11.   |  | Executive Compensation                                                                             |    |      | 36 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |    |      | 39 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                                     |    |      | 41 | 
|Item 14.   |  | Controls and Procedures                                                                            |    |      | 41 | 
|PART IV   
|Item 15.   |  | Exhibits, Financial Statements Schedules, and
    Reports on Form 8-K                              |    |      | 42 | 
|SIGNATURES |  |                                                                                                    | 76 |     

1



---



##### Table of Contents






PART I




Item 1.     Business

We may make statements in this Annual Report
on Form 10-K, such as statements regarding our plans,
objectives, expectations and intentions that are forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements generally are
identified by the words believes,
expects, anticipates,
intends, estimates,
strategy, plan, may,
should, will, would and
similar expressions. These forward-looking statements are
subject to risks and uncertainties. Our actual results could
differ materially from those anticipated in these
forward-looking statements as a result of these risks and
uncertainties, including those we discuss in Factors Affecting
Future Results and elsewhere in this annual report. These
forward-looking statements speak only as of the date of this
annual report, and we caution you not to rely on these
statements without also considering the risks and uncertainties
associated with these statements and our business as addressed
in this annual report. Except as required by law, we undertake
no obligation to update any forward-looking statement, whether
as a result of new information, future events or
otherwise.

Overview

Our goal is to be a global leader in the emerging
market for integrated wireless devices offering voice, data,
email and personal information management capabilities in a
single device. We refer to these devices as
communicators or smartphones. We shipped
our first communicator, the monochrome GSM Treo 180, in
December 2001, and subsequently have shipped the color GSM/ GPRS
Treo 270 and the color CDMA Treo 300. In June 2003, we
announced the Treo 600 smartphone design, an integrated
device with a smaller, more phone like form factor. Our current
carrier partners include Sprint for the Treo 300 and 600;
Orange for the Treo 600; and T-Mobile, AT&T Wireless
and Cingular for the Treo 270.

When Handspring was formed in July 1998, we
focused on developing products for the handheld organizer
market. In our fourth quarter of fiscal 2001, we began to shift
our strategic focus to communicators due to a number of adverse
changes in the handheld organizer market including lower demand,
compressed gross margins and increased competition. As of the
completion of our third quarter of fiscal 2003, we had
substantially completed this strategic transition.

On June 4, 2003, we announced that we had
entered into a definitive agreement for Palm, Inc. to acquire
us. Palm also announced that its board of directors had given
final approval for the spin-off of PalmSource, Inc., its
subsidiary responsible for developing and licensing the Palm
operating system. Under the proposed terms of the transaction,
and following the spin-off of PalmSource, our stockholders will
receive 0.09 shares of Palm common stock  and no
shares of PalmSource  for each share of Handspring
common stock owned. Palm will issue approximately
13.9 million shares of Palm common stock to our
stockholders on a fully diluted basis using the treasury stock
method. As a result of the merger, our stockholders will own
approximately 31% of the newly merged company on a fully diluted
basis, and Palms stockholders will own approximately 69%.
The value per share to be received by our stockholders will be
based on the Palm share price following the spin-off of
PalmSource. The spin-off of PalmSource will be completed
immediately prior to the closing of the merger between Palm and
Handspring. However, the merger with Palm is subject to
specified closing conditions, and we cannot assure you that we
will complete it. As part of the merger agreement, Palm has
provided us with an up to $20.0 million secured credit
facility.

Following the completion of the merger with Palm,
we believe the combined company will be a stronger competitor in
the handheld computing and communications products markets. We
believe the combined company will be well positioned to take
advantage of future growth opportunities through increased scale
and operational efficiency; offer a broad portfolio of mobile
products ranging from entry level handhelds to smartphones;
benefit from Palms brand and from strong retail
distribution and carrier relationships; and have a highly
experienced management team. The merger is scheduled to close in
the fall of 2003, subject to certain conditions.

2



---



##### Table of Contents



We make available, free of charge, copies of our
Securities and Exchange Commission (SEC) filings and
submissions on our website, www.handspring.com, as soon
as practicable after electronically filing or furnishing such
documents with the SEC.

Products and Services

Communicators and Smartphones.We design, manufacture and sell a line
of integrated, handheld wireless devices that combine a mobile
phone, an organizer based on the Palm operating system, and
wireless applications such as messaging, Internet access and
email, all in a shirt pocket size form factor. We call these
devices communicators or smartphones.

Today we sell the GSM/ GPRS Treo 270 and the CDMA
Treo 300. The Treo 270 and 300 have a flip lid design
and combine the following features:



| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A built-in, backlit QWERTY keyboard that allows
    the user to dial contacts by number or name, enter data and type
    messages.                                                                  
|
| |  | A full-color 160 x 160 pixel display.                                                                                                                                                               
|
| |  | A wireless phone with call management features
    (e.g. speed dials, three way calling, call history), full
    integration with the users electronic Phone Book, and a
    personal speakerphone.
|
| |  | A Palm organizer with standard applications (e.g.
    Phone Book, Date Book, To Do List), HotSync synchronization, and
    the capability to run thousands of Palm OS based applications.           
|
| |  | Wireless email and SMS (Short Message Service)
    capability.                                                                                                                                      
|
| |  | The Handspring Blazer web browser for accessing a
    wide range of Internet websites.                                                                                                              

In June 2003, we announced the Treo 600
smartphone design, an integrated device with a smaller, more
phone like form factor. The new design is the result of
significant research and development focused on reducing size,
maximizing the utility and ease of use of both phone and data
functions, and minimizing trade-offs typically found in
converged products. The unique domed key shape and layout of the
keys make typing fast and simple even with the significantly
reduced size of the product.

The Treo 600 will be available in a
dual-band CDMA version and a quad-band GSM/ GPRS version and is
expected to be available this fall. The Treo 600 will have
the following enhancements compared to the Treo 270 and 300:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | A smaller QWERTY and numeric keyboard that
    nonetheless accommodates keys with more surface area and larger
    letters and numbers.
|
| |  | A faster processor and additional memory.                                                                                              
|
| |  | The Palm OS 5 operating system.                                                                                                        
|
| |  | A brighter color display.                                                                                                              
|
| |  | A five way navigation button for one handed use.                                                                                       
|
| |  | A built-in VGA camera.                                                                                                                 
|
| |  | A secure digital/ MMC expansion slot.                                                                                                  
|
| |  | Improved battery life for longer talk time.                                                                                            
|
| |  | A new proxyless version of the Handspring Blazer
    web browser.                                                                      

We believe Treo communicators and smartphones are
distinguished by several features from their competitors. First,
Treo software has an easy-to-use interface that makes functions
such as conference calling, caller ID, speed-dialing, call
history and standard dialing, fast and intuitive. Second, the
software has integrated the telephone functionality with the
organizer functionality such that there is now a single
application that contains both the phone book and the address
book. As a result, users can use the integrated

3



---



##### Table of Contents



keyboard to quickly and easily look up and dial
any name in a large address book just by typing a few letters of
that name. Third, the small size of the Treo, particularly the
Treo 600, allows it to easily fit into a shirt pocket or purse.
Fourth, the Treo also comes with significant data services
software: the Handspring Blazer Internet browser, an SMS
messaging client and a POP3 email client. Finally, Treo is the
smallest communicator designed for both voice and data services
that includes an integrated alpha numeric physical keyboard.


Third Party Applications.Handspring supports the development of
third party applications for its Treo products through a program
that provides developers with application program interfaces,
access to technical documentation, online developer forums and
other resources. One area of particular third party developer
interest has been the extension of various mobile email and data
access services to Treo devices. In July 2003, Handspring
announced that Good Technology, Visto Corporation and SEVEN are
planning to offer their respective wireless services on the Treo
600.

Accessories.We
offer a full line of accessories for our products. For example,
we sell a selection of cases, a stylus pack, a car lighter
adaptor and an optional cradle for our communicators. In
addition, third parties offer a variety of accessories and
software programs for our products.

Sales and Marketing

We have worked to develop strong relationships
with a variety of wireless carriers around the world including
Sprint, T-Mobile, Cingular and AT&T Wireless in the United
States and Orange in Europe. We work with carriers in different
ways, depending on each carriers unique situation and
requirements.

Our most substantial carrier relationships are
with Sprint in the United States and Orange in Europe. Sprint is
a major customer for the Treo 300 and 600, accounting for
37% of net revenues in fiscal 2003. Orange will launch the
Treo 600 in Europe this fall. The Sprint and Orange
relationships include co-development, product customization for
the carriers network, systems integration and joint
marketing and sales. With these carriers, we typically build
product quantities based on contractual commitments. Other
carriers typically purchase non-customized, or only slightly
customized, Treos whether from Handspring directly or from a
Handspring distributor. For these carriers, we build product
based on a combination of received purchase orders and our
business forecasts.

We also sell our products through select
distribution, retail and online partners in the United States,
Asia-Pacific, Canada, the Middle East and Europe and through our
own website at www.handspring.com. When we sell a Treo
communicator on our website, we sometimes have the opportunity
to earn subsidies from carriers if the Treo communicator
customer also purchases a voice or data plan. To support
distribution, retail and web sales, we build a small amount of
product to forecast.

North American Sales constituted 82% of total
revenue during fiscal 2003 (see Note 12 of our Consolidated
Financial Statements).

Our target customer is an individual who carries
multiple devices such as a cell phone, a handheld computer (such
as a Palm OS organizer) and a pager. To these people, our key
selling points are the ability to eliminate multiple devices and
consolidate monthly invoices, and the benefits of integrating
functionality, such as dialing any name in the address book.
Treo communicator customers to date have generally been
consumers, often professionals, who are interested in new
technologies and new products. These early adopters
represent a significant part of the selling process in new
categories as they recommend a product to friends and colleagues.

Although our sales to date principally have been
to individual consumers, we have seen interest in the Treo
communicator product line from education, government and
enterprise customers. We typically rely on our carrier partners
to pursue these opportunities. For example, Decision One, a
provider of out-sourced service and support for technology
companies, recently purchased over 800 Treo 300s as a first
phase implementation of equipping their entire field service
staff with Treo 300s.

To date we have not seen meaningful seasonal
variations in customer demand for our communicators. This
contrasts with our experience when selling organizers where
demand typically increased during our

4



---



##### Table of Contents



second fiscal quarter due to increased consumer
spending on electronic devices during the holiday season. We
attribute this lack of seasonality for our communicators to two
factors. First, our communicators are sold at higher prices than
organizers and holiday seasonality typically affects demand for
lower priced products. Second, purchasing our product also
requires selection of a carrier, and the purchase of a service
plan, which complicates the buying process for gift-giving.


Customer Service and Support

We generally sell our products with a one-year
limited warranty and offer a supplemental extended warranty
program. We currently outsource our Treo communicator repair
services to Solectron Global Service.

We provide telephone-based customer support and
technical support to our customers through outsource partners
and through our website. This service currently is offered free
of charge for 90 days after purchase, and then on a modest
cost per call basis thereafter. Our retail and carrier partners
provide first-line customer and technical support to their
customers. We provide escalation service and support and
technical training for our outsource providers and retail and
carrier partners.

Product Development and Technology

Our products are conceived, designed and
implemented through the collaboration of our internal
engineering, marketing and manufacturing organizations. Our
product design efforts are focused on both improving our
existing products and developing new products. We intend to
continue to employ a customer focused design approach by
providing innovative products that respond to and anticipate
customer needs for functionality, mobility, simplicity, style
and ease of use.

Technologies required to support product
development are either created internally or licensed from
outside providers. Our internal staff includes engineers of many
disciplines, including software architects, electrical
engineers, mechanical engineers, radio specialists, quality
engineers, manufacturing process engineers and user interface
design specialists. Once a project is initiated and approved, a
multi-disciplinary team is created to complete the design of the
product and transition it into manufacturing.

Although hardware is the most visible aspect of
our products, we also add value to our products through software
development. This software development is at a low level to
enable hardware functionality, at the operating system level to
enhance and extend the Palm OS, at the applications software
level to provide integrated functionality, and, outside of the
devices, at the server level, to manage communications such as
with the Blazer web browser used with the Treo 270 and 300.
In addition to developing our own technologies, we license
various technologies from third parties and integrate those
technologies with our products.

Our Treo communicators typically are required to
pass individual carrier certification requirements before they
may be operated on a carriers network. Our devices also
must receive approval from relevant governmental bodies, such as
FCC approval in the U.S. In addition, our GSM communicators must
pass Full Type Approval (FTA). We have established an internal
certification team and carrier certification processes,
including early testing, to facilitate our ability to meet these
certification and standards requirements.

Our research and development expenditures totaled
$22.2 million in fiscal 2003, $24.7 million in fiscal
2002 and $23.6 million in fiscal 2001. As of July 26,
2003, we had 76 people engaged in research and development
activities.

Manufacturers and Suppliers

Our Treo communicators are manufactured by
Solectron at its facilities in Guadalajara, Mexico. Solectron
procures components, and manufactures, assembles and tests our
products. By outsourcing the manufacturing process, we are able
to focus on our core competencies of product development and
design, minimize capital expenditures, rely on third parties
with more manufacturing expertise than we have, and avoid the
need to maintain facilities for manufacturing operations.

5



---



##### Table of Contents



The components that make up our products are
purchased from various vendors, including key suppliers such as
Motorola and Texas Instruments, which supplies microprocessors,
and Seiko, which supplies displays. Some of our components are
currently supplied by sole or single source suppliers for which
alternative sources have not been readily available in
sufficient quantities or at an attractive cost. For example, we
relied on two key partners for the radios used in our
Treo 270 and 300 communicators: Wavecom for GSM radios and
AirPrime for CDMA radios. Power supply integrated circuits,
cameras, microprocessors, and certain discrete components also
are obtained from a sole or single source.

Product orders are transmitted to Modus Media
International, Inc., our fulfillment agent, who completes the
pack-out process by assembling a finished goods box consisting
of the applicable product, software and other assorted materials.

Competition

The market for communicators and smartphones is
highly competitive, and we expect competition to increase. Most
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 to new or
emerging technologies or changes in customer requirements than
we can. They also may devote greater resources to the
development, promotion and sale of their products than we do.

We believe that the principal competitive factors
affecting the market for communicators and smartphones are
design, performance, carrier relationships, price and brand. We
believe that we compete favorably compared to many of our
current competitors with respect to some or all of these factors.

Our products compete with a variety of handheld
devices, including handheld computers, high-end cell phones, and
two-way pagers. Our principal competitors include:



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mobile handset manufacturers such as Audiovox,
    Ericsson, HTC Corporation, Kyocera, LG, Motorola, Nokia,
    Samsung, Sanyo and Sony-Ericsson;
|
| |  | Research In Motion Limited, a leading provider of
    wireless email, instant messaging and Internet connectivity;                               
|
| |  | Handheld manufacturers, such as Hewlett-Packard,
    the Palm Solutions Group and Sony, that offer bluetooth and or
    WiFi enabled devices; and
|
| |  | Danger and a variety of other privately held
    start-up companies who compete in our current and future markets.                               

To be competitive, we must continue to invest
significant resources in research and development as well as
sales and marketing. 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.

Intellectual Property

Our success depends in part on our ability to
maintain the proprietary aspects of our technology and operate
without infringing the proprietary rights of others. We rely on
a combination of trade secret, trademark, copyright and patent
laws, and contractual restrictions on disclosure, to protect our
intellectual property rights.

We license various technologies from third
parties that have been integrated into our products. We believe
that licensing complementary technologies improves our products
in an efficient manner, allowing us to focus on our core
competencies. Our most significant license is of the
Palm OS operating system from PalmSource. We also license
conduit software from Chapura, Inc. that allows for
synchronization with Microsoft Outlook, encryption technology
from Certicom for our Blazer browser, email technology from
Visto and a variety of other applications software technologies.
Our Palm OS operating system license requires the payment of
royalties and maintenance and support fees to PalmSource. The
license agreement extends until April 2009 and is non-exclusive.

6



---



##### Table of Contents



Employees

As of July 26, 2003, we had a total of
240 employees, of which 76 were in research and
development, 22 were in manufacturing services, 53 were in
marketing and sales, 43 were in customer relations and
operations and 46 were in general and administrative. We
consider our relationships with employees to be good. None of
our employees is covered by collective bargaining agreements.




Item 2.Properties

Our headquarters are located in two leased office
spaces in Mountain View, California. These buildings comprise an
aggregate of approximately 86,500 square feet. In January
2003, we amended our lease agreement for one of our headquarter
buildings with EOP-Industrial, Portfolio, LLC. As a result of
this amendment, in the third quarter of fiscal 2003, we
surrendered a letter of credit for $2.1 million held in the
landlords name and a security deposit of $200,000. We also
issued warrants to purchase 150,000 shares of common stock
valued at $46,500. The lease terms for our Mountain View
facilities extend to August 2004 and June 2008. In addition, we
currently lease office space in Singapore, the United Kingdom,
the Netherlands and Switzerland. We believe our current office
space is adequate for our current operations.

In January 2003, we restructured the leases for
two new buildings in Sunnyvale, California that we entered into
in February 2001. The Sunnyvale leases had initial terms of
twelve years each, with monthly rent expense of approximately
$1.7 million, plus monthly operating expenses of
approximately $300,000 per month, for a total monthly expense of
approximately $2.0 million. Including annual increases, we
estimate that the total obligation to the landlord would have
been approximately $350.0 million over twelve years.

As a result of the restructuring of the Sunnyvale
leases, we took a charge of $75.9 million in the third
quarter of fiscal 2003. The components of this charge include
$15.3 million paid from our cash, cash equivalents and
short-term investments, $40.9 million paid from the release
of certain letters of credit which had secured our obligations
under the Sunnyvale leases, $5.0 million for future lease
payments and note payable obligations, $3.7 million for
warrants to purchase 10.0 million shares of common stock,
$10.4 million net write-off of tenant improvements and rent
expenses, and $0.6 million for legal fees and other
professional expenses.




Item 3.Legal
Proceedings

We are subject to legal proceedings, claims and
litigation, including those described below, arising in the
ordinary course of business. While the outcome of those matters
that have not been fully adjudicated is currently not
determinable, management does not expect that the ultimate costs
to resolve these matters will have a material adverse effect on
our financial position, results of operations or cash flows. No
estimate can be made of the possible loss or possible range of
loss, if any associated with the resolution of these legal
proceedings, claims and litigation. As a result, no loss has
been accrued in the financial statements as of June 28,
2003. However, the results of legal proceedings cannot be
predicted with certainty. Should we fail to prevail in any of
these legal matters or should several of these legal matters be
resolved against Handspring in the same reporting period, the
operating results of a particular reporting period could be
materially adversely affected.

On March 14, 2001, NCR Corporation filed
suit against Handspring and Palm, Inc. in the United States
District Court for the District of Delaware. The complaint
alleges infringement of two U.S. patents. The complaint
seeks unspecified compensatory and treble damages and to
permanently enjoin the defendants from infringing the patents in
the future. Handspring filed an answer on April 30, 2001,
denying NCRs allegations and asserting counterclaims for
declaratory judgments that it does not infringe the patents in
suit, that the patents in suit are invalid, and that they are
unenforceable. On June 14, 2002, following the retirement
of the judge hearing the case, the case was referred to a
magistrate. On July 11, 2002, the magistrate granted our
motion for summary judgment finding that we did not infringe the
patents. On August 29, 2002, NCR filed an objection to the
magistrates ruling. On August 28, 2003, the new
district judge rejected NCRs objection and affirmed the
magistrates ruling.

On June 19, 2001, DataQuill Limited filed
suit against Handspring in the United States District Court for
the Northern District of Illinois, case no. 01-CV-4635. The
complaint alleges infringement of one U.S. patent.

7



---



##### Table of Contents



The complaint seeks unspecified compensatory and
treble damages and to permanently enjoin Handspring from
infringing the patent in the future. We filed an answer on
August 1, 2001, denying DataQuills allegations and
asserting counterclaims for declaratory judgments that we do not
infringe the patent in suit, that the patent in suit is invalid,
and that it is unenforceable. On August 7, 2002, we filed
motions for summary judgment for non-infringement and
invalidity, which were renewed in filings made on
October 29, 2002. On February 28, 2003, the Court
granted in part and denied in part our summary judgment motions.
DataQuill then filed a motion for this ruling to be
reconsidered, which on April 16, 2003 the Court granted in
part and denied in part.


On August 13, 2001, Handspring and two of
our officers were named as defendants in a securities class
action lawsuit filed in United States District Court for the
Southern District of New York. On September 6, 2001, a
substantially identical suit was filed. These cases have been
consolidated with hundreds of other so called
laddering cases brought on similar grounds in the
United States District Court for the Southern District of New
York. The complaints against Handspring assert that the
prospectus for Handsprings June 20, 2000 initial public
offering failed to disclose certain alleged actions by the
underwriters for the offering. The complaints against Handspring
allege claims against Handspring and two of its officers under
Sections 11 and 15 of the Securities Act of 1933, as
amended, and under Section 10(b) and Section 20(a) of
the Securities Exchange Act of 1934, as amended. The complaints
against Handspring also name as defendants the underwriters for
Handsprings initial public offering. Handspring has sought
indemnification from its underwriters pursuant to the
Underwriting Agreement dated as of June 20, 2000 with the
underwriters in connection with Handsprings initial public
offering. On October 9, 2002, the Handspring officers named
as defendants were dismissed without prejudice from these cases
by court order. On July 9, 2003, a committee of
Handsprings Board of Directors conditionally approved a
proposed partial settlement with the plaintiffs in this matter.
The settlement would provide, among other things, a release of
Handsprings and its officers, and Handsprings agreement to
assign to the plaintiffs certain potential claims Handspring may
have against its underwriters. Any direct financial impact of
the proposed settlement is expected to be borne by
Handsprings insurers.

On November 6, 2002, MLR, LLC filed an
amended complaint in the United States District Court for the
Northern District of Illinois in a patent lawsuit that had been
pending against other defendants, adding additional defendants,
including Handspring. As to Handspring, the complaint alleges
infringement of one U.S. patent. On February 5, 2003,
we filed an answer denying infringement, and asserting
counterclaims for declaratory judgments that we do not infringe
the patents in suit and that the patents in suit are invalid. On
January 24, 2003, we filed a related lawsuit in the United
States District Court for the Northern District of California,
seeking declaratory judgments that the MLR patents are invalid
and not infringed by Handspring, and that MLR, by seeking to
coerce businesses to buy unwanted and unneeded patent licenses,
is engaged in conduct in violation of California Business &
Professions Code section 17200. This second case was stayed
pending a ruling on MLRs motion before the Joint Panel on
Multidistrict Litigation to consolidate various cases relating
to the patent in question. On July 15, 2003, Handspring and
MLR entered into an agreement whereby in exchange for a one time
payment from Handspring, MLR agreed to grant Handspring a
royalty-free, fully paid-up irrevocable license under the patent
in dispute as well as MLRs other issued and pending
patents worldwide. The amount of this settlement is included in
Handsprings consolidated financial statements as of
June 28, 2003. In conjunction with that agreement, the
litigation between the two companies was dismissed with
prejudice. Settlement of this matter did not have a material
effect on our financial position or results of operations.

On February 28, 2003, Credit Suisse First
Boston Corporation and approximately 50 of its clients,
including Handspring, were named as defendants in a securities
class action lawsuit filed in United States District Court for
the Southern District of Florida. The complaint also names as
defendants numerous officers of CSFB and its clients including
one current and one former Handspring officer. The complaint
asserts wrongdoing relating to various initial public offerings
in which Credit Suisse First Boston was involved between 1999
and 2001. Among other things, the complaint alleges that
Handspring and/or its named current and former officers,
violated Section 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and under Section 15 of the
Securities Act of 1933, as amended. On July 16, 2003,
Handspring, its current and

8



---



##### Table of Contents



former officer, and numerous other defendants
were dismissed from the case due to the plaintiffs failure
to effectuate service of process.


On June 17, 2003 and June 19, 2003,
purported class action lawsuits were filed in Delaware Chancery
Court, New Castle County, on behalf of Handspring stockholders
against Handspring, Palm, and a number of individuals alleged to
be directors of Handspring. Both actions contain substantially
identical allegations that the individual defendants breached
their fiduciary duties to us and our stockholders in connection
with the proposed merger of Handspring and Palm that was
publicly announced on June 4, 2003, and that Palm aided and
abetted these breaches of fiduciary duty. On June 23, 2003,
an amended complaint was filed in one the two lawsuits. This
amended complaint did not change the substantive allegations,
but omitted as individual defendants persons who were not
directors of Handspring. The complaints seek to enjoin the
proposed merger, to rescind the merger if it is not enjoined, to
recover unspecified compensatory damages, and award unspecified
attorneys fees and costs. There is no date fixed for the
defendants to respond either to the complaints or to
plaintiffs written discovery requests. Plaintiffs have not
filed a motion for preliminary injunction, and there is no trial
date.




Item 4.Submission
of Matters to a Vote of Security Holders

None.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Market for Registrants Common
Equity

Our common stock is traded on the Nasdaq National
Market under the symbol HAND. The following table
sets forth the range of the high and low sales prices by quarter
as reported by the Nasdaq National Market for the two most
recent fiscal years:

|                 |  |      |      |     |  |   |      | 
|---------------- |  | ---- | ---- | --- |  | - | ---- | 
|Fiscal Year 2003 |  | High |      | Low
|                 |  |      |      |    
|Fourth Quarter   |  | $    | 1.30 |     |  | $ | 0.60 | 
|Third Quarter    |  |      | 1.25 |     |  |   | 0.63 | 
|Second Quarter   |  |      | 1.55 |     |  |   | 0.56 | 
|First Quarter    |  |      | 2.14 |     |  |   | 1.00 | 

|                 |  |      |      |     |  |   |      | 
|---------------- |  | ---- | ---- | --- |  | - | ---- | 
|Fiscal Year 2002 |  | High |      | Low
|                 |  |      |      |    
|Fourth Quarter   |  | $    | 4.86 |     |  | $ | 1.21 | 
|Third Quarter    |  |      | 8.03 |     |  |   | 3.68 | 
|Second Quarter   |  |      | 7.75 |     |  |   | 1.13 | 
|First Quarter    |  |      | 7.61 |     |  |   | 1.27 | 

Sales of Unregistered Securities

In January 2003, warrants for
1,000,000 shares were exercised at the exercise price of
$0.01 per share by M-F Downtown Sunnyvale, LLC, a landlord
for certain of our facilities, in a private transaction.

Holders

On July 31, 2003, there were
470 stockholders of record and over 49,950 beneficial
holders.

Dividends

We have never declared or paid cash dividends on
our common stock. We currently intend to retain any earnings for
use in our business and do not anticipate paying any cash
dividends in the foreseeable future.

9



---



##### Table of Contents






Item 6.Selected
Financial Data

The following selected consolidated financial
data should be read in conjunction with our Consolidated
Financial Statements and the related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this annual report. The selected consolidated statement of
operations data for the years ended June 28, 2003,
June 29, 2002 and June 30, 2001, and the selected
consolidated balance sheet data at June 28, 2003 and
June 29, 2002, are derived from our audited consolidated
financial statements that have been included elsewhere in this
annual report. The consolidated statement of operations data for
the year ended July 1, 2000 and the period from
July 29, 1998 (date of inception) to June 30, 1999 and
the consolidated balance sheet data as of June 30, 2001,
July 1, 2000 and June 30, 1999 are derived from our
audited consolidated financial statements not included herein.

|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         |               |          |         |         |   |         |        |         |   |        |       |       | 
|------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------- | -------- | ---------- | ------- | ---------- | ------- | ---------- | ------- | ------------- | -------- | ------- | ------- | - | ------- | ------ | ------- | - | ------ | ----- | ----- | 
|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         | Period from  
|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         | July 29, 1998
|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         | (Date of     
|                                                                    |                                                                 | Year Ended                            |          | Year Ended |         | Year Ended |         | Year Ended |         | Inception)   
|                                                                    |                                                                 | June 28,                              |          | June 29,   |         | June 30,   |         | July 1,    |         | to June 30,  
|                                                                    |                                                                 | 2003                                  |          | 2002       |         | 2001       |         | 2000       |         | 1999         
|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         |              
|                                                                    |                                                                 |                                      
|                                                                    |                                                                 | (In thousands, except per share data)
|Consolidated Statements of Operations
    Data:                     |                                                                 |                                       |          |            |         |            |         |            |         |               |          |         |         |   |         |        |         |   |        |      
|Revenue                                                             |                                                                 | $                                     | 147,256  |            |         | $          | 240,651 |            |         | $             | 370,943  |         |         | $ | 101,937 |        |         | $ |       |      
|Costs and operating expenses:                                       |                                                                 |                                       |          |            |         |            |         |            |         |               |          |         |         |   |         |        |         |   |        |      
|                                                                    | Costs of revenue                                                |                                       |          | 112,152    |         |            |         | 205,917    |         |               |          | 292,311 |         |   |         | 69,921 |         |   |        |      |      
|                                                                    | Research and development                                        |                                       |          | 22,226     |         |            |         | 24,739     |         |               |          | 23,603  |         |   |         | 10,281 |         |   |        | 2,738 |      
|                                                                    | Selling, general and administrative                             |                                       |          | 61,053     |         |            |         | 85,612     |         |               |          | 145,132 |         |   |         | 42,424 |         |   |        | 2,451 |      
|                                                                    | In-process research and development                             |                                       |          |           |         |            |         |           |         |               |          | 12,225  |         |   |         |       |         |   |        |      |      
|                                                                    | Amortization of deferred stock compensation and
    intangibles |                                       |          | 8,516      |         |            |         | 20,181     |         |               |          | 32,830  |         |   |         | 40,077 |         |   |        | 3,646 |      
|                                                                    | Sunnyvale restructuring                                         |                                       |          | 75,931     |         |            |         |           |         |               |          |        |         |   |         |       |         |   |        |      |      
|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         |               |          |         |         |   |         |        |         |   |        |      
|                                                                    |                                                                 | Total costs and operating expenses    |          |            | 279,878 |            |         |            | 336,449 |               |          |         | 506,101 |   |         |        | 162,703 |   |        |       | 8,835 | 
|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         |               |          |         |         |   |         |        |         |   |        |      
|Loss from operations                                                |                                                                 |                                       | (132,622 | )          |         |            | (95,798 | )          |         |               | (135,158 | )       |         |   | (60,766 | )      |         |   | (8,835 | )    
|Interest and other income, net                                      |                                                                 |                                       | 1,802    |            |         |            | 5,259   |            |         |               | 12,195   |         |         |   | 675     |        |         |   | 446    |      
|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         |               |          |         |         |   |         |        |         |   |        |      
|Loss before taxes                                                   |                                                                 |                                       | (130,820 | )          |         |            | (90,539 | )          |         |               | (122,963 | )       |         |   | (60,091 | )      |         |   | (8,389 | )    
|Income tax provision                                                |                                                                 |                                       | 238      |            |         |            | 1,050   |            |         |               | 3,000    |         |         |   | 200     |        |         |   |       |      
|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         |               |          |         |         |   |         |        |         |   |        |      
|Net loss                                                            |                                                                 | $                                     | (131,058 | )          |         | $          | (91,589 | )          |         | $             | (125,963 | )       |         | $ | (60,291 | )      |         | $ | (8,389 | )    
|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         |               |          |         |         |   |         |        |         |   |        |      
|Basic and diluted net loss per share                                |                                                                 | $                                     | (0.91    | )          |         | $          | (0.71   | )          |         | $             | (1.21    | )       |         | $ | (1.77   | )      |         | $ | (0.71  | )    
|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         |               |          |         |         |   |         |        |         |   |        |      
|Shares used in calculating basic and diluted net
    loss per share |                                                                 |                                       | 144,444  |            |         |            | 128,221 |            |         |               | 103,896  |         |         |   | 34,015  |        |         |   | 11,772 |      
|                                                                    |                                                                 |                                       |          |            |         |            |         |            |         |               |          |         |         |   |         |        |         |   |        |      

|                                              |  |                |        |          |  |          |         |         |  |          |         |  |  |   |         |  |  |   |        |  
|--------------------------------------------- |  | -------------- | ------ | -------- |  | -------- | ------- | ------- |  | -------- | ------- |  |  | - | ------- |  |  | - | ------ | -
|                                              |  | June 28,       |        | June 29, |  | June 30, |         | July 1, |  | June 30,
|                                              |  | 2003           |        | 2002     |  | 2001     |         | 2000    |  | 1999    
|                                              |  |                |        |          |  |          |         |         |  |         
|                                              |  |               
|                                              |  | (In thousands)
|Consolidated Balance Sheet Data:              |  |                |        |          |  |          |         |         |  |          |         |  |  |   |         |  |  |   |        |  
|Cash and cash equivalents                     |  | $              | 31,308 |          |  | $        | 85,554  |         |  | $        | 87,580  |  |  | $ | 196,548 |  |  | $ | 7,533  |  
|Short-term investments                        |  |                | 5,602  |          |  |          | 15,235  |         |  |          | 33,943  |  |  |   |        |  |  |   | 6,234  |  
|Restricted investments                        |  |                | 8,185  |          |  |          | 49,482  |         |  |          | 53,634  |  |  |   | 2,114   |  |  |   |       |  
|Working capital                               |  |                | (517   | )        |  |          | (22,217 | )       |  |          | 48,670  |  |  |   | 182,662 |  |  |   | 13,108 |  
|Total assets                                  |  |                | 80,767 |          |  |          | 290,154 |         |  |          | 253,235 |  |  |   | 230,472 |  |  |   | 15,631 |  
|Long-term liabilities, net of current portion |  |                | 16,441 |          |  |          |        |         |  |          |        |  |  |   | 57      |  |  |   |       |  
|Redeemable convertible preferred stock        |  |                |       |          |  |          |        |         |  |          |        |  |  |   |        |  |  |   | 17,972 |  
|Total stockholders equity (deficit)          |  |                | 6,627  |          |  |          | 122,906 |         |  |          | 145,202 |  |  |   | 194,229 |  |  |   | (3,616 | )

10



---



##### Table of Contents






Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

Overview

Our goal is to be a global leader in the emerging
market for integrated wireless devices offering voice, data,
email and personal information management capabilities in a
single device. We refer to these devices as
communicators or smartphones. We shipped
our first communicator, the monochrome GSM Treo 180, in
December 2001, and subsequently have shipped the color GSM/ GPRS
Treo 270 and the color CDMA Treo 300. In June 2003, we
announced the Treo 600 smartphone design, an integrated
device with a smaller, more phone like form factor. Our current
carrier partners include Sprint for the Treo 300 and 600;
Orange for the Treo 600; and T-Mobile, AT&T Wireless
and Cingular for the Treo 270.

When Handspring was formed in July 1998, we
focused on developing products for the handheld organizer
market. In our fourth quarter of fiscal 2001, we began to shift
our strategic focus to communicators due a number of adverse
changes in the handheld organizer market including lower demand,
compressed gross margins and increased competition. As of the
completion of our third quarter of fiscal 2003, we had
substantially completed this strategic transition.

On June 4, 2003, we announced that we had
entered into a definitive agreement for Palm, Inc. to acquire
us. Palm also announced that its board of directors had given
final approval for the spin-off of PalmSource, Inc., its
subsidiary responsible for developing and licensing the Palm
operating system. Under the proposed terms of the transaction,
and following the spin-off of PalmSource, our stockholders will
receive 0.09 shares of Palm common stock  and no
shares of PalmSource  for each share of Handspring
common stock owned. Palm will issue approximately
13.9 million shares of Palm common stock to our
stockholders on a fully diluted basis using the treasury stock
method. As a result of the merger, our stockholders will own
approximately 31% of the newly merged company on a fully diluted
basis using the treasury stock method, and Palms
stockholders will own approximately 69%. The value per share to
be received by our stockholders will be based on the Palm share
price following the spin-off of PalmSource. The spin-off of
PalmSource will be completed immediately prior to the closing of
the merger between Palm and Handspring. However, the merger with
Palm is subject to specified closing conditions, and we cannot
assure you that we will complete it. As part of the merger
agreement, Palm will provide us with an up to $20.0 million
secured credit facility.

Significant Accounting Policies

The consolidated financial statements are
prepared in conformity with accounting principles generally
accepted in the United States of America, which require
management to make estimates and assumptions that affect the
reported amounts. Actual results could differ from these
estimates.

Revenue Recognition.Revenue is comprised almost entirely
of sales of our communicator and organizer products. The Company
recognizes a small portion of revenue from the sale of software
and extended warranty and support contracts. The Company
recognizes revenue pursuant to applicable accounting standards,
including Statement of Position (SOP) No. 97-2,
Software Revenue Recognition, as amended. Revenue is
recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable,
and collectibility is probable. Product is considered delivered
to the customer once it has been shipped, and title and risk of
loss have been transferred. Sales of our communicators may also
include subsidy revenue from wireless carriers for new customer
service contracts or the extension of existing customer
contracts. In these cases, the customer has a specified period
of time in which they may cancel their service. All revenue
related to these subsidies is deferred until this specified
period of time has elapsed. The Company records reductions to
revenue for estimated commitments related to price protection
and for customer incentive programs, including reseller and end
user rebates and other sales programs and volume-based
incentives.

Revenue from extended warranty and support
contracts is recognized ratably over the contract period.
Amounts billed to customers in excess of revenue recognized on
extended warranty and support contracts are recognized as
deferred revenue until revenue recognition criteria are met.

11



---



##### Table of Contents



Revenue on software that includes multiple
elements is allocated to each element based on vendor specific
objective evidence of the fair value of each element pursuant to
SOP 97-2, as amended. Allocated revenue for each element is
recognized when revenue recognition criteria have been met for
each element. Vendor specific objective evidence of fair value
is generally determined based on the price charged when each
element is sold separately.

No significant post-delivery obligations exist
with respect to revenue recognized during fiscal 2003, 2002 or
2001.

Returns reserve.We
offer limited return rights on our products and accordingly, at
the time the related sale is recorded, we reduce revenues for
estimated returns. The estimates for returns are adjusted
periodically and are based upon various factors including
historical rates of returns and inventory levels in the channel.
We also estimate and reserve for rebates and price protection
based upon specific programs. Actual results may differ from
these estimates.

Warranty reserve.The cost of product warranties is estimated and accrued at the
time revenue is recognized. While we engage in extensive product
quality programs and processes, our warranty obligation is
affected by product failures rates, component costs and repair
service costs incurred in correcting a product failure. Should
actual product failure rates, component costs or repair service
costs differ from our estimates, revisions to the estimated
warranty costs would be required.

Cash and cash equivalents and short-term
investments.The Company invests its
excess cash in debt instruments of the U.S. Government and its
agencies, and in high-quality corporate issuers. All highly
liquid debt or equity instruments purchased with an original
maturity of three months or less from the date of purchase are
considered to be cash equivalents. Those with original
maturities greater than three months and current maturities less
than twelve months from the balance sheet date are considered
short-term investments.

All short-term investments are classified as
available-for-sale securities and are stated at market value
with any temporary difference between an investments
amortized cost and its market value recorded as a separate
component of stockholders equity until such gains or
losses are realized. Gains or losses on the sales of securities
are determined on a specific identification basis.

Accounts receivable.Accounts receivable are recorded at face value, less an
allowance for doubtful accounts. The allowance for doubtful
accounts is an estimate calculated based on an analysis of
current business and economic risks, customer credit-worthiness,
credit card fraud, specific identifiable risks such as
bankruptcies, terminations or discontinued customers, or other
factors that may indicate a potential loss. The allowance is
reviewed on a consistent basis to ensure that it adequately
provides for all reasonably expected losses in the receivable
balances. An account may be determined to be uncollectable if
all collection efforts have been exhausted, the customer has
filed for bankruptcy and all recourse against the account is
exhausted, or disputes are unresolved and negotiations to settle
are exhausted. This uncollectable amount is written off as bad
debt against the allowance.

Inventories.Inventories are stated at the lower of standard cost (which
approximates first-in, first-out cost) or market. Provisions for
potentially obsolete or slow moving inventories are made based
on managements analysis of inventory levels and future
sales forecasts. These provisions are estimates, which could
vary significantly, either favorably or unfavorably, from actual
requirements if future economic conditions, customer inventory
levels or competitive conditions differ from our expectations.

Income Taxes.We
account for income taxes in accordance with Statement of
Financial Accounting Standards, or SFAS, No 109,
Accounting for Income Taxes. This statement prescribes
the use of the liability method whereby deferred tax assets and
liabilities are determined based on the differences between
financial reporting and tax bases of assets and liabilities and
measured at tax rates that will be in effect when the
differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets where
it is more likely than not that the deferred tax asset will not
be realized.

Construction in progress  Sunnyvale
property.Emerging Issues Task Force,
or EITF, Issue No. 97-10, The Effect of Lessee
Involvement in Asset Construction, is applied to entities
involved with certain

12



---



##### Table of Contents



structural elements of the construction of an
asset that will be leased when construction of the asset is
completed. EITF No. 97-10 requires us to be considered the
owner (for accounting purposes only) of these types of projects
during the construction period. This is the case even though we
are not obligated to guarantee the non-recourse mortgage
obligation, nor are we involved in the management of the
construction of the building or the management of the
owner-lessor. Therefore, we have recorded such building costs
related to the Sunnyvale leases as construction in progress with
a corresponding non-cash obligation for construction in progress.


Results of Operations

Revenue.Fiscal 2003
revenue was $147.3 million, a decline of $93.4 million, or
39%, from fiscal 2002 revenue of $240.7 million. The
decrease was primarily due to the following factors:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | There was a decline in unit shipments of our
    organizers of 958,000 units as we transitioned our product
    development and marketing efforts from organizer products to
    communicator products. Our organizer products represented 32%,
    or $46.5 million, of net revenue for the year ended
    June 28, 2003 compared with 82%, or $197.2 million, of
    net revenue for the year ended June 29, 2002. The decrease
    in organizer revenue was offset in part by revenue generated
    from shipments of our Treo communicator.
|
| |  | There was an increase in unit shipments of our
    Treo communicators of 163,000 units. Our communicator
    products represented 68%, or $100.8 million, of net revenue for
    the year ended June 28, 2003 compared with 18%, or
    $43.5 million, of net revenue for the year ended
    June 29, 2002.                                                                                                                                                                                                                                    
|
| |  | Revenue outside North America represented 18%, or
    $26.9 million, of total revenue during fiscal 2003 compared
    with 16%, or $38.2 million, of total revenue during fiscal
    2002.                                                                                                                                                                                                                                                                                                                                                     

Fiscal 2002 revenue was $240.7 million, a
decline of $130.2 million, or 35%, from fiscal 2001 revenue
of $370.9 million. The decrease was primarily due to the
following factors:



| |   |                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | There was a decline in unit shipments of our
    organizers of 521,000 units. We believe that unit sales
    decreased due to economic weakness, a significant slowing in the
    growth rate of the organizer market, excess channel inventories,
    increased competition, and our shift in focus from organizer
    products to communicator products.        
|
| |  | There was a decline in the average selling price
    for our organizers from $222 per unit in fiscal year 2001
    to $175 per unit in fiscal year 2002, which was primarily
    attributable to pricing and promotion actions that we initiated
    to reduce channel inventory, as well as a general reduction in
    the market prices for handheld organizers.
|
| |  | The decrease in organizer revenue of
    $173.7 million was offset in part by revenue generated from
    the first shipments of our Treo communicator of
    $43.5 million, which began shipping internationally at the
    end of the second quarter of fiscal 2002, and began shipping in
    North America during the third quarter of fiscal 2002.            
|
| |  | Revenue outside North America represented 16%, or
    $38.2 million, of total revenue during fiscal 2002 compared
    with 19%, or $72.3 million, of total revenue during fiscal
    2001.                                                                                                                                                                        

Cost of revenue.Cost of revenue was $113.2 million during fiscal 2003, a
decline of $95.3 million, or 46%, from cost of revenue of
$208.5 million during fiscal 2002. Total cost of revenues
is comprised of cost of revenues and the applicable
portion of amortization of deferred stock compensation and
intangibles. Total cost of revenues resulted in gross
margins increasing from 13% in fiscal 2002 to 23% in fiscal
2003. This increase was primarily attributable to the increase
in communicator sales of $57.3 million, which typically
have higher gross margins than our organizer products, and fewer
pricing and promotional activities.

Cost of revenue was $208.5 million during
fiscal 2002, a decline of $88.3 million, or 30%, from cost
of revenue of $296.8 million during fiscal 2001. Total cost
of revenues is comprised of cost of revenues and
amortization of deferred stock compensation and
intangibles of $1.1 million and $2.6 million
during fiscal 2003 and fiscal 2002, respectively. Total cost of
revenues resulted in gross margins declining from 20% in fiscal

13



---



##### Table of Contents



2001 to 13% in fiscal 2002. This decline was
primarily attributable to aggressive pricing and promotion
actions taken in order to increase demand and reduce inventory
of our organizer products. The negative effect of the pricing
and promotion actions on gross margin was partially offset by
higher margins on the sales of our Treo communicators beginning
in the second quarter of fiscal 2002. Also offsetting the
decrease in gross margin was a higher percentage of our products
sold through our website of 22% of revenue in fiscal 2002, as
compared to 17% of revenue in fiscal 2001. Sales through our
website typically generate higher gross margins as compared to
retail sales.


Gross margins may be adversely affected by new
product introductions by our competitors, competitor pricing
actions, higher inventory balances, warranty expenses and
charges for excess and obsolete products. We also expect our
gross margin to fluctuate in the future due to channel mix,
geographic mix, new product introductions, promotional funding
and timing and amount of carrier subsidies.

Research and
development.Research and development
expenses during fiscal 2003 were $22.2 million, a decrease
of $2.5 million, or 10%, from $24.7 million during
fiscal 2002. The decrease in fiscal 2003 was primarily due to
the timing of projects and reductions in our workforce as well
as $1.3 million in carrier reimbursed development costs.
Research and development expenses during fiscal 2002 were
$24.7 million, an increase of $1.1 million, or 5%,
from $23.6 million during fiscal 2001. The increase in
fiscal 2002 was primarily due to the hiring of additional
personnel required for development of new products, including
our Treo communicator. We believe that continued investment in
research and development is critical to our plan to continue to
develop wireless communicator products.

Selling, general and
administrative.Selling, general and
administrative expenses during fiscal 2003 were
$61.1 million, a decline of $24.5 million, or 29%,
from $85.6 million during fiscal 2002. This decrease was
primarily due to general cost reductions made company-wide,
including reductions in advertising and marketing activities of
$14.9 million and reductions in our workforce. This
reduction was partially offset by a restructuring charge of
$2.3 million taken during the first quarter of fiscal 2003
to align our expenses with the current size of the company. This
charge included severance expenses associated with headcount
reductions for both U.S. and European operations, and the
write-off of leases and capital equipment for our European
operations. Selling, general and administrative expenses during
fiscal 2002 were $85.6 million, a decline of
$59.5 million, or 41%, from $145.1 million during
fiscal 2001. This decrease was primarily due to significant
reductions in advertising and marketing activities of
$43.7 million, $5.5 million in cost savings realized
from the restructuring of our customer support organization and
general cost reductions made company-wide.

In-process research and
development.In February 2001, we
completed our acquisition of BlueLark Systems, a provider of
client and server based software designed to deliver content and
services to wirelessly connected mobile devices. Under the terms
of the agreement related to this acquisition, we issued
450,000 shares and options to purchase Handsprings
common stock in exchange for all of BlueLark Systems
outstanding shares and options for a total purchase price of
$16.4 million. The acquisition was accounted for as a
purchase.

In connection with the acquisition of BlueLark
Systems, we recorded a $12.2 million charge for in-process
research and development and acquisition related costs during
fiscal 2001 for projects that had not reached technological
feasibility and had no alternative future use. The Company
considered various factors in determining the fair value of the
total purchase price to allocate to the assets acquired and
liabilities assumed from BlueLark Systems, including in-process
research and development. The amount allocated to in-process
research and development was determined by assessing the stage
and expected date of completion of the research and development
efforts at the acquisition date and calculating the net present
value of cash flows expected to result from the new technology.
The estimated net present value of cash flows took into account
the characteristics and applications of the technologies, the
size and growth rate of existing and future markets and an
evaluation of past and anticipated technology and product life
cycles. These cash flows included the after-tax effects of
future revenues, cost of revenues, operating expenses, working
capital charge and expenditures for capital and intangibles.
Both the estimated stage of completion and the discount rate
used to calculate the net present value factored into account
the uncertainty surrounding the successful deployment of the new
technology resulting from the in-process research and
development effort.

14



---



##### Table of Contents



Amortization of deferred stock compensation
and intangibles.We recognized
$8.5 million, $20.2 million and $32.8 million of
amortization of deferred stock compensation and intangibles
during fiscal 2003, 2002 and 2001, respectively. This amount is
primarily related to stock options that we granted to our
officers and employees prior to our initial public offering on
June 20, 2000, at prices subsequently deemed to be below
the fair value of the underlying stock. The cumulative
difference between the fair value of the underlying stock at the
date the options were granted and the exercise price of the
granted options was $102.0 million. In addition, in
February 2001, we recorded $3.9 million of deferred stock
compensation in relation to the unvested stock options and
restricted stock assumed in the acquisition of BlueLark Systems.
All of the deferred stock compensation is being amortized, using
the multiple option method, over the vesting period of the
related options and restricted stock. Accordingly, our results
of operations will include amortization of deferred stock
compensation through fiscal 2004. Future amortization of
deferred stock compensation is estimated to be $1.3 million
for fiscal year 2004.

As part of the acquisition of BlueLark Systems,
we recorded intangible assets consisting of goodwill and
assembled workforce of $0.6 million. These assets were
amortized from the date of acquisition through fiscal 2002 on a
straight-line basis over three years. However, with the adoption
of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, beginning in fiscal
2003, the value of assembled workforce was reclassified and
recorded as goodwill and the amortization was discontinued. In
accordance with SFAS No. 142, we applied impairment
tests in May 2003 and determined goodwill to be impaired. The
unamortized balance of $0.3 million was expensed in the
fourth quarter of fiscal 2003.

Restructuring.In
September 2002, the Board of Directors approved a restructuring
plan to align expenses with our current size. In connection with
the restructuring charge, we recorded a restructuring charge to
operating expenses of $2.3 million. This charge included
$1.2 million for workforce reduction for both U.S. and
International operations, $0.5 million to downsize and
close excess facilities and $0.4 million of asset-related
charges related to certain long-lived assets that were
abandoned. The restructuring activities resulted in the
termination of 77 employees, of which all were designated
for termination and were terminated in fiscal 2003.

On January 29, 2003, we restructured the
leases for two new buildings in Sunnyvale, California (the
Sunnyvale leases) that we entered into in February 2001. The
Sunnyvale leases had initial terms of twelve years each, with
monthly rent expense of approximately $1.7 million, plus
monthly operating expenses of approximately $300,000 per
month, for a total monthly expense of approximately
$2.0 million. We estimate that the total obligation to the
landlord would have been approximately $350.0 million over
12 years. We also had obligations totaling approximately
$5.3 million to a contractor who was constructing the
tenant improvements in the buildings.

Some time after entering into the Sunnyvale
leases, we determined that we no longer needed additional office
space. We attempted to sublet the buildings with the help of a
commercial realtor, but due to the substantial decline in the
demand for commercial real estate in the Silicon Valley,
California area, we were unable to secure any subtenants.
Consequently, we entered into negotiations with the landlord to
restructure the Sunnyvale leases.

As a result of this restructuring, we took a
charge of $75.9 million in the third quarter of fiscal
2003. The components of this charge include $15.3 million
paid from our cash, cash equivalents and short-term investments,
$40.9 million paid from the release of certain letters of
credit which had secured our obligations under the Sunnyvale
leases, $5.0 million for future lease payments and note
payable obligations, $3.7 million for warrants to purchase
10.0 million shares of common stock, $10.4 million net
write-off of tenant improvements and rent expenses and
$0.6 million for legal fees and expenses.

15



---



##### Table of Contents



Details of the restructuring charges in fiscal
2003, included in accrued liabilities, are as follows:

|                       |                  |                |       |            |   |             |     |         |   |               |        |         |   |   |     |      |   |   |     |     |   |   |        |         |  
|---------------------- | ---------------- | -------------- | ----- | ---------- | - | ----------- | --- | ------- | - | ------------- | ------ | ------- | - | - | --- | ---- | - | - | --- | --- | - | - | ------ | ------- | -
|                       |                  | Severance      |       |            |   | Sunnyvale   |     |         |   |               |        |        
|                       |                  | and            |       | Excess     |   | Lease       |     | Asset-  |   | Other         |        |        
|                       |                  | Benefits       |       | Facilities |   | Restructure |     | Related |   | Restructuring |        | Total  
|                       |                  |                |       |            |   |             |     |         |   |               |        |        
|                       |                  |               
|                       |                  | (In thousands)
|Restructuring charges  |                  | $              | 1,242 |            |   | $           | 536 |         |   | $             | 75,930 |         |   | $ | 411 |      |   | $ | 155 |     |   | $ | 78,274 |        
|                       | Cash charges     |                |       | (1,242     | ) |             |     | (192    | ) |               |        | (48,997 | ) |   |     |     |   |   |     | (69 | ) |   |        | (50,500 | )
|                       | Non-cash charges |                |       |           |   |             |     |        |   |               |        | (14,081 | ) |   |     | (411 | ) |   |     |    |   |   |        | (14,492 | )
|                       |                  |                |       |            |   |             |     |         |   |               |        |         |   |   |     |      |   |   |     |     |   |   |        |        
|Balance, June 28, 2003 |                  | $              |      |            |   | $           | 344 |         |   | $             | 12,852 |         |   | $ |    |      |   | $ | 86  |     |   | $ | 13,282 |        
|                       |                  |                |       |            |   |             |     |         |   |               |        |         |   |   |     |      |   |   |     |     |   |   |        |        

During the fourth quarter of fiscal 2001 we
recorded a $26.8 million charge for excess and obsolete
inventory. This charge resulted from the overall economic
slowdown and high levels of channel inventory, which in turn
drove aggressive price reductions and increased competition.

Interest and other income,
net.Interest and other income, net
was $1.8 million during fiscal 2003, a decline of
$3.5 million, or 66%, from $5.3 million in fiscal
2002. Interest and other income, net during fiscal 2002
decreased by $6.9 million, or 57%, from $12.2 million
in fiscal 2001. The decrease during fiscal 2003 compared to
fiscal 2002 was primarily due to a decrease in interest income
from lower average cash and investment balances as well as lower
interest rates during fiscal 2003, partially offset by an
impairment loss of $258,000 on a strategic investment when we
determined that there had been a decline in the fair value of
the investment that was other than temporary. The decrease
during fiscal 2002 compared to fiscal 2001 was primarily the
result of a decrease in interest income from lower average cash
and investment balances as well as lower interest rates during
fiscal 2002 compared to fiscal 2001.

Also included are gains and losses from
fluctuations in foreign currency exchange rates, primarily
caused from the movement between the Euro and the
U.S. dollar on our foreign subsidiaries
U.S. dollar liabilities. These fluctuations partially
contributed to the decrease in interest and other income, net
during fiscal 2003 of $0.1 million and partially offset the
decrease during fiscal 2002 of $1.4 million. During fiscal
2002 and 2001, we entered into foreign exchange forward
contracts to minimize the impact of foreign currency
fluctuations on assets and liabilities denominated in currencies
other than the functional currency of the reporting entity. As
of June 29, 2002 we did not have any outstanding foreign
exchange forward contracts. We did not enter into any foreign
exchange forward contracts in fiscal 2003 and did not have any
outstanding foreign exchange forward contracts as of
June 28, 2003. We will continue to assess the need to
utilize financial instruments to hedge currency exposures.

Income Tax Provision.The provision for income taxes was
$0.2 million, $1.1 million and $3.0 million
during fiscal 2003, 2002 and 2001, respectively. The provision
for income taxes consists primarily of foreign taxes related to
our business outside of the United Sates of America. The
fluctuations in the provision for income taxes from fiscal 2001
through fiscal 2003 relate to the decrease during fiscal 2002
and 2003 in the level of our operations outside of the United
States.

No provision for federal income taxes was
recorded because we have experienced significant net losses,
which have resulted in deferred tax assets. We provided a full
valuation allowance for all deferred tax assets because, in
light of our history of operating losses, we are presently
unable to conclude that it is more likely than not that the
deferred tax assets will be realized.

Liquidity and Capital Resources

As of June 28, 2003, we had cash and cash
equivalents and short-term investments of $36.9 million,
down $63.9 million from $100.8 million as of
June 29, 2002. This decrease is primarily attributable to
cash used in operations and for settlement of the Sunnyvale
leases, partially offset by a reduction of restricted
investments pledged under the Sunnyvale leases.

Net cash used in operating activities was
$47.0 million during fiscal 2003. The net cash used in
operating activities was primarily attributable to our net
losses and decreases in accounts payable and accrued liabilities

16



---



##### Table of Contents



offset partially by the Sunnyvale lease
restructuring, amortization of deferred stock compensation and
intangibles, depreciation and amortization and decreases in
account receivable and inventories. The decrease in accounts
receivable was due primarily to the decrease in sales from the
prior year. The decrease in inventory was due primarily to the
decrease in the inventory levels of the organizer products and
the production transition to the next generation communicator
products. Net cash used in operating activities was
$89.0 million and $16.9 million during fiscal 2002 and
2001, respectively. During fiscal 2002, the net cash used in
operating activities was primarily attributable to our net loss,
an increase in inventories and a decrease in accrued liabilities
offset partially by amortization of deferred stock compensation
and intangibles, depreciation and amortization and a decrease in
prepaid expenses and other current assets. The increase in
accounts receivable was due to the timing of shipments in the
last quarter of fiscal 2002 compared with the previous year, and
the decrease in accrued liabilities was due to a general
decrease in the level of operations throughout the year as well
as the payment for excess and obsolete inventories reserved for
in the previous year. Also, during fiscal 2002 we changed our
business practice with our logistics partners, whereby we now
own all inventory held at their facilities. This change in
practice caused a decrease in prepaid expenses and other current
assets and an increase in inventory on the balance sheet. During
fiscal 2001, the net cash used in operating activities was
primarily attributable to our net loss, an increase in prepaid
expenses and other current assets and inventories offset
partially by amortization of deferred stock compensation and
intangibles, depreciation and amortization, the write-off of
excess and obsolete inventories, the write-off of in-process
research and development costs associated with our acquisition
of BlueLark Systems and increases in accounts payable and
accrued liabilities. These increases in prepaid expenses were
primarily a result of the prepayment of foreign taxes,
prepayments made to our suppliers for inventory that they held
on our behalf and purchases of long lead-time,
Handspring-specific, product components.


Net cash provided by investing activities was
$37.4 million during fiscal 2003. The net cash provided by
investing activities during fiscal 2003 resulted primarily from
the reduction of pledged investments for our Sunnyvale lease
restructuring and cash received from the sales and maturities of
available-for-sale securities, partially offset by purchases of
available-for-sale securities and purchases of property and
equipment. Net cash provided by investing activities was
$36.4 million during fiscal 2002. The net cash provided by
investing activities during fiscal 2002 was primarily
attributable to proceeds received from maturities or sales of
available-for-sale securities, partially offset by purchases of
available-for-sale securities, and purchases of property and
equipment. Net cash used in investing activities was
$123.6 million during fiscal 2001. The net cash used in
investing activities during fiscal 2001 primarily consisted of
purchases of available-for-sale securities, purchases of
investments for collateral on our operating leases, and
purchases of property and equipment partially offset by proceeds
received from maturities or sales of available-for-sale
securities.

Net cash used in financing activities was
$45.3 million during fiscal 2003, primarily attributable to
the repayment of obligations for construction in progress
related to our Sunnyvale lease restructuring of
$48.1 million. Net cash provided by financing activities
was $51.1 million during fiscal 2002, resulted primarily
from the public sale of our common stock and a
$10.0 million investment from QUALCOMM Incorporated, for
total net proceeds of $47.0 million. Net cash provided by
financing activities was $31.0 million during fiscal 2001,
resulted primarily from the underwriters of our initial public
offering exercising their over-allotment to purchase
1,500,000 shares of common stock for net proceeds of
$28.0 million. In addition, we received proceeds of $3.0
million, $4.1 million and $3.1 million during fiscal
2003, 2002 and 2001, respectively, from the issuance of common
stock under stock option plans and stock purchase plans.

We currently anticipate that our available cash
resources, including the credit facility from Palm, will be
sufficient to meet our anticipated working capital and capital
expenditure requirements for the next twelve months. However, if
our revenues are lower or our expenses are higher than we
anticipate, or if inventory, accounts receivable, or other
assets require a greater use of cash than we anticipate, our
resources, including the credit facility from Palm, may prove to
be insufficient for working capital and capital expenditure
requirements. In addition, existing and potential customers and
vendors may take actions that could further harm our liquidity
position if they believe that our cash balances are not
adequate. Depending on market conditions, any additional
financing we need may not be available on terms acceptable to
us, or at all, and would require Palms consent. If
adequate funds are not available our business could be harmed.

17



---



##### Table of Contents



Recently Issued Accounting
Pronouncements

In August 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 supercedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and Accounting Principles Board (APB) Opinion
No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Under SFAS No. 144 a single accounting
model for long-lived assets to be disposed of is established.
The accounting model is based on the framework established in
SFAS No. 121 and resolves certain implementation issues.
SFAS No. 144 was adopted by the Company at the beginning of
fiscal 2003, and did not have a material impact on the
Companys financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires that a liability for
costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is
incurred. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 did not have a material impact on
the Companys accounting for restructuring actions
initiated during the third quarter of fiscal year 2003. However,
the provisions of SFAS No. 146 may affect the timing and
amount of future exit or disposal activities.

In November 2002, the FASB issued FIN
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN No. 45 requires that a
liability be recorded in the guarantors balance sheet upon
issuance of a guarantee. In addition, FIN No. 45 requires
disclosures about the guarantees that an entity has issued,
including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and
initial measurement provisions of FIN No. 45 are applicable
on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors
fiscal year-end. The disclosure requirements of FIN No. 45
are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of FIN
No. 45 did not have a material impact on the Companys
financial position or results of operations.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which
amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
to the fair value method of accounting for stock-based employee
compensation, and also amends the disclosure provision of SFAS
No. 123 to require disclosure in the summary of significant
accounting policies the effects of an entitys accounting
policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim
financial statements. The disclosure provision is required for
all companies with stock-based employee compensation, regardless
of whether the company utilizes the fair value method of
accounting described in SFAS No. 123 or the intrinsic value
method described in APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 148s
amendment of the transition and annual disclosure provisions of
SFAS No. 123 are effective for fiscal years ending after
December 15, 2002. The disclosure requirements for interim
financial statements containing condensed consolidated financial
statements are effective for interim periods beginning after
December 15, 2002. The Company currently uses the intrinsic
value method of accounting for stock-based employee compensation
described by APB Opinion No. 25. The Company adopted the
disclosure provisions of SFAS 148 in the third quarter of fiscal
year 2003 and has included the new disclosure requirements in
these notes to the condensed consolidated financial statements.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities. FIN
No. 46 clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements,
to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN No. 46 applies immediately to
variable interest entities created after January 31, 2003,
and to variable interest entities in which an enterprise obtains
an interest after that date. It applies to the first fiscal year
or interim period beginning after June 15, 2003 to variable
interest entities in

18



---



##### Table of Contents



which an enterprise holds a variable interest
that is acquired before February 1, 2003. The adoption is
not expected to have a material impact on the Companys
financial position or results of operations.


In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, which provides guidance on the timing and
method of revenue recognition for arrangements that include the
delivery of more than one product or service. EITF
No. 00-21 is effective for arrangements entered into in
periods beginning after June 15, 2003. The adoption of EITF
No. 00-21 did not have a material impact on the
Companys financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149,
Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and clarifies
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. In particular,
this Statement clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a
derivative. It also clarifies when a derivative contains a
financing component that warrants special reporting in the
statement of cash flows. SFAS No. 149 is generally
effective for contracts entered into or modified after
June 30, 2003 and is not expected to have a material impact
on the Companys financial position or results of
operations.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150
is effective for interim periods beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material
impact on the Companys financial position or results of
operations

Factors Affecting Future Results

Risks Related to the Proposed Merger with
Palm, Inc.s Palm Solutions Group

Our proposed merger with Palm involves a high
degree of risk, including the following risks.



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Handsprings stockholders will receive
    a fixed ratio of 0.09 shares of Palm common stock per share
    of Handspring common stock even if there are changes in the
    market value of Handspring common stock or Palm common stock
    before the closing of the merger.

Upon the closing of our merger with the Palm
Solutions Group, each holder of shares of our common stock will
be entitled to receive 0.09 of a share of Palm common stock for
each share of our common stock held by such holder at the
closing of the merger. The market values of Palm common stock
and our common stock have varied since we entered into the
merger agreement with Palm and will continue to vary in the
future due to a number of factors, including: market assessments
of the PalmSource common stock to be distributed by Palm
immediately prior to the merger; changes in the business,
operations or prospects of Palm and us; market assessments of
the merger; regulatory considerations; and market and economic
considerations. There will be no adjustment to the exchange
ratio (except for adjustments to reflect the effect of any stock
split, reverse stock split, stock dividend, reorganization,
recapitalization, reclassification or other like change with
respect to Palm common stock or our common stock, other than
with respect to the PalmSource distribution), and the parties do
not have a right to terminate the merger agreement based upon
changes in the market price of either Palm common stock or our
common stock. Accordingly, if Palms stock price decreases,
Handsprings stockholders will receive less in value for
their shares of our common stock.



| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Handspring stockholders will not receive
    any shares of PalmSource common stock in the transaction, and
    the effect that the PalmSource distribution will have on
    Palms stock price following the transaction is
    uncertain.

The dollar value of Palm common stock that our
stockholders will receive upon the closing of the merger will
depend on the market value of Palm common stock at the time of
the merger, which may be different

19



---



##### Table of Contents



from, and lower than, the closing price of Palm
common stock on the last full trading day preceding the public
announcement of the transaction, the last full trading day prior
to the date of this Annual Report on Form 10-K or the date
of the Palm annual meeting and Handspring special meeting to
vote on the merger. In particular, Handspring stockholders will
not receive any shares of PalmSource common stock in the
transaction, and the effect that the PalmSource distribution
will have on Palms stock price following the transaction
is uncertain.




| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Although we expect that the merger with the
    Palm Solutions Group will result in benefits to the combined
    company, the combined company may not realize those benefits
    because of integration and other challenges.

The failure of the combined company to meet the
challenges involved in integrating the operations of the Palm
Solutions Group and Handspring successfully or otherwise to
realize any of the anticipated benefits of the transaction,
including the anticipated annual cost savings of approximately
$25 million from improved operating efficiencies, could
seriously harm the results of operations of the combined
company. Realizing the benefits of the transaction will depend
in part on the integration of technology, operations and
personnel. The integration of the companies is a complex,
time-consuming and expensive process that, without proper
planning and implementation, could significantly disrupt the
respective businesses of the Palm Solutions Group and
Handspring. The challenges involved in this integration include
the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | overcoming any perceived adverse changes in
    business focus, including demonstrating to the customers of the
    Palm Solutions Group and Handspring that the transaction will
    not result in adverse changes in customer service standards or
    business focus and helping customers conduct business easily
    with the combined company;           
|
| |  | consolidating operations, including rationalizing
    corporate information technology and administrative
    infrastructures;                                                                                                                                                                                                                                 
|
| |  | combining product offerings;                                                                                                                                                                                                                                                                                                                                   
|
| |  | combining sales and distribution channels in such
    a way that does not result in high rate of product returns or
    customer dissatisfaction;                                                                                                                                                                                                              
|
| |  | coordinating and rationalizing research and
    development activities to enhance introduction of new products
    and technologies with reduced cost;                                                                                                                                                                                                         
|
| |  | preserving distribution, manufacturing, supplier,
    marketing and other important relationships of both the Palm
    Solutions Group and Handspring and specifically motivating those
    business partners whose relationships will be terminated as a
    part of the combination to continue to support the companies
    through the integration process;
|
| |  | minimizing the diversion of management attention
    from ongoing business concerns and successfully returning the
    Palm Solutions Group and Handspring managers to regular business
    responsibilities from their integration planning activities;                                                                                                       
|
| |  | overcoming potential incompatibility of the
    business cultures of the Palm Solutions Group and Handspring;                                                                                                                                                                                                                                                  
|
| |  | retaining key employees and maintaining employee
    morale both prior to and following the closing of the
    transaction; and                                                                                                                                                                                                                                
|
| |  | coordinating and combining foreign operations,
    relationships and facilities, which may be subject to additional
    constraints imposed by local laws and regulations.                                                                                                                                                                                     

The combined company may not successfully
integrate the operations of the Palm Solutions Group and
Handspring in a timely manner, and the combined company may not
realize the anticipated benefits and synergies of the
transaction, which are based on projections and assumptions, not
actual experience, and assume a successful integration. In
addition to the integration risks discussed above, the combined
companys

20



---



##### Table of Contents



ability to realize these benefits and synergies
could be adversely impacted by practical or legal constraints on
its ability to combine operations.




| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Stockholder approval of the transaction may
    be difficult to obtain on a timely basis or at
    all.

Completion of the transaction is subject to
several closing conditions, including obtaining requisite
stockholder approvals, and we may be unable to obtain such
approvals on a timely basis or at all, particularly in the case
of Palm given the large number of beneficial holders of its
common stock.



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | Our stock price and business may be
    adversely affected if the transaction is not
    completed.

If the transaction is not completed, the trading
prices of our common stock may decline. In addition, our
business and operations may be harmed to the extent that
customers, suppliers and others believe that we cannot
effectively compete in the marketplace without the transaction,
or there is customer or employee uncertainty surrounding the
future direction of the product and service offerings and
strategy of us on a standalone basis. In addition, we may have
difficulty as a standalone company obtaining additional
financing. We also will be required to pay significant costs
incurred in connection with the transaction, including legal,
accounting and a portion of financial advisory fees, whether or
not the transaction is completed. Moreover, under specified
circumstances, we may be required to pay Palm a termination fee
of up to $4.5 million plus any applicable costs, expenses
and interest pursuant to the merger agreement, in connection
with the termination of the merger agreement.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | The combined company may have difficulty
    funding its respective future capital
    requirements.

The Palm Solutions Group has indicated that it
currently believes that its existing cash, cash equivalents and
short-term investments will be sufficient to satisfy anticipated
cash requirements for it and for the combined company for the
next twelve months. Following the transaction, the combined
company could be required to seek additional funding if the
financial expectations of the combined company are not met. For
example, if the Palm Solutions Groups or the combined
companys operating results do not meet its expectations or
if inventory, accounts receivable or other assets require
greater use of cash than currently anticipated, the Palm
Solutions Group or the combined company may be required to seek
additional funding through financings or other arrangements.
Even if expectations for the Palm Solutions Group or for the
combined company are met, the Palm Solutions Group or the
combined company may find it advisable to seek additional
funding. If the Palm Solutions Group or the combined company
seeks additional funding, adequate funds may not be available
when needed on favorable terms or at all, which could have a
negative effect on the Palm Solutions Groups or the
combined companys business and financial condition. It is
not possible at this time to determine whether such funding will
be more or less available than if Palm did not distribute its
shares of PalmSource common stock and combine with us.

We believe that the combined companys
capital requirements will vary greatly from quarter to quarter,
depending on, among other things, fluctuation in their
respective operating results, financing activities,
acquisitions, investments and other costs relating to the
integration of Handspring and the Palm Solutions Group following
the transaction. The combined company may require or choose to
obtain additional debt or equity financing in order to finance
acquisitions or other investments in their respective
businesses. The combined company may also require additional
financing if its operating and working capital requirements vary
materially from those currently planned. Future equity
financings would be dilutive to the existing holders of the
combined companys common stock. Future debt financings
could involve restrictive covenants which could impair its
ability to engage in certain business transactions. We cannot
assure you that financing and funding for the combined
companys capital requirements, if needed, will be
available to the combined company on favorable terms or at all.

21



---



##### Table of Contents





| |                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We will need to obtain third party consents
    for Handsprings assignment to the combined company of some
    agreements and if we cannot obtain these consents, we may not be
    able to maintain these relationships on favorable terms or at
    all.

We are currently attempting to obtain third-party
consents for some agreements to be assigned to the combined
company, but if we are unable to do so, the combined company may
be forced to renegotiate these agreements or enter into new
agreements with various third parties as a separate, stand-alone
entity. We cannot assure you that the combined company will be
able to negotiate new agreements on terms as favorable to it as
those that we had, or at all.



| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The combined company will have limited use
    and control of the Palm brand and related brands following the
    distribution, which could impact its revenues and results of
    operations.

We believe that the Palm brand is a valuable
asset. Prior to the transaction, certain Palm and PalmSource
trade names, trademarks, service marks and domain names
containing the word or letter string palm will be
assigned to the Palm Trademark Holding Company, LLC, a holding
company owned by Palm and PalmSource for the purpose of
receiving, holding, maintaining, registering, enforcing and
defending such intellectual property. Following the transaction,
the combined company will be changing its branding strategy,
corporate name and Nasdaq ticker symbol. While we will continue
to use elements of the Palm brand pursuant to a trademark
license from the holding company, we cannot assure you that
these changes will not have an adverse impact on the business of
the combined company. In addition, if the combined company is
unable in the future to license the Palm-related trademarks,
service marks, domain names and trade names from the Palm
Trademark Holding Company, LLC, or if the holding company fails
to enforce its intellectual property rights in them
successfully, its competitive position could suffer, which could
harm its business.

Risks Related to Handspring



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are not successful in the development
    and introduction of new communicator products and related
    services, our business would be substantially
    harmed.

The market for our communicator products is
characterized by rapidly changing technology, evolving industry
standards, changes in customer needs, intense competition and
frequent new product introductions. Wireless carriers
significantly affect the ability of device manufacturers such as
Handspring to develop and launch products for use on their
wireless networks. If we fail to address the needs of wireless
carriers, identify new product and service opportunities or
modify or improve our communicator products in response to
changes in technology, industry standards or carrier
requirements, our products could rapidly become less competitive
or obsolete. Our future success will depend, in part, on our
ability to:



| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | use leading technologies effectively;                                                                                                                                  
|
| |  | continue to develop our technical expertise,
    particularly with wireless technologies;                                                                              
|
| |  | enhance our current products and develop new
    products that meet changing customer needs and carrier
    requirements;                                              
|
| |  | timely develop products that meet carrier product
    planning cycles;                                                                                                 
|
| |  | time new product introductions in a way that
    minimizes the impact of customers delaying purchases of existing
    products in anticipation of new product releases;
|
| |  | certify our wireless products for use on carrier
    networks;                                                                                                         
|
| |  | adjust the prices of our existing products to
    increase demand; and                                                                                                 
|
| |  | influence and respond to emerging industry
    standards, technological changes and carrier requirements.                                                              

We cannot guarantee that we will be able to
introduce new products on a timely or cost-effective basis, that
our new products will meet carrier requirements, or that
customer demand will meet our expectations. If we are
unsuccessful in developing and introducing new products and
services or improving existing products

22



---



##### Table of Contents



that are appealing to carriers and end user
customers, our business and operating results would be
negatively impacted.




| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | We are highly dependent on wireless
    carriers for the success of our Treo communicator and smartphone
    products.

The success of our Treo communicators and
smartphones, and the success of our business strategy, is highly
dependent on our ability to establish new relationships, and
build on our existing relationships, with strategic domestic and
international wireless carriers. We cannot assure you that we
will be successful in establishing new relationships or
advancing existing relationships with wireless carriers or that
these wireless carriers will act in a manner that will promote
the success of Treo. Factors that are largely within the control
of wireless carriers but which are important to the success of
our Treo communicators, include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the wireless carriers interest in testing
    Treo on their networks;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | the quality and coverage area of voice and data
    services offered by the wireless carriers for use with Treo;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | the degree to which wireless carriers will
    facilitate the successful introduction of Treo and actively
    promote, distribute and resell Treo;                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | the extent to which wireless carriers will
    require specific hardware and software features on Treo
    communicators to be used on their networks;                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | the timely build out of advanced wireless carrier
    networks such as General Packet Radio Services (GPRS) and
    1xRTT, which are expected to enhance the user experience for
    email and other services through higher speed and always
    on functionality;                                                                                                                                                                                                                                                                                                                                              
|
| |  | the extent to which wireless carriers will sell
    and promote competitive products over Treo;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | the conditions imposed on us in our agreements
    with wireless carriers that, in some circumstances, could limit
    our ability to make similar products available through
    competitive carriers in certain markets;                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | the wireless carriers pricing requirements
    and subsidy programs; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | the pricing and terms of voice and data rate
    plans that the wireless carriers will offer for use with Treo.
    For example, flat data rate pricing plans offered by some
    carriers may expose us to risk. While flat data pricing helps
    customer adoption of the data services offered by carriers and
    therefore highlights the advantages of the data applications of
    Treo, such plans may not allow Treo to contribute as much
    average revenue per user (ARPU) to carriers as when they
    were pricing incrementally, and therefore reduces our
    differentiator from other products.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Our relationships with Sprint and Orange
    are particularly important to the success of our
    business.

In August 2002, we began selling the
Treo 300, a jointly developed and co-labeled CDMA version
of the Treo communicator that operates on Sprints 3G
network. Beginning this fall, we also expect to sell a
substantial number of CDMA Treo 600s to Sprint. Sprint
represented 37% of our net revenue in our 2003 fiscal year and
37% of our net accounts receivable as of June 28, 2003 and
we expect Sprint to represent a substantial portion of our
revenue and net accounts receivable in the current 2004 fiscal
year. In April 2003, we announced a similarly important
relationship with Orange to co-label and sell a GSM version of
the Treo 600 in Europe. Since we customize product for the
Sprint and Orange networks, Handspring currently manufactures
the product only in volumes that are supported by purchase
orders from these carriers or if these carriers assume financial
liability for long lead time components. If Sprint or Orange
does not sell and promote the product to the extent we
anticipate, our business will be substantially harmed.

23



---



##### Table of Contents





| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | As we build strategic relationships with
    wireless carriers, we will be exposed to significant quarterly
    fluctuations in revenue.

Because of their large sales channels, strategic
carriers may purchase large quantities of our products prior to
launch so that the products are widely available. Reorders of
products may fluctuate quarter to quarter, depending upon
customer demand and inventory levels required by the carriers.
As we develop new strategic relationships and launch new
products with new and existing strategic partners, our quarterly
revenue will be subject to fluctuation based upon the timing of
carrier product launches as well as customer demand and carrier
inventory requirements.



| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are highly dependent on carriers and
    distributors to sell our products and disruptions in these
    channels and other risks of selling through carriers and
    distributors could harm our ability to sell our
    products.

We are subject to many risks relating to the
distribution of our products by carriers and distributors,
including the following:



| |   |                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | product returns from carriers and distributors;                                                                                                                                                                                                                                  
|
| |  | carriers and distributors may not maintain
    inventory levels sufficient to meet customer demand or may elect
    not to carry our new communicator products;                                                                                                                  
|
| |  | carriers and distributors may emphasize our
    competitors products or decline to carry our products;                                                                                                                                                                          
|
| |  | distributors may not maintain relationships with
    carriers on whose networks our communicator products are
    designed to operate;                                                                                                                                           
|
| |  | To the extent the financial condition of our
    distributors deteriorated in light of the current overall
    weakness of the technology sector, we could experience a
    disruption in distribution as well as a loss of outstanding
    accounts receivables;                
|
| |  | conflicts may develop between the carrier and
    distribution channels and direct sales of our products through
    our handspring.com website and by our e-commerce partners;                                                                                                  
|
| |  | we may experience difficulty collecting accounts
    receivables from retail and distribution channels after our
    relationships terminate; and                                                                                                                                
|
| |  | if we reduce the prices of our products, as we
    have in the past, in order to maintain good business relations,
    we may compensate carriers and distributors for the difference
    between the higher price they paid to buy their inventory and
    the new lower prices.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | We might need additional capital in the
    future and additional financing might not be
    available.

Our accumulated deficit as of June 28, 2003
was $417.3 million. We had net losses of
$131.1 million during the fiscal year ended June 28,
2003 and $91.6 million during the same period of the
previous fiscal year. As of June 28, 2003, we had a total
of $1.3 million of deferred compensation to be amortized,
of which all will be amortized in fiscal year 2004. We expect
these net losses to continue.

As part of our agreement to merge with Palm, Palm
has agreed to provide an initial $10 million securitized
line of credit to us for working-capital purposes until the
transaction closes. Under certain conditions, the line of credit
may increase to $20 million, and its maturity may be
extended.

We currently anticipate that our available cash
resources, including the credit facility from Palm, will be
sufficient to meet our anticipated working capital and capital
expenditure requirements for the next twelve months. However, if
our revenues are lower or our expenses are higher than we
anticipate, or if inventory, accounts receivable, or other
assets require a greater use of cash than we anticipate, our
resources, including the credit facility from Palm, may prove to
be insufficient for working capital and capital expenditure
requirements in the event the merger with Palm was significantly
delayed or does not occur. In such a case, existing and
potential customers and vendors may take actions that could
further harm our liquidity position if

24



---



##### Table of Contents



they believe that our cash balances are not
adequate. Depending on market conditions, any additional
financing we need given such circumstances may not be available
on terms acceptable to us, or at all, and in certain
circumstances might require Palms consent. If adequate
funds are not available our business could be harmed.




| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Treo communicator products present many
    significant manufacturing, marketing and other operational risks
    and uncertainties, many of which are beyond our
    control.

The development and production of our Treo
wireless communicator products presents many significant
manufacturing, marketing and other operational risks and
uncertainties, many of which are beyond our control. Factors
that could affect the success of our communicator products
include:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our dependence on third parties to supply
    components, such as AirPrime which provide radios for our CDMA
    based Treo communicators;                                                                     
|
| |  | our ability to manufacture our Treo communicators
    in sufficient volumes and on a timely basis;                                                                                                             
|
| |  | the type of distribution channels where Treo will
    be available;                                                                                                                                            
|
| |  | our ability to forecast demand accurately, which
    is made more challenging by the fact that Treo communicators are
    in a new product category for which relevant data is incomplete
    or not available;
|
| |  | the end user price of Treo products; and                                                                                                                                                                       
|
| |  | the extent of consumer acceptance of and demand
    for integrated wireless devices generally and Treo communicators
    in particular.                                                                        



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | The amount of future carrier subsidies is
    uncertain and carriers are free to lower or reduce their
    subsidies with little or no notice to us.

When we sell a Treo communicator on our own
website, we sometimes have the opportunity to earn subsidies
from carriers if the Treo communicator customer also purchases a
voice or data plan from the carrier. Today the wireless industry
is generally decreasing subsidies on voice services. Moreover,
carriers that currently provide Handspring with subsidies may
reduce or discontinue such subsidies with little or no notice to
Handspring. While we believe carriers will continue to offer
subsidies to Handspring, if these subsidies were reduced or
eliminated the gross margins for Treo communicators would
decline and we would be more limited in our ability to sell Treo
communicators at prices that are attractive to cost sensitive
consumers.



| |                                                                       
| | ----------------------------------------------------------------------
| | Economic conditions could lead to reduced
    demand for our products.

The current difficult economic conditions have
led to reduced demand for a variety of goods and services,
including many technology products. If economic conditions
decline further, or fail to improve, we could see a significant
additional decrease in the overall demand for our products that
could harm our operating results. This is particularly true with
respect to our Treo communicators as they typically carry a list
price between $99 and $699 and therefore are expensive purchases
for many consumers.



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend heavily on our license from
    PalmSource. Termination of this license, an adverse change in
    our relationship with PalmSource, PalmSources failure to
    remain competitive, or an unfavorable outcome in any material
    lawsuit involving the Palm OS could seriously harm our
    business.

Our license of the Palm OS operating system from
PalmSource is critical for the operation of our products. While
we are not contractually precluded from licensing or developing
an alternative operating system, doing so could be less
desirable and could be costly in terms of cash and other
resources. Our business could be seriously harmed if:



| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we were to breach the license agreement and
    PalmSource terminated the license;                                                                                                              
|
| |  | PalmSource were to be acquired and the acquiring
    company was not as strategically aligned with us as PalmSource
    even though it would be obligated to honor our license
    agreement; or

25



---



##### Table of Contents





| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | PalmSource does not continuously upgrade the Palm
    OS and otherwise maintain the competitiveness of the Palm OS
    platform.

Palm has announced its intention to spin-off
PalmSource, now a wholly owned subsidiary, as a separate and
publicly traded company in the fall of 2003. Our business would
be harmed if PalmSource is not able to successfully implement
its business strategy or is otherwise unsuccessful as a
standalone company. If the spin-off does not occur, Palms
business could suffer due to the difficulties of recombining the
two companies, which in turn could adversely affect Palm OS
licensees, including Handspring.

The Palm OS operating system license agreement
was renewed in April 2001 and extends until April 2009. Upon
expiration or termination of the license agreement, other than
due to our breach, we may choose to keep the license granted
under the agreement for two years following its expiration or
termination. However, the license during this two-year period is
limited and does not entitle us to upgrades to the Palm OS
operating system. In addition, there are limitations on our
ability to assign the PalmSource license to a third-party. The
existence of these license termination provisions and
limitations on assignment may have an anti-takeover effect in
that it could discourage third parties from seeking to acquire
us.

PalmSource is a defendant in several intellectual
property lawsuits involving the Palm OS operating system, such
as the lawsuit against Palm brought by Xerox Corporation
alleging that the Graffiti handwriting recognition system
infringes a Xerox patent. Although we are indemnified by Palm
for damages arising from such lawsuits, we could still be
adversely affected by a determination adverse to Palm as a
result of market uncertainty or product changes that could arise
from such a determination.



| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business could be seriously harmed if
    we experience component shortages or if our suppliers or third
    party service providers are not able to meet our demand and
    alternative sources are not available.

Our products contain components, including liquid
crystal displays, touch panels, connectors, cameras, memory
chips and microprocessors, that are procured from a variety of
suppliers. We rely on our suppliers to deliver necessary
components to our contract manufacturer in a timely manner based
on forecasts that we provide. At various times, some of the key
components for our products have been in short supply due to
high industry demand. Shortages of components would harm our
ability to deliver our products on a timely basis.

Some components, such as power supply integrated
circuits, radios, cameras, microprocessors and certain discrete
components, come from sole or single source suppliers. For
example, AirPrime is the sole supplier of certain wireless
technology components for the Treo 300 and 600. Alternative
sources are not currently available for these sole and 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, we might not be able to maintain timely and
cost-effective production of our products. This risk is
compounded when the sole or single source supplier is facing
financial difficulties and the possibility of discontinuing its
operations.

We also rely on third parties for network
operations, order fulfillment, repair services and technical
support and for outsourced services. Although we have the
ability to add new service providers or replace existing ones,
transition difficulties and lead times involved in developing
additional or new third-party relationships could cause
interruptions in services and harm our business.



| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

The markets for communicators and smartphones are
highly competitive and we expect competition to increase. Most
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 we
can 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.

26



---



##### Table of Contents



Our products compete with a variety of handheld
devices, including handheld computers, high end cell phones and
two-way pagers. Our principal competitors include:



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mobile handset manufacturers such as Audiovox,
    Ericsson, HTC Corporation, Kyocera, LG, Motorola, Nokia,
    Samsung, Sanyo and Sony-Ericsson;
|
| |  | Research In Motion Limited, a leading provider of
    wireless email, instant messaging and Internet connectivity;                               
|
| |  | Handheld manufacturers such as Hewlett-Packard,
    the Palm Solutions Group and Sony that offer bluetooth and or
    WiFi enabled devices; and  
|
| |  | Danger and a variety of privately held start-up
    companies looking to compete in our current and future markets.                              

We expect our competitors to continue to improve
the performance of their current products 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, limit the
opportunities to participate in carrier product planning cycles,
cause intense price competition and result in reduced gross
margins and lower our market share. We cannot be sure that we
will have sufficient resources or that we will be able to make
the technological advances and establish the carrier
relationships necessary to be competitive.



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to accurately anticipate demand
    for our products, we may have costly excess production or not be
    able to secure sufficient quantities or cost-effective
    production of our products.

The demand for our products depends on many
factors and is difficult to forecast, particularly given our
dependence on wireless carriers, intense competition and a
difficult economic environment. Significant unanticipated
fluctuations in demand could cause problems in our operations.

Although we build a large percentage of our
product based on committed purchase orders, if demand does not
develop as expected, we could have excess production resulting
in excess finished products and components and may be required
to incur excess and obsolete inventory charges. We have limited
capability to reduce manufacturing capacity once a purchase
order has been placed and in some circumstances we would incur
cancellation charges or other liabilities to our manufacturing
partner if we cancel or reschedule purchase orders. Moreover, if
we reduce manufacturing capacity, we would incur higher per unit
costs based on smaller volume purchases.

If demand exceeds our expectations, we will need
to rapidly increase production at Solectron, our third-party
manufacturer. Our suppliers will also need to provide additional
volumes of components, which may not be possible within our
timeframes. Even if Solectron is able to obtain enough
components, it might not be able to produce enough of our
products as fast as we need them. The inability of either our
manufacturer or our suppliers to increase production rapidly
enough could cause us to fail to meet customer demand. In
addition, 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 would lower our profit margins.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | If Solectron fails to produce quality
    products on time and in sufficient quantities, our reputation
    and results of operations would suffer.

We depend on a single third party manufacturer,
Solectron, to produce sufficient volume of our products in a
timely fashion and at satisfactory quality levels. The cost,
quality and availability of Solectrons manufacturing
operations are essential to the successful production and sale
of our products. Under our manufacturing agreement with
Solectron we order some products on a purchase order basis in
accordance with a forecast. For other products we submit
purchase orders to Solectron only after we receive a
corresponding purchase order from a carrier or distributor. The
absence of dedicated capacity under our manufacturing agreement
with Solectron means that, with little or no notice, Solectron
could refuse to continue to manufacture all or some of the units
of our devices that we require or change the terms under which
they manufacture our devices, such as our credit terms. If they
were to stop manufacturing our devices,

27



---



##### Table of Contents



it could take from three to six months to secure
alternative manufacturing capacity and our results of operations
could be harmed. In addition, if Solectron were to change the
terms under which they manufacture for us, our manufacturing
costs could increase and our results of operations could suffer.


Our reliance on Solectron exposes us to risks
outside our control, including the following:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | unexpected increases in manufacturing and repair
    costs;                                                                
|
| |  | interruptions in shipments if they are unable to
    complete production;                                                  
|
| |  | inability to control quality of finished products;                                                                         
|
| |  | inability to control delivery schedules;                                                                                   
|
| |  | the risks associated with international
    operations in Guadalajara, Mexico where Solectron maintains
    facilities; and
|
| |  | unpredictability of manufacturing yields.                                                                                  

In addition, our ability to deliver product in a
timely fashion is tied directly to our ability to secure
sufficient quantities of long lead time components. The model of
building product only after we receive a binding purchase order
from a carrier or distributor could mean product is not
delivered in time to satisfy the carrier and to meet product
launch dates. However, purchasing long lead time components
without a corresponding purchase order could expose the Company
to risk of excess inventory.



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | Our failure to develop brand recognition
    could limit or reduce the demand for our products.

We believe that continuing to strengthen our
brands is important to increasing demand for and achieving
widespread acceptance of our products. However, currently we
have limited our marketing resources in response to reducing our
overall costs. Most of our competitors and potential competitors
have better name recognition, more marketing resources, and more
powerful brands. Promoting and positioning our brands will
depend largely on the success of the marketing efforts of our
carrier customers and our ability to produce well received new
products.



| |                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products may contain errors or defects
    that 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 products are complex and must meet stringent
user requirements. We must develop our products quickly to keep
pace with the rapidly emerging communicator market. Products as
sophisticated as ours are likely to contain detected and
undetected errors or defects, especially when first introduced
or when new models or versions are released. We may experience
delays in releasing new products or producing them in
significant volumes as problems are corrected.

From time to time, we have become aware of
problems with components and other defects. Errors or defects in
our products that are significant, or are perceived to be
significant, could result in the rejection of the products,
damage to our reputation, lost revenues, diverted development
resources and increased customer service and support costs and
warranty claims. Such errors or defects would be particularly
detrimental to the Companys business given our need to
establish a reputation for quality products in the emerging
communicator market.

In addition, we warrant that our hardware will be
free of defects for one year after the date of purchase. In
Europe, we are required by law in some countries to provide a
two-year warranty for certain defects. Errors or defects in our
products may give rise to warranty liabilities which could harm
our business.



| |                                                                
| | ---------------------------------------------------------------
| | Business interruptions could adversely
    affect our business.

Our facilities, information systems and general
business operations, and those of our partners and customers,
are vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure, terrorist

28



---



##### Table of Contents



attacks and other events beyond our control. The
business interruption insurance we carry may not be sufficient
to compensate us fully for losses or damages that may occur as a
result of such events. Any such losses or damages incurred by us
could have a material adverse effect on our business.




| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | If we lose our key personnel, we may not be
    able to manage our business successfully.

Our future success depends to a significant
extent on the continued service of our key technical, sales and
senior management personnel and their ability to execute our
growth strategy. In particular, we rely on Jeffrey C. Hawkins,
our Chief Product Officer, Donna L. Dubinsky, our Chief
Executive Officer, and Edward T. Colligan, our President and
Chief Operating Officer. The loss of the services of any of
these or any of our other senior level management or other key
employees could harm our business, particularly in the event the
merger of Handspring and Palm is not completed.

Mr. Hawkins recently has formed a non-profit
organization, the Redwood Neuroscience Institute, to pursue his
life-long interest in brain research. He is now dividing his
time between the Redwood Neuroscience Institute and Handspring,
where he continues to serve as Chief Product Officer and as
Chairman of the Board of Directors. At Handspring, he focuses on
strategic product planning and new product directions. It is
anticipated that he will continue this arrangement following the
closing of the merger. Should Mr. Hawkins increase the
allocation of his time to the Redwood Neuroscience Institute
such that he cannot participate in product planning at
Handspring, our business could be harmed.



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to attract, retain and motivate
    qualified employees, our ability to execute our business plan
    would be compromised.

Our future success depends on our ability to
attract, retain and motivate highly skilled employees.
Competition for highly skilled employees in our industry is
intense. Although we provide compensation packages that include
stock options, cash incentives and other employee benefits, we
may be unable to retain our key employees or to attract,
assimilate and retain other highly qualified employees in the
future. If we fail to retain, hire and integrate qualified
employees and contractors, we will not be able to maintain and
expand our business. In addition, when our common stock price is
less than the exercise price of stock options granted to
employees, turnover may increase, which could harm our results
of operations or financial condition.



| |                                                                           
| | --------------------------------------------------------------------------
| | We depend on proprietary rights to develop
    and protect our technology.

Our success and ability to compete substantially
depends on our internally developed proprietary technologies,
which we protect through a combination of trade secret,
trademark, copyright and patent laws. While we have numerous
patent applications pending, to date few U.S. or foreign patents
have been granted to us.

Patent applications or trademark registrations
may not be approved. Even if they are approved, our patents or
trademarks may be successfully challenged by others or
invalidated. In addition, any patents that may be granted to us
may not provide us a significant competitive advantage. If we
fail to protect or enforce our intellectual property rights
successfully, our competitive position could suffer.



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We could be subject to claims of
    infringement of third-party intellectual property, which could
    result in significant expense and loss of intellectual property
    rights.

Our industry is characterized by uncertain and
conflicting intellectual property claims and frequent
intellectual property litigation, especially regarding patent
rights. From time to time, third parties have in the past and
may in the future assert patent, copyright, trademark or other
intellectual property rights to technologies that are important
to our business. In particular, we have received, and expect to
continue to receive, communications from holders of patents
related to GSM, GPRS, CDMA and other mobile communication
standards.

Any litigation to determine the validity of
intellectual property claims, regardless of their merit or
resolution, would likely be costly and time consuming and divert
the efforts and attention of our management

29



---



##### Table of Contents



and technical personnel. Our policy is to
vigorously defend meritless lawsuits while respecting the
intellectual property rights of others. We cannot assure that we
would prevail in such litigation given the complex technical
issues and inherent uncertainties in intellectual property
litigation. If such litigation resulted in an adverse ruling, we
could be required to:




| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pay substantial damages and costs;                                                                                                                                          
|
| |  | cease the manufacture, use or sale of infringing
    products;                                                                                                              
|
| |  | discontinue the use of certain technology; or                                                                                                                               
|
| |  | obtain a license under the intellectual property
    rights of the third-party claiming infringement, which license
    may not be available on reasonable terms, or at all.

We currently are a defendant in the two patent
infringement lawsuits described below.

On March 14, 2001, NCR Corporation filed
suit against Handspring and Palm, Inc. in the United States
District Court for the District of Delaware. The complaint
alleges infringement of two U.S. patents. The complaint seeks
unspecified compensatory and treble damages and to permanently
enjoin the defendants from infringing the patents in the future.
We filed an answer on April 30, 2001, denying NCRs
allegations and asserting counterclaims for declaratory
judgments that we do not infringe the patents in suit, that the
patents in suit are invalid, and that they are unenforceable. On
June 14, 2002, following the retirement of the judge
hearing the case, the case was referred to a magistrate. On
July 11, 2002, the magistrate granted our motion for
summary judgment finding that we did not infringe the patents.
On August 29, 2002, NCR filed an objection to the
magistrates ruling. On August 28, 2003, the new
district judge rejected NCRs objection and affirmed the
magistrates ruling.

On June 19, 2001, DataQuill Limited filed
suit against Handspring in the United States District Court for
the Northern District of Illinois, case no. 01-CV-4635. The
complaint alleges infringement of one U.S. patent. The
complaint seeks unspecified compensatory and treble damages and
to permanently enjoin us from infringing the patent in the
future. We filed an answer on August 1, 2001, denying
DataQuills allegations and asserting counterclaims for
declaratory judgments that we do not infringe the patent in
suit, that the patent in suit is invalid, and that it is
unenforceable. On August 7, 2002, we filed motions for
summary judgment for non-infringement and invalidity, which were
renewed in filings made on October 29, 2002. On
February 28, 2003, the Court granted in part and denied in
part our summary judgment motions. DataQuill then filed a motion
for this ruling to be reconsidered, which on April 16, 2003
the Court granted in part and denied in part.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Provisions in our charter documents might
    deter a company from acquiring us.

We have a classified board of directors. Our
stockholders are unable to call special meetings of
stockholders, to act by written consent, or to remove any
director or the entire board of directors without a super
majority vote or to fill any vacancy on the board of directors.
Our stockholders must also meet advance notice requirements for
stockholder proposals. Our board of directors may also issue
preferred stock without any vote or further action by the
stockholders. These provisions, the stockholder rights plan we
recently implemented and other provisions under Delaware law
could make it more difficult for a third-party to acquire us,
even if doing so would benefit our stockholders.



| |                                                                    
| | -------------------------------------------------------------------
| | Our officers and directors exert
    substantial influence over us.

Our executive officers, our directors and
entities affiliated with them together beneficially own a
substantial portion of our outstanding common stock. As a
result, these stockholders are able to exercise substantial
influence over all matters requiring approval by our
stockholders, including the election of directors and approval
of significant corporate transactions. This concentration of
ownership may also have the effect of delaying or preventing a
change in our control that may be viewed as beneficial by other
stockholders.

30



---



##### Table of Contents






Item 7A.Quantitative
and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity.We maintain a portfolio of short-term
and long-term investments consisting mainly of fixed income
securities with an average maturity of less than one year. These
securities may fall in value if interest rates rise and if
liquidated prior to their maturity dates. We have the ability to
hold our fixed income investments until maturity and therefore
we do not anticipate our operating results or cash flows to be
significantly affected by any increase in market interest rates.
We do not hedge interest rate exposures.

Foreign Currency Exchange Risk.Revenue and expenses of our
international operations are denominated in various foreign
currencies and, accordingly, we are subject to exposure from
movements in foreign currency exchange rates. We have in the
past entered into foreign exchange forward contracts to hedge
certain balance sheet exposures and intercompany balances
against future movements in foreign exchange rates. We will
continue to assess the need to utilize financial instruments to
hedge currency exposures on an ongoing basis. We do not use
derivative financial instruments for speculative or trading
purposes. Gains and losses on the forward contracts are largely
offset by the underlying transactions exposure and,
consequently, for hedged exposures, a sudden or significant
change in foreign exchange rates is not expected to have a
material impact on future net income or cash flows. We are
exposed to credit-related losses in the event of nonperformance
by counter parties to these financial instruments, but do not
expect any counter party to fail to meet its obligation.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The index to our Consolidated Financial
Statements and the Report of the Independent Accountants appears
in Part IV of this annual report.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure

None.

31



---



##### Table of Contents






PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant






Directors


The Company currently has six directors divided
among three classes as follows: Class I  Bruce
W. Dunlevie; Class II  Jeffrey C. Hawkins and
L. John Doerr; and Class III  Donna L.
Dubinsky, Mitchell E. Kertzman and William E. Kennard. The
Class I director was elected for a three-year term which
expires at the 2004 Annual Meeting of stockholders. The
Class II directors were elected for a three-year term which
expires at the 2005 Annual Meeting of stockholders. The
Class III directors were elected for a three-year term
which expires at the 2003 Annual Meeting of stockholders.

The names of the members of the Board and certain
information about them as of July 26, 2003, are set forth
below:

|                        |  |     |    |                      |  |                                                                         |  |  |      | 
|----------------------- |  | --- | -- | -------------------- |  | ----------------------------------------------------------------------- |  |  | ---- | 
|                        |  |     |    |                      |  | Director                                                               
|Name of Director        |  | Age |    | Principal Occupation |  | Since                                                                  
|                        |  |     |    |                      |  |                                                                        
|Donna L. Dubinsky       |  |     | 48 |                      |  | Chief Executive Officer of Handspring, Inc.                             |  |  | 1998 | 
|Jeffrey C. Hawkins      |  |     | 46 |                      |  | Chairman of the Board and Chief Product Officer
    of Handspring, Inc. |  |  | 1998 | 
|L. John Doerr(2)        |  |     | 52 |                      |  | General Partner of Kleiner Perkins
    Caufield & Byers                 |  |  | 1998 | 
|Bruce W. Dunlevie(1)(2) |  |     | 46 |                      |  | Managing Member of Benchmark Capital                                    |  |  | 1998 | 
|William E. Kennard      |  |     | 46 |                      |  | Managing Director of The Carlyle Group                                  |  |  | 2001 | 
|Mitchell E. Kertzman(1) |  |     | 54 |                      |  | General Partner of Hummer Winblad Venture Partners                      |  |  | 2000 | 



---



|    |                                      
|--- | -------------------------------------
|(1) | Member of the Audit Committee.       
|   
|(2) | Member of the Compensation Committee.

Ms. Dubinskyis
a co-founder of Handspring. She has been the Chief Executive
Officer and a director since July 1998. From July 1998 through
October 2002, she served as President of Handspring and from
July 2002 through September 2002, she served as the Acting Chief
Financial Officer. She served as President and Chief Executive
Officer of Palm Computing, Inc. (Palm) from June 1992 to July
1998. From 1982 to 1991, she was with Claris Corporation, a
subsidiary of Apple Computer, Inc. (Apple), and with Apple,
where she served in a number of logistics, sales and marketing
positions, most recently as Vice President International of
Claris from 1987 to January 1991. Ms. Dubinsky is also a
director of Intuit Inc. and a Trustee of the Computer History
Museum. She holds a B.A. degree in history from Yale
University and an M.B.A. from the Harvard Graduate School of
Business Administration.

Mr. Hawkinsis
a co-founder of Handspring. He has been the Chief Product
Officer and Chairman of the Board since July 1998. Since April
2002, he has served as Chairman and Executive Director of the
Redwood Neuroscience Institute. He was a founder of Palm and
served as its Product Architect and one of its directors from
1992 to June 1998. From 1982 to 1992, Mr. Hawkins was Vice
President of Research at GRiD Systems Corporation, a laptop
computer company. He holds a B.S. degree in electrical
engineering from Cornell University.

Mr. Doerrhas
served as a director of Handspring since October 1998. He has
been a general partner of Kleiner Perkins Caufield &
Byers since September 1980. Before his tenure at Kleiner
Perkins, Mr. Doerr was employed by Intel Corporation for
five years. He serves on the Board of Directors of Intuit Inc.,
Amazon.com, Inc., drugstore.com, Inc., Homestore, Inc., and Sun
Microsystems, Inc. Mr. Doerr holds B.S.E.E. and M.E.E.
degrees from Rice University and an M.B.A. from the Harvard
Graduate School of Business Administration.

Mr. Dunleviehas served as a director of Handspring since October 1998.
Mr. Dunlevie has been a Managing Member of Benchmark
Capital, a venture capital firm, since its founding in
May 1995. From 1989

32



---



##### Table of Contents



to 1995, Mr. Dunlevie was a general partner
at Merrill, Pickard, Anderson & Eyre, a venture capital
firm. Mr. Dunlevie also has served as Vice President and
General Manager of the Personal Computer Division of Everex
Systems, Inc., a personal computer manufacturer, and as an
investment banker with Goldman, Sachs & Co. He is a
director of Rambus, Inc. and of several privately held
companies. Mr. Dunlevie holds a B.A. degree from Rice
University and an M.B.A. from the Stanford Graduate School of
Business.


Mr. Kennardhas
served as a director of Handspring since April 2001. He has
been a Managing Director in the Global Telecommunications and
Media Group of The Carlyle Group since May 2001. Prior to
joining The Carlyle Group, Mr. Kennard served as Chairman
of the U.S. Federal Communications Commission from
November 1997 to January 2001. Mr. Kennard served
as the FCCs general counsel from December 1993 to
November 1997. Before serving in government,
Mr. Kennard was a partner and member of the Board of
Directors of the law firm of Verner, Liipfert, Bernhard,
McPherson and Hand. Mr. Kennard also serves as a director
of Nextel Communications, Inc. and The New York Times Company.
Mr. Kennard graduated from Stanford University and received
his law degree from Yale Law School.

Mr. Kertzmanhas served as a director of Handspring since April 2000. He
has been a Partner of Hummer Winblad Venture Partners since
June 2003. Prior to joining Hummer Winblad Venture
Partners, Mr. Kertzman was the Chief Executive Officer and
director of Liberate Technologies, an interactive TV software
company, from November 1998 to June 2003, was the
Chairman of the Board of Directors from June 2002 to
June 2003, and was the President from November 1998
until January 2002. Mr. Kertzman was a member of the
Board of Directors of Sybase, Inc., a database company, from
February 1995 to November 1998 and he served as
Chairman of Sybases Board of Directors from July 1997
to November 1998. Between February 1998 and
August 1998, he also served as Co-Chief Executive Officer
of Sybase. From July 1996 until February 1997,
Mr. Kertzman served as Chief Executive Officer of Sybase
and, from July 1996 until July 1997, he also served as
President of Sybase. Between February 1995 and
July 1996 he served as an Executive Vice President of
Sybase. In February 1995, Sybase merged with Powersoft
Corporation, a provider of application development tools.
Mr. Kertzman had served as Chief Executive Officer and a
director of Powersoft since he founded it in 1974. He also
served as President of Powersoft from April 1974 to
June 1992. Mr. Kertzman also serves as a director of
CNET Networks, Inc.

Executive Officers and Key Employees

The names of the executive officers and other key
employees of the Company, and certain information about them as
of July 26, 2003, are set forth below:

|                      |  |     |    |          |  |                                                                 
|--------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------
|Name                  |  | Age |    | Position
|                      |  |     |    |         
|Jeffrey C. Hawkins(1) |  |     | 46 |          |  | Chairman of the Board of Directors and Chief
    Product Officer
|Donna L. Dubinsky(1)  |  |     | 48 |          |  | Chief Executive Officer and a Director                          
|Edward T. Colligan    |  |     | 42 |          |  | President and Chief Operations Officer                          
|William R. Slakey     |  |     | 44 |          |  | Vice President and Chief Financial Officer                      
|Celeste S. Baranski   |  |     | 45 |          |  | Vice President, Engineering                                     
|C. John Hartnett      |  |     | 40 |          |  | Vice President, Worldwide Operations                            
|David G. Pine         |  |     | 44 |          |  | Vice President and General Counsel and Secretary                
|Joseph K. Sipher      |  |     | 39 |          |  | Vice President, Worldwide Marketing                             
|Patricia A. Tomlinson |  |     | 45 |          |  | Vice President, Human Resources                                 
|Gregory S. Woock      |  |     | 40 |          |  | Vice President, Worldwide Sales                                 



---



|    |                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------
|(1) | Additional information with respect to
    Mr. Hawkins and Ms. Dubinsky is set forth herein under
    Directors.

Mr. Colliganis
a co-founder of Handspring. He has served as President of
Handspring since October 2002 and Chief Operating Officer
of Handspring since July 2001. Prior to his promotion to
Chief Operating Officer, Mr. Colligan served as Senior Vice
President, Marketing and Sales of Handspring from
October 1998 through July 2001. Before he joined
Handspring, he served as Vice President of Marketing of

33



---



##### Table of Contents



Palm from January 1993 to
September 1998. From 1986 to 1993, Mr. Colligan was at
Radius Inc., a provider of displays and graphics cards, most
recently serving as Vice President of Strategic and Product
Marketing. He holds a B.A. degree in political science from the
University of Oregon.


Mr. Slakeyhas
served as Vice President and Chief Financial Officer since
September 2002. Before he joined Handspring, he was
Executive Vice President and Chief Financial Officer at
WJ Communications, a leading RF semiconductor company, from
October 2001 to August 2002. From September 1999
to December 2000, he was Chief Financial Officer at
SnapTrack, a QUALCOMM company that pioneered the industrys
most advanced GPS-based wireless tracking system for pinpointing
wireless phones, PDAs, pagers and other wireless devices. Prior
to SnapTrack, Mr. Slakey was a senior controller at
3COMs Palm Computing Division and held various financial
roles at Apple Computer. Mr. Slakey holds a B.A. degree in
economics from the University of California and an M.B.A. from
the Harvard Graduate School of Business Administration.

Ms. Baranskihas served as Vice President, Engineering of Handspring since
September 1999. From January 1999 to August 1999,
she served as a Product Development Manager at Set Engineering,
Inc., a product development consulting company. She served as a
Research and Development Manager for the Mobile Computing
Division at Hewlett Packard Company from March 1996 to
November 1998. Before that she served as Director of Product
Development at Norand Corporation, a supplier of handheld
computers to vertical markets, from June 1994 to
February 1996, and as Vice President of Engineering at EO,
Inc., a start-up PDA company, from 1990 to 1994. She holds B.S.
and M.S. degrees in electrical engineering from Stanford
University.

Mr. Hartnetthas served as Vice President, Customer Relations and Operations
of Handspring since February 2000. From July 1999 to
February 2000, he served as Senior Vice President of
Marketing, Support and Operations of MetaCreations, a creative
web software company. Mr. Hartnett also served as Vice
President of Worldwide Support and Operations for MetaCreations
from December 1997 to July 1999 and Vice President of
International Operations for MetaCreations from July 1996
to December 1997. Prior to joining MetaCreations,
Mr. Hartnett was with Claris Corporation from 1992 to
July 1996 where he most recently held the position of
Director of International Operations. He holds a degree in
marketing from the Marketing Institute of Ireland and a Post
Graduate degree in finance through the ACCA and the University
of Limerick.

Mr. Pinehas
served as Vice President, General Counsel of Handspring since
May 2000 and Secretary since February 2001. From
April 1996 to May 2000, Mr. Pine served with At
Home Corporation, most recently as Senior Vice President and
General Counsel and Secretary. From 1990 to March 1996, he
was Vice President, General Counsel and Secretary of Radius
Inc., a manufacturer of Macintosh computer peripherals.
Mr. Pine also has served as a state legislator in the New
Hampshire House of Representatives. Mr. Pine holds an A.B.
degree in government from Dartmouth College and a J.D. degree
from the University of Michigan Law School.

Mr. Sipherhas
served as Vice President, Product Marketing of Handspring since
May 2000. From May 1993 through May 2000, he
served in a number of product marketing management positions at
Palm Computing, Inc., most recently as a Palm Fellow. Prior to
Palm, Mr. Sipher held positions at Microsoft Corporation
and Apple. Mr. Sipher holds a B.A. degree in English and an
M.B.A. both from the University of Michigan.

Ms. Tomlinsonhas served as Vice President, Human Resources of Handspring
since January 2000. From April 1996 to
November 1999, she was Vice President of Human Resources at
Edify Corporation, a self-service software company. From
March 1995 to April 1996, she was Vice President of
Human Resources for the Desktop Document Systems Division of
Xerox Corporation. Ms. Tomlinson also served as Director of
Human Resources at Synopsys, Inc., an electronic design
automation software company, from June 1992 to
March 1995. From July 1983 to June 1992, she held
human resources management positions with Apple Computer, Inc.
Ms. Tomlinson holds a B.A. degree in sociology from Pomona
College.

34



---



##### Table of Contents



Mr. Woockhas
served as Vice President, North American Sales of Handspring
since November 1999. From April 1992 through
September 1999, Mr. Woock was at Creative Labs, Inc.,
a provider of PC entertainment products, most recently serving
as Vice President of Sales. Prior to Creative Labs,
Mr. Woock worked for Canon USA. Mr. Woock earned his
B.A. from Columbia College in Chicago.

Section 16(a) Beneficial Ownership
Compliance

Section 16(a) of the Exchange Act requires
our directors and executive officers and persons who
beneficially own more than 10% of common stock, to file initial
reports of beneficial ownership and reports of changes in
beneficial ownership with the Commission. These persons are
required by regulation to furnish us with copies of all
Section 16(a) forms they file. Based solely on our review
of the copies of such forms furnished to us and written
representations from these persons, we believe that all
Section 16(a) filing requirements were met during fiscal
2003 except with respect to each of the stock option grants
described below that were subsequently reported on a late
Form 4.

Under Handsprings 2000 Equity Incentive
Plan, each member of Handsprings Board of Directors who is
not a Handspring employee, automatically receives a
11,250 share option grant immediately following each annual
meeting of stockholders. On November 7, 2002, the following
directors received such an automatic grant: L. John Doerr,
Bruce Dunlevie, William Kennard and Mitchell Kertzman.

On November 18, 2002, each of the following
executive officers of Handspring were granted stock options
pursuant to Handsprings Option Exchange Program following
the cancellation of earlier stock options for the same number of
shares with a higher exercise price: Celeste Baranski
(40,000 shares), Edward Colligan (200,000 shares),
David Pine (490,000 shares), William Slakey
(80,000 shares) and Gregory Woock (80,000 shares). The
options canceled by each of these executive officers was
reported on a timely basis.

On February 5, 2003, each of the following
executive officers of Handspring were granted stock options
pursuant to Handsprings 2000 Equity Incentive Plan:
Celeste Baranski (80,000 shares), Edward Colligan
(200,000 shares), David Pine (80,000 shares) and
Gregory Woock (25,000 shares).

Prior to August 29, 2002, each of the stock
options described above was eligible for reporting on a year-end
Form 5. Section 403 of the Sarbanes-Oxley Act of 2002,
however, amended Section 16(a) effective August 29,
2002 to require such stock option grants to be reported by the
end of the second business day following the date of grant.

35



---



##### Table of Contents








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Executive Compensation

The following table sets forth all compensation
awarded to or earned or paid for services rendered in all
capacities to us and our subsidiaries during each of fiscal
2003, 2002 and 2001 by (i) our chief executive officer and
(ii) our five other most highly compensated employees who
were serving as executive officers at the end of fiscal 2003
(together, the Named Executive Officers). This information
includes the dollar values of base salaries and bonus awards,
the number of shares subject to stock options granted and
certain other compensation, whether paid or deferred.

Summary Compensation Table:

|                            |                         |             |      |                        |  |              |         |              |  |            |        |                 |  |   |   |   |  |  |         |         |  |   |   |   | 
|--------------------------- | ----------------------- | ----------- | ---- | ---------------------- |  | ------------ | ------- | ------------ |  | ---------- | ------ | --------------- |  | - | - | - |  |  | ------- | ------- |  | - | - | - | 
|                            |                         |             |      |                        |  | Long-Term    |         |             
|                            |                         |             |      | Annual Compensation($) |  | Compensation |         |             
|                            |                         |             |      |                        |  |              |         |             
|                            |                         |             |      |                        |  | Other        |         | Securities   |  |           
|                            |                         |             |      |                        |  | Annual       |         | Underlying   |  | All Other 
|Name and Principal Position |                         | Fiscal Year |      | Salary                 |  | Bonus        |         | Compensation |  | Options(#) |        | Compensation($)
|                            |                         |             |      |                        |  |              |         |              |  |            |        |                
|Donna L. Dubinsky          |                         |             | 2003 |                        |  | $            | 165,376 |              |  | $          |       |                 |  | $ |  |   |  |  |        |         |  | $ |  |  
|                            | Chief Executive Officer |             |      | 2002                   |  |              | $       | 186,666      |  |            | $      |                |  |   | $ |  |  |  |         |        |  |   | $ |  | 
|                            | and a Director          |             |      | 2001                   |  |              | $       | 150,000      |  |            | $      |                |  |   | $ |  |  |  |         |        |  |   | $ |  | 
|Gregory S. Woock           |                         |             | 2003 |                        |  | $            | 171,900 |              |  | $          | 22,076 |                 |  | $ |  |   |  |  | 105,000 |         |  | $ |  |  
|                            | Vice President,         |             |      | 2002                   |  |              | $       | 178,267      |  |            | $      | 33,846          |  |   | $ |  |  |  |         | 25,000  |  |   | $ |  | 
|                            | Worldwide Sales(1)      |             |      | 2001                   |  |              | $       | 172,500      |  |            | $      | 7,500           |  |   | $ |  |  |  |         | 25,000  |  |   | $ |  | 
|Celeste S. Baranski        |                         |             | 2003 |                        |  | $            | 193,500 |              |  | $          |       |                 |  | $ |  |   |  |  | 120,000 |         |  | $ |  |  
|                            | Vice President,         |             |      | 2002                   |  |              | $       | 194,641      |  |            | $      |                |  |   | $ |  |  |  |         | 40,000  |  |   | $ |  | 
|                            | Engineering             |             |      | 2001                   |  |              | $       | 183,327      |  |            | $      |                |  |   | $ |  |  |  |         | 40,000  |  |   | $ |  | 
|Edward T. Colligan         |                         |             | 2003 |                        |  | $            | 180,000 |              |  | $          |       |                 |  | $ |  |   |  |  | 400,000 |         |  | $ |  |  
|                            | President and Chief     |             |      | 2002                   |  |              | $       | 186,666      |  |            | $      |                |  |   | $ |  |  |  |         |        |  |   | $ |  | 
|                            | Operations Officer      |             |      | 2001                   |  |              | $       | 200,000      |  |            | $      |                |  |   | $ |  |  |  |         | 200,000 |  |   | $ |  | 
|C. John Hartnett           |                         |             | 2003 |                        |  | $            | 180,000 |              |  | $          |       |                 |  | $ |  |   |  |  | 120,000 |         |  | $ |  |  
|                            | Vice President,         |             |      | 2002                   |  |              | $       | 186,667      |  |            | $      |                |  |   | $ |  |  |  |         | 40,000  |  |   | $ |  | 
|                            | Worldwide               |             |      | 2001                   |  |              | $       | 200,000      |  |            | $      |                |  |   | $ |  |  |  |         | 40,000  |  |   | $ |  | 
|                            | Operations              |             |      |                        |  |              |         |              |  |            |        |                 |  |   |   |   |  |  |         |         |  |   |   |   | 
|David G. Pine              |                         |             | 2003 |                        |  | $            | 180,000 |              |  | $          |       |                 |  | $ |  |   |  |  | 570,000 |         |  | $ |  |  
|                            | Vice President and      |             |      | 2002                   |  |              | $       | 126,667      |  |            | $      |                |  |   | $ |  |  |  |         | 40,000  |  |   | $ |  | 
|                            | General Counsel and     |             |      | 2001                   |  |              | $       | 200,000      |  |            | $      |                |  |   | $ |  |  |  |         | 40,000  |  |   | $ |  | 
|                            | Secretary               |             |      |                        |  |              |         |              |  |            |        |                 |  |   |   |   |  |  |         |         |  |   |   |   | 



---



|    |                                                           
|--- | ----------------------------------------------------------
|(1) | Bonus paid to Mr. Woock consists of sales
    commissions.

Grant of Stock Options

The following table sets forth further
information regarding individual grants of stock options during
fiscal 2003 to each of the Named Executive Officers. In
accordance with the rules of the Securities and Exchange
Commission, the table sets forth the hypothetical gains or
option spreads that would exist for the options at
the end of their respective ten-year terms based on assumed
annualized rates of compound stock price appreciation of 5% and
10% from the dates the options were granted to the end of the
respective option terms. Actual gains, if any, on option
exercises are dependent on the future performance of our Common
Stock and

36



---



##### Table of Contents



overall market conditions. There can be no
assurance that the potential realizable values shown in this
table will be achieved.


Option Grants in Fiscal 2003

|                    |  |                   |         |                            |     |                |     |                             |   |                    |      |        |  |  |         |        |  |   |         |        |  |   |         |         | 
|------------------- |  | ----------------- | ------- | -------------------------- | --- | -------------- | --- | --------------------------- | - | ------------------ | ---- | ------ |  |  | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------- | 
|                    |  |                   |         |                            |     |               
|                    |  | Individual Grants |         |                           
|                    |  |                   |         | Potential Realizable Value
|                    |  | Number of         |         | Percent of                 |     |                |     | at Assumed Annual Rates    
|                    |  | Securities        |         | Total Options              |     |                |     | of Stock Price Appreciation
|                    |  | Underlying        |         | Granted to                 |     | Per Share      |     |                             |   | for Option Term(2)
|                    |  | Options           |         | Employees in               |     | Exercise       |     | Expiration                  |   |                   
|Name                |  | Granted(#)        |         | Fiscal 2003                |     | Price($/sh)(1) |     | Date                        |   | 5%($)              |      | 10%($)
|                    |  |                   |         |                            |     |                |     |                             |   |                    |      |       
|Donna L. Dubinsky   |  |                   |        |                            |     |                |    | %                           |   | $                  |     |        |  |  |        |        |  | $ |        |        |  | $ |        |        
|Gregory S. Woock    |  |                   | 25,000  | (3)                        |     |                | 0.2 | %                           |   | $                  | 1.01 |        |  |  | 5/4/11  |        |  | $ | 12,898  |        |  | $ | 31,288  |        
|                    |  |                   |         | 80,000                     |     |                |     | 0.6                         | % |                    | $    | 0.78   |  |  |         | 2/5/13 |  |   | $       | 39,193 |  |   | $       | 99,322  | 
|Celeste S. Baranski |  |                   | 40,000  | (3)                        |     |                | 0.3 | %                           |   | $                  | 1.01 |        |  |  | 5/4/11  |        |  | $ | 20,637  |        |  | $ | 50,061  |        
|                    |  |                   |         | 80,000                     |     |                |     | 0.6                         | % |                    | $    | 0.78   |  |  |         | 2/5/13 |  |   | $       | 39,193 |  |   | $       | 99,322  | 
|Edward T. Colligan  |  |                   | 200,000 | (3)                        |     |                | 1.6 | %                           |   | $                  | 1.01 |        |  |  | 6/15/11 |        |  | $ | 104,901 |        |  | $ | 255,293 |        
|                    |  |                   |         | 200,000                    |     |                |     | 1.6                         | % |                    | $    | 0.78   |  |  |         | 2/5/13 |  |   | $       | 97,982 |  |   | $       | 248,305 | 
|C. John Hartnett    |  |                   | 40,000  | (3)                        |     |                | 0.3 | %                           |   | $                  | 1.01 |        |  |  | 5/4/11  |        |  | $ | 20,637  |        |  | $ | 50,061  |        
|                    |  |                   |         | 76,668                     |     |                |     | 0.6                         | % |                    | $    | 0.78   |  |  |         | 2/5/13 |  |   | $       | 37,560 |  |   | $       | 95,185  | 
|                    |  |                   |         | 3,332                      |     |                |     |                            | % |                    | $    | 0.78   |  |  |         | 2/5/13 |  |   | $       | 1,632  |  |   | $       | 4,137   | 
|David G. Pine       |  |                   | 253,541 | (3)                        |     |                | 2.0 | %                           |   | $                  | 1.01 |        |  |  | 5/1/10  |        |  | $ | 112,235 |        |  | $ | 264,778 |        
|                    |  |                   |         | 196,459                    | (3) |                |     | 1.6                         | % |                    | $    | 1.01   |  |  |         | 5/1/10 |  |   | $       | 86,967 |  |   | $       | 205,166 | 
|                    |  |                   |         | 40,000                     | (3) |                |     | 0.3                         | % |                    | $    | 1.01   |  |  |         | 5/4/11 |  |   | $       | 20,637 |  |   | $       | 50,061  | 
|                    |  |                   |         | 56,668                     |     |                |     | 0.5                         | % |                    | $    | 0.78   |  |  |         | 2/5/13 |  |   | $       | 27,762 |  |   | $       | 70,355  | 
|                    |  |                   |         | 23,332                     |     |                |     | 0.2                         | % |                    | $    | 0.78   |  |  |         | 2/5/13 |  |   | $       | 11,431 |  |   | $       | 28,967  | 



---



|    |                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Handspring stock options were awarded to the
    Named Executive Officers with an exercise price equal to the
    fair market value of Handsprings Common Stock on the date
    of grant. Handspring stock options expire ten years after the
    date of grant or at the time of the optionees termination
    of employment.
|   
|(2) | The 5% and 10% assumed rates of annual compound
    stock price appreciation are prescribed by rules of the SEC and
    do not represent Handsprings estimate or projection of
    future Common Stock prices.                                                                                                                 
|   
|(3) | Stock options granted pursuant to
    Handsprings Option Exchange Program following the
    cancellation of an earlier stock option for the same number of
    shares with a higher exercise price.                                                                                                                            

Exercise of Stock Options

The following table sets forth certain
information concerning the exercise of stock options during
fiscal 2003 by each of the Named Executive Officers and the
number and value at June 28, 2003 of unexercised options
held by said individuals. There were no shares acquired on the
exercise of stock options by the Named Executive Officers during
fiscal 2003.

Aggregated Option Exercise in Fiscal 2003 and
Fiscal Year-End Option Values:

|                    |  |                          |           |                        |  |             |         |               |  |   |           |  |  |   |        | 
|------------------- |  | ------------------------ | --------- | ---------------------- |  | ----------- | ------- | ------------- |  | - | --------- |  |  | - | ------ | 
|                    |  |                          |           |                        |  |            
|                    |  | Number of Securities     |           |                       
|                    |  | Underlying Unexercised   |           | Value of Unexercised  
|                    |  | Options at June 28, 2003 |           | In-the-Money Options  
|                    |  | (shares)                 |           | at June 28, 2003(1)($)
|                    |  |                          |           |                       
|Name                |  | Exercisable              |           | Unexercisable          |  | Exercisable |         | Unexercisable
|                    |  |                          |           |                        |  |             |         |              
|Donna L. Dubinsky   |  |                          |          |                        |  |             |        |               |  | $ |          |  |  | $ |       | 
|Gregory S. Woock    |  |                          | 80,572    |                        |  |             | 153,960 |               |  | $ | 7,658     |  |  | $ | 25,577 | 
|Celeste S. Baranski |  |                          | 829,791   |                        |  |             | 242,709 |               |  | $ | 476,586   |  |  | $ | 68,238 | 
|Edward T. Colligan  |  |                          | 4,126,128 |                        |  |             | 375,001 |               |  | $ | 3,977,643 |  |  | $ | 46,100 | 
|C. John Hartnett    |  |                          | 231,902   |                        |  |             | 270,836 |               |  | $ |          |  |  | $ | 19,680 | 
|David G. Pine       |  |                          | 290,626   |                        |  |             | 319,374 |               |  | $ | 2,906     |  |  | $ | 21,274 | 

37



---



##### Table of Contents





---



|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These values have not been, and may never be,
    realized. The values are based on the positive spread between
    the respective exercise prices of outstanding stock options and
    the closing price of Handsprings Common Stock on
    June 28, 2003 ($1.02 per share).

Compensation of Directors

Each member of the Board of Directors who is not
employed by us and who resides outside of the San Francisco Bay
Area is paid a fee of $2,000 for each meeting of the Board of
Directors, or committee thereof, attended in person by that
director. Mr. Kennard is the only director who currently
resides outside the San Francisco Bay Area and is not employed
by us. In any calendar year, there are typically four regular
meetings of the Board held in person and numerous special
meetings of the Board held by telephone conference call.

In addition, under our 2000 Equity Incentive
Plan, each Handspring director who is not a Handspring employee
(or of any parent or subsidiary of Handspring) (Outside
Director) receives automatic grants of stock options. The
following equity compensation will be paid to the Outside
Directors:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Upon joining the Board, each new Outside
    Director will be automatically granted an option to purchase
    37,500 shares of Common Stock on the date the Outside Director
    first becomes a member of the Board (an Initial Grant), to be
    vested as to 25% of the shares on the one year anniversary of
    the start date for such Initial Grant, and thereafter as to
    2.08333% of the shares at the end of each full succeeding month,
    so long as the Outside Director continuously remains a director
    or a consultant of Handspring.
|
| | (2) Immediately following each annual
    meeting of stockholders, each Outside Director will
    automatically receive a new 11,250 share option grant (a
    Succeeding Grant), to be vested as to 25% of the shares on the
    one year anniversary of the start date for such Succeeding
    Grant, and thereafter as to 2.08333% of the shares at the end of
    each full succeeding month, so long as the Outside Director
    continuously remains a director or a consultant of Handspring.                                                            

Notwithstanding the foregoing, the Board may
increase or decrease the number of option shares that may be
granted to an Outside Director under the 2000 Equity Incentive
Plan.

Employment Contracts and Termination of
Employment and Change-In-Control Arrangements

Employment and Retention and Severance
Agreements.Handspring has adopted a
retention and severance plan to induce full-time employees of
Handspring to remain employed by Handspring through the merger
with Palm, and, in some instances, for transition periods
following the merger. Under the retention and severance plan,
William Slakey, David Pine and Donna Dubinsky, each an executive
officer of Handspring, will receive the following severance
payments and benefits: a lump sum payment equal to
12 months of base salary; 100% acceleration of vesting of
all outstanding unvested equity awards and payment of any costs
incurred in connection with continuation of health coverage
under the Consolidated Omnibus Budget Reconciliation Act for a
12 month period. To receive these payment and benefits,
these individuals must be full time employee of Handspring as of
the closing of the merger and must sign both a release of claims
and an acknowledgement of his or her continuing obligations
under Handsprings employee invention and confidentiality
agreement.

Indemnification agreements with directors and
executive officers.We have entered
into indemnification agreements with certain of our directors
and executive officers, including some who began serving as
directors or executive officers within the past year. These
agreements provide the maximum indemnity available to them under
Section 145 of the Delaware General Corporation Law and
under our bylaws, as well as certain additional procedural
protections. These agreements provide generally that we will
advance expenses incurred by directors and executive officers in
any action or proceeding as to which they may be indemnified,
and require us to indemnify such individuals to the fullest
extent permitted by law.

38



---



##### Table of Contents



Compensation Committee Interlocks and Insider
Participation

The Compensation Committee of the Board (the
Committee) makes all decisions involving the compensation of
executive officers of Handspring. The Committee consists of the
following non-employee directors: L. John Doerr and Bruce W.
Dunlevie. No executive officer of Handspring served during
fiscal 2003 or currently serves, as a member of the Board of
Directors or the Compensation Committee of any entity that has
one or more executive officers serving on Handsprings
Board or Handsprings Committee. Although Donna L. Dubinsky
(Handsprings Chief Executive Officer), David G. Pine
(Handsprings Vice President, General Counsel and
Secretary) and Patricia A. Tomlinson (Handsprings Vice
President, Human Resources) are generally invited to attend the
meetings of the Committee, they do not participate in
deliberations that relate to their own compensation.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Equity Compensation Plan Information

The following table sets forth certain
information, as of June 28, 2003, concerning securities
authorized for issuance under all equity compensation plans of
Handspring:

|                                                               |       |                         |            |                      |  |                           |      |      |  |  |            |            | 
|-------------------------------------------------------------- | ----- | ----------------------- | ---------- | -------------------- |  | ------------------------- | ---- | ---- |  |  | ---------- | ---------- | 
|                                                               |       |                         |            |                      |  | (c)                      
|                                                               |       |                         |            |                      |  | Number of Securities     
|                                                               |       | (a)                     |            | (b)                  |  | Remaining Available for  
|                                                               |       | Number of Securities to |            | Weighted-Average     |  | Future Issuance Under    
|                                                               |       | be Issued Upon Exercise |            | Exercise Price of    |  | Equity Compensation Plans
|                                                               |       | of Outstanding Options, |            | Outstanding Options, |  | (Excluding Securities    
|Plan Category                                                  |       | Warrants and Rights     |            | Warrants and Rights  |  | Reflected in Column (a)) 
|                                                               |       |                         |            |                      |  |                          
|Equity compensation plans approved by security
    holders     |       |                         | 21,036,760 |                      |  | $                         | 1.17 |      |  |  | 22,038,767 | (1)       
|Equity compensation plans not approved by
    security holders |       |                         |           | (2)                  |  |                           |     | (2)  |  |  |           | (2)       
|                                                               |       |                         |            |                      |  |                           |      |      |  |  |            |           
|                                                               | Total |                         |            | 21,036,760           |  |                           | $    | 1.17 |  |  |            | 22,038,767 | 
|                                                               |       |                         |            |                      |  |                           |      |      |  |  |            |           



---



|    |                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reflects 1,237,661 shares available for issuance
    under Handsprings 2000 Employee Stock Purchase Plan and
    20,801,106 shares available for issuance under Handsprings
    2000 Equity Incentive Plan. There are no shares available for
    issuance under Handsprings 1998 Equity Incentive Plan and
    1999 Equity Incentive Plan.
|   
|(2) | Does not include options and warrants to purchase
    36,125 shares outstanding, with a weighted average exercise
    price of $0.88 that were assumed in Handsprings
    acquisition of BlueLark Systems, Inc. There were no shares
    available for future issuance under the BlueLark plans.                                             

The following table sets forth certain
information, as of July 26, 2003, with respect to the
beneficial ownership of Handsprings Common Stock by
(i) each stockholder known by Handspring to be the
beneficial owner of more than 5% of Handsprings Common
Stock, (ii) each director/ nominee, (iii) each of the
Named Executive Officers of Handspring (as defined above) and
(iv) all directors and executive

39



---



##### Table of Contents



officers as a group. There were 148,642,451
shares of Handsprings Common Stock outstanding on
July 26, 2003.


|                                                          |                                                                                            |              |            |            |  |  |      |   | 
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------ | ---------- | ---------- |  |  | ---- | - | 
|                                                          |                                                                                            | Amount and   |            |           
|                                                          |                                                                                            | Nature of    |            |           
|                                                          |                                                                                            | Beneficial   |            | Percent of
|Name and Address of Beneficial Owner(1)                   |                                                                                            | Ownership(2) |            | Class     
|                                                          |                                                                                            |              |            |           
|Jeffrey C. Hawkins(3)                                     |                                                                                            |              | 36,879,608 |            |  |  | 24.8 | %
|Donna L. Dubinsky(4)                                      |                                                                                            |              | 21,800,728 |            |  |  | 14.7 |  
|L. John Doerr(5)                                          |                                                                                            |              | 14,885,985 |            |  |  | 10.0 |  
|                                                          | Kleiner Perkins Caufield & Byers
    2750 Sand Hill Road
    Menlo Park, California 94205  |              |            |            |  |  |      |   | 
|M-F Downtown Sunnyvale, LLC(6)                            |                                                                                            |              | 10,000,000 |            |  |  | 6.3  |  
|Edward T. Colligan(7)                                     |                                                                                            |              | 5,685,088  |            |  |  | 3.7  |  
|Bruce W. Dunlevie(8)                                      |                                                                                            |              | 5,012,462  |            |  |  | 3.4  |  
|                                                          | Benchmark Capital Partners II, LP
    2480 Sand Hill Road
    Menlo Park, California 94205 |              |            |            |  |  |      |   | 
|Celeste S. Baranski(9)                                    |                                                                                            |              | 1,166,606  |            |  |  | *    |  
|Gregory S. Woock(10)                                      |                                                                                            |              | 450,087    |            |  |  | *    |  
|C. John Hartnett(11)                                      |                                                                                            |              | 349,648    |            |  |  | *    |  
|David G. Pine(12)                                         |                                                                                            |              | 347,916    |            |  |  | *    |  
|Mitchell E. Kertzman(13)                                  |                                                                                            |              | 37,186     |            |  |  | *    |  
|William E. Kennard(14)                                    |                                                                                            |              | 27,811     |            |  |  | *    |  
|All Directors and Executive Officers
    (11 persons)(15) |                                                                                            |              | 86,643,125 |            |  |  | 56.1 | %



---



| |   |             
| | - | ------------
| | * | Less than 1%



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Unless otherwise indicated above, the address for
    each person and entity named in the table is: c/o Handspring,
    Inc., 189 Bernardo Avenue, Mountain View, California 94043.                                                                                                                                                                                                                                                                                                                                                                        
|
| | (2) | Unless otherwise indicated below, the persons and
    entities named in the table have sole voting and sole investment
    power with respect to all shares beneficially owned, subject to
    community property laws where applicable.                                                                                                                                                                                                                                                                                                                   
|
| | (3) | Includes 36,686,108 shares held by
    Mr. Hawkins and his spouse as trustees under the
    Strauss-Hawkins Trust Agreement dated April 17, 1991. Also
    includes 193,500 shares held by various charitable trusts for
    which Mr. Hawkins is the trustee.                                                                                                                                                                                                                                                                                             
|
| | (4) | Represents shares held by Ms. Dubinsky as
    trustee under the Amended and Restated Dubinsky Trust Agreement
    dated May 23, 1995.                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (5) | Represents 13,848,663 shares held by Kleiner
    Perkins Caufield & Byers VIII, L.P., 802,185 shares held by
    KPCB VIII Founders Fund, L.P. and 15,670 shares held by KPCB
    Information Sciences Zaibatsu Fund II, L.P., 214,312 shares held
    by Mr. Doerr and 5,155 shares issuable upon the exercise of
    options held by Mr. Doerr that are exercisable within 60
    days of July 26, 2003. Mr. Doerr is a general partner
    of KPCB VIII Associates, L.P., which is a general partner of
    Kleiner Perkins Caulfield & Byers VIII, L.P.
|
| | (6) | Represents 1,000,000 shares held by M-F Downtown
    Sunnyvale, LLC and 9,000,000 shares subject to a fully
    exercisable warrant held by M-F Downtown Sunnyvale, LLC. The
    address of M-F Downtown Sunnyvale, LLC is c/o the Mozart
    Development Company, 1068 East Meadow Circle, Palo Alto,
    California 94303.                                                                                                                                                                                                                               
|
| | (7) | Represents 1,533,960 shares held by
    Mr. Colligan and his spouse and 4,151,128 shares subject to
    options held by Mr. Colligan that are exercisable within
    60 days of July 26, 2003.                                                                                                                                                                                                                                                                                                                                                             
|
| | (8) | Represents 474,093 shares held by
    Mr. Dunlevie and his spouse as trustees under the Bruce and
    Elizabeth Dunlevie Living Trust U/ A/ D, 4/8/2002, Bruce and
    Elizabeth Dunlevie TTEES, 5,155                                                                                                                                                                                                                                                                                                                                                     

40



---



##### Table of Contents



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | shares issuable upon the exercise of options held
    by Mr. Dunlevie that are exercisable within 60 days of
    July 26, 2003 and 4,533,214 shares held by Benchmark
    Capital Partners II, L.P. as nominee for Benchmark Capital
    Partners II, L.P., Benchmark Founders Fund II,
    L.P., Benchmark Founders Fund II-A, L.P. and
    Benchmark Members Fund II, L.P. Mr. Dunlevie is
    a Managing Member of Benchmark Capital Management Co. II,
    LLC, the general partner of Benchmark Capital Partners II,
    L.P., Benchmark Founders Fund II, L.P., Benchmark
    Founders Fund II-A, L.P. and Benchmark Members
    Fund II, L.P. Mr. Dunlevie disclaims beneficial
    ownership of these shares, except to the extent of his pecuniary
    interest in the Benchmark funds.
|
| | (9) | Represents 247,440 shares held by
    Ms. Baranski and 919,166 shares subject to options held by
    Ms. Baranski that are exercisable within 60 days of
    July 26, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



|     |                                                                                                                                                                                     
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Represents 338,265 shares held by Mr. Woock
    and his spouse and 111,822 shares subject to options held by
    Mr. Woock that are exercisable within 60 days of
    July 26, 2003.
|    
|(11) | Represents 70,559 shares held by
    Mr. Hartnett and 279,089 shares subject to options held by
    Mr. Hartnett that are exercisable within 60 days of
    July 26, 2003.          
|    
|(12) | Represents 27,500 shares held by Mr. Pine
    and 320,416 shares subject to options held by Mr. Pine that
    are exercisable within 60 days of July 26, 2003.                      
|    
|(13) | Represents shares subject to options held by
    Mr. Kertzman that are exercisable within 60 days of
    July 26, 2003.                                                             
|    
|(14) | Represents shares subject to options held by
    Mr. Kennard that are exercisable within 60 days of
    July 26, 2003.                                                              
|    
|(15) | Includes 5,856,928 shares subject to options held
    that are exercisable within 60 days of July 26, 2003.                                                                         






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

From July 1, 2002 to the present, there have
been no (and there are no currently proposed) transactions in
which the amount involved exceeded $60,000 to which we or any of
our subsidiaries were (or will be) a party and in which any
executive officer, director, 5% beneficial owner of our Common
Stock or member of the immediate family of any of the foregoing
persons had (or will have) a direct or indirect material
interest, except under Executive Compensation and
Compensation of Directors and except as follows:

M-F Downtown Sunnyvale, LLC, a landlord for
certain of our facilities, holds 1,000,000 shares of Handspring
common stock which it obtained upon exercising a warrant issued
in connection with the restructuring of our lease obligations in
Sunnyvale, California. In connection with this lease
restructuring, M-F Downtown Sunnyvale, LLC also was issued a
fully exercisable warrant to purchase an additional 9,000,000
shares of Handspring common stock. These holdings in the
aggregate represent approximately 6.3% of our total outstanding
common stock. In fiscal 2003, we paid M-F Downtown Sunnyvale,
LLC approximately $333,000 under a promissory note and amended
lease agreement that were put in place in connection the
restructuring of the Sunnyvale lease obligations.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures.Regulations under the
Securities Exchange Act of 1934 (the Exchange Act) require
public companies to maintain disclosure controls and
procedures, which are defined to mean a companys
controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that it
files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in
the Commissions rules and forms. Our chief executive
officer and our chief financial officer, based on their
evaluation of our disclosure controls and procedures as of the
end of the period covered by this report, concluded that our
disclosure controls and procedures were effective for this
purpose.

Changes in Internal Controls over Financial
Reporting.There were no changes in
our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of
Rule 13a-15

41



---



##### Table of Contents



of the Exchange Act that occurred during our
fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.







|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a)(1) Financial Statements. We have filed
the following financial statements with this Form 10-K:

|                                                                                                                                                  |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                                  |  | Page
|                                                                                                                                                  |  |     
|Report of Independent Auditors                                                                                                                    |  |      | 46 | 
|Consolidated Balance Sheets at June 28, 2003
    and June 29, 2002                                                                                |  |      | 47 | 
|Consolidated Statements of Operations for the
    Years Ended June 28, 2003, June 29, 2002 and
    June 30, 2001                                  |  |      | 48 | 
|Consolidated Statements of Stockholders
    Equity and Comprehensive Loss for the Years Ended June 28,
    2003, June 29, 2002 and June 30, 2001 |  |      | 49 | 
|Consolidated Statements of Cash Flows for the
    Years Ended June 28, 2003, June 29, 2002 and
    June 30, 2001                                  |  |      | 50 | 
|Notes to Consolidated Financial Statements                                                                                                        |  |      | 52 | 

(a)(2) Financial Statement Schedule.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

|                                |  |                |        |                   |  |            |        |            |  |   |         |   |  |   |        | 
|------------------------------- |  | -------------- | ------ | ----------------- |  | ---------- | ------ | ---------- |  | - | ------- | - |  | - | ------ | 
|                                |  | Balance at     |        | Additions Charged |  |            |        | Balance at
|                                |  | Beginning of   |        | to Costs and      |  |            |        | End of    
|Year Ended June 28, 2003:       |  | Period         |        | Expenses          |  | Deductions |        | Period    
|                                |  |                |        |                   |  |            |        |           
|                                |  |               
|                                |  | (In thousands)
|Allowance for doubtful accounts |  | $              | 3,711  |                   |  | $          | 319    |            |  | $ | (924    | ) |  | $ | 3,106  | 
|Product return reserve          |  |                | 2,860  |                   |  |            | 13,142 |            |  |   | (15,598 | ) |  |   | 404    | 
|Accrued product warranty        |  |                | 14,436 |                   |  |            | 12,429 |            |  |   | (14,712 | ) |  |   | 12,153 | 

|                                |  |              |        |                   |  |            |        |            |  |   |         |   |  |   |        | 
|------------------------------- |  | ------------ | ------ | ----------------- |  | ---------- | ------ | ---------- |  | - | ------- | - |  | - | ------ | 
|                                |  | Balance at   |        | Additions Charged |  |            |        | Balance at
|                                |  | Beginning of |        | to Costs and      |  |            |        | End of    
|Year Ended June 29, 2002:       |  | Period       |        | Expenses          |  | Deductions |        | Period    
|                                |  |              |        |                   |  |            |        |           
|Allowance for doubtful accounts |  | $            | 2,239  |                   |  | $          | 1,667  |            |  | $ | (195    | ) |  | $ | 3,711  | 
|Product return reserve          |  |              | 4,552  |                   |  |            | 15,060 |            |  |   | (16,752 | ) |  |   | 2,860  | 
|Accrued product warranty        |  |              | 13,202 |                   |  |            | 19,801 |            |  |   | (18,567 | ) |  |   | 14,436 | 

|                                |  |              |       |                   |  |            |        |            |  |   |         |   |  |   |        | 
|------------------------------- |  | ------------ | ----- | ----------------- |  | ---------- | ------ | ---------- |  | - | ------- | - |  | - | ------ | 
|                                |  | Balance at   |       | Additions Charged |  |            |        | Balance at
|                                |  | Beginning of |       | to Costs and      |  |            |        | End of    
|Year Ended June 30, 2001:       |  | Period       |       | Expenses          |  | Deductions |        | Period    
|                                |  |              |       |                   |  |            |        |           
|Allowance for doubtful accounts |  | $            | 50    |                   |  | $          | 3,017  |            |  | $ | (828    | ) |  | $ | 2,239  | 
|Product return reserve          |  |              | 2,364 |                   |  |            | 14,682 |            |  |   | (12,494 | ) |  |   | 4,552  | 
|Accrued product warranty        |  |              | 8,033 |                   |  |            | 28,287 |            |  |   | (23,118 | ) |  |   | 13,202 | 

42



---



##### Table of Contents



(a)(3) Exhibits.

|        |    |     |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | --- |  | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |              
|Number  |    |     |  | Exhibit Title
|        |    |     |  |              
|        | 2  | .1  |  |              |  | Agreement and Plan of Reorganization by and among
    the Registrant, Palm, Inc., Peace Separation Corporation and
    Harmony Acquisition Corporation, dated as of June 4, 2003(7)                                                                                                                                                                                                                                                                                                                              
|        | 2  | .2  |  |              |  | Form of Voting Agreement by and between Palm,
    Inc. and each of certain individual stockholders of the
    Registrant, dated as of June 4, 2003(7)                                                                                                                                                                                                                                                                                                                                                            
|        | 3  | .1  |  |              |  | Second Amended and Restated Certificate of
    Incorporation (incorporated herein by reference to exhibit 3.3
    to our Registration Statement on Form S-1 (File
    No. 333-33666) which became effective on June 20, 2000
    (the Form S-1))                                                                                                                                                                                                                                                                 
|        | 3  | .2  |  |              |  | Restated Bylaws (incorporated by reference to
    Exhibit 3.5 to the Form S-1)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 3  | .3  |  |              |  | Certificate of Designations specifying the terms
    of the Series A Junior Participating Preferred Stock of the
    Registrant, as filed with the Secretary of State of the State of
    Delaware on June 11, 2003 (incorporated by reference to
    Exhibit 3.2 of the Form 8-A)                                                                                                                                                                                                                               
|        | 4  | .1  |  |              |  | Specimen Common Stock Certificate(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 4  | .2  |  |              |  | Amended and Restated Investors Rights
    Agreement, dated July 7, 1999(1)                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 4  | .3  |  |              |  | Rights Agreement dated June 5, 2003 between
    the Registrant and EquiServe Trust Company, N.A., as Rights
    Agent, which includes as Exhibit A the Form of Certificate
    of Designations of Series A Junior Participating Preferred
    Stock, as Exhibit B the Summary of Stock Purchase Rights
    and as Exhibit C the Form of Right Certificate
    (incorporated by reference to Exhibit 4.1 to our
    Registration Statement on Form 8-A (File
    No. 000-30719) filed June 11, 2003 (the Form 8-A)
|        | 10 | .1  |  |              |  | Form of Indemnity Agreement entered into between
    Registrant and all executive officers and directors(1)                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .2  |  |              |  | 1998 Equity Incentive Plan*(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .3  |  |              |  | 1999 Executive Equity Incentive Plan*(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .4  |  |              |  | Form of 2000 Equity Incentive Plan*(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .5  |  |              |  | Form of 2000 Employee Stock Purchase Plan*(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .6  |  |              |  | Single Tenant Absolute Net Lease between
    Registrant and Chan-Paul Partnership, dated June 22, 1999(1)                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .7  |  |              |  | Software License Agreement between Palm
    Computing, Inc. and Registrant, dated April 10,
    2001(2)                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .8  |  |              |  | Standard Manufacturing Agreement between
    Registrant and Solectron (de Mexico), dated June 11,
    2002(4)                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .9  |  |              |  | Offer Letter of Employment between Registrant and
    William Slakey, dated July 26, 2002*(4)                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .10 |  |              |  | Founders Restricted Stock Purchase
    Agreement between Registrant and Donna Dubinsky, dated
    August 21, 1998*(1)                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .11 |  |              |  | Founders Restricted Stock Purchase
    Agreement between Registrant and Jeff Hawkins, dated
    August 20, 1998*(1)                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .12 |  |              |  | Offer Letter of Employment between Registrant and
    Bernard Whitney, dated May 31, 1999*(1)                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .13 |  |              |  | Stock Option Agreement between Registrant and
    Edward Colligan, dated October 12, 1998*(1)                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .14 |  |              |  | Lease between Registrant and Spieker Properties,
    L.P., dated April 24, 2000(1)                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .15 |  |              |  | Form of Outside Director Stock Option
    Agreement*(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .16 |  |              |  | Master Purchase Agreement For Subscriber
    Equipment between Registrant and Sprint Spectrum L.P., dated
    March 14, 2002(5)                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .17 |  |              |  | Master Purchase Agreement between Registrant and
    Wavecom Inc., dated June 12, 2001(4)                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .18 |  |              |  | Amendment 1 to Master Purchase Agreement
    between Registrant and Wavecom Inc., dated January 22,
    2002(4)                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .19 |  |              |  | Master Purchase Agreement between Registrant and
    AirPrime, Inc., dated September 10, 2002(5)                                                                                                                                                                                                                                                                                                                                                                                                                

43



---



##### Table of Contents



|        |    |     |  |               |  |                                                                                                                                                                                                                                                                                         
|------- | -- | --- |  | ------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |              
|Number  |    |     |  | Exhibit Title
|        |    |     |  |              
|        | 10 | .20 |  |              |  | Lease Agreement (Building 2) between
    Registrant and M-F Downtown Sunnyvale, LLC, dated as of February
    14, 2001(3)                                                                                                                                                              
|        | 10 | .21 |  |              |  | Lease Agreement (Building 3) between
    Registrant and M-F Downtown Sunnyvale, LLC, dated as of
    February 14, 2001(3)                                                                                                                                                              
|        | 10 | .22 |  |              |  | Standby Letter Of Credit (Building 2,
    Security Deposit) between Registrant And Wells Fargo Bank,
    National Association(3)                                                                                                                                                        
|        | 10 | .23 |  |              |  | Standby Letter of Credit (Building 2, Tenant
    Improvements) between Registrant and Wells Fargo Bank, National
    Association(3)                                                                                                                                                     
|        | 10 | .24 |  |              |  | Standby Letter of Credit (Building 3,
    Security Deposit) between Registrant and Wells Fargo Bank,
    National Association(3)                                                                                                                                                        
|        | 10 | .25 |  |              |  | Standby Letter of Credit (Building 3, Tenant
    Improvements) between Registrant and Wells Fargo Bank, National
    Association(3)                                                                                                                                                     
|        | 10 | .26 |  |              |  | Form of Addendum to Standby Letter of Credit
    between Registrant and Wells Fargo Bank, National Association(3)                                                                                                                                                                       
|        | 10 | .27 |  |              |  | Securities Account Control Agreement among
    Registrant, Wells Fargo Bank, National Association, acting
    through its Investment Group and Wells Fargo Bank, National
    Association, acting through its Peninsula Technology RCBO
    Office, dated as of February 16, 2001(3)    
|        | 10 | .28 |  |              |  | Security Agreement between Registrant and Wells
    Fargo Bank, National Association, dated as of February 16,
    2001(3)                                                                                                                                                              
|        | 10 | .29 |  |              |  | Addendum to Security Agreement between Registrant
    and Wells Fargo Bank, National Association, dated as of
    February 16, 2001(3)                                                                                                                                                  
|        | 10 | .30 |  |              |  | Amendment to Lease Agreement (Building 2)
    between Registrant and M-F Downtown Sunnyvale, LLC, dated as of
    July 12, 2002(4)                                                                                                                                                      
|        | 10 | .31 |  |              |  | Amendment to Lease Agreement (Building 3)
    between Registrant and M-F Downtown Sunnyvale, LLC, dated as of
    July 12, 2002(4)                                                                                                                                                      
|        | 10 | .32 |  |              |  | Limited Liability Company Agreement of Handspring
    Facility Company, LLC, dated as of January 15, 2003(6)                                                                                                                                                                            
|        | 10 | .33 |  |              |  | Property Purchase and Lease Modification
    Agreement between Registrant and M-F Downtown Sunnyvale, LLC,
    dated as of January 16, 2003(6)                                                                                                                                          
|        | 10 | .34 |  |              |  | Amended and Restated Lease Agreement
    (Building 3) between Registrant and M-F Downtown Sunnyvale,
    LLC, dated as of January 29, 2003(6)                                                                                                                                           
|        | 10 | .35 |  |              |  | Guaranty by and between Registrant and M-F
    Downtown Sunnyvale, LLC, dated as of January 29, 2003(6)                                                                                                                                                                                 
|        | 10 | .36 |  |              |  | Promissory Note between Registrant and Handspring
    Facility Company, LLC, dated as of January 29, 2003(6)                                                                                                                                                                            
|        | 10 | .37 |  |              |  | Warrant to Purchase Common Stock
    (1,000,000 shares) between Registrant and M-F Downtown
    Sunnyvale, LLC, dated as of January 29, 2003(6)                                                                                                                                         
|        | 10 | .38 |  |              |  | Warrant to Purchase Common Stock
    (9,000,000 shares) between Registrant and M-F Downtown
    Sunnyvale, LLC, dated as of January 29, 2003(6)                                                                                                                                         
|        | 10 | .39 |  |              |  | Warrant to Purchase Common Stock
    (150,000 shares) between Registrant and EOP-Industrial
    Portfolio, L.L.C., dated as of March 15, 2003 (incorporated
    by reference to Exhibit 4.9 to our Registration Statement
    on Form S-3 (File No. 333-106136) filed June 13,
    2003)
|        | 10 | .40 |  |              |  | Loan Agreement by and between the Registrant and
    Palm, Inc., dated as of June 4, 2003(7)                                                                                                                                                                                            
|        | 21 | .1  |  |              |  | List of Subsidiaries of Registrant                                                                                                                                                                                                                                                      
|        | 23 | .1  |  |              |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                   
|        | 31 | .1  |  |              |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                               
|        | 31 | .2  |  |              |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                               

44



---



##### Table of Contents



|        |    |    |  |               |  |                                                                                                                                                          
|------- | -- | -- |  | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |              
|Number  |    |    |  | Exhibit Title
|        |    |    |  |              
|        | 32 | .1 |  |              |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
|        | 32 | .2 |  |              |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.



---



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| | * | Management contracts or compensatory plans
    required to be filed as an exhibit to Form 10-K.



| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment has been granted with
    respect to certain information contained in this document.
    Confidential portions have been omitted from this public filing
    and have been filed separately with the Securities and Exchange
    Commission.



|    |                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the exhibit with the
    same number to our Registration Statement on Form S-1 (File
    No. 333-33666), which became effective on June 20,
    2000.
|   
|(2) | Incorporated by reference to the exhibit with the
    same number to our Report on Form 10-K, filed on
    September 28, 2001.                                                    
|   
|(3) | Incorporated by reference to the exhibit with the
    same number to our Report on Form 10-Q, filed on
    May 4, 2001.                                                           
|   
|(4) | Incorporated by reference to the exhibit with the
    same number to our Report on Form 10-K, filed on
    September 27, 2002.                                                    
|   
|(5) | Incorporated by reference to the exhibit with the
    same number to our Report on Form 10-Q, filed on
    November 12, 2002.                                                     
|   
|(6) | Incorporated by reference to the exhibit with the
    same number to our Current Report on Form 8-K, filed on
    January 31, 2003.                                               
|   
|(7) | Incorporated by reference to the exhibit with the
    same number to our Current Report on Form 8-K, filed on
    June 11, 2003.                                                  

(b) Reports on Form 8-K.

On June 11, 2003, we filed a report on
Form 8-K pursuant to Items 5 and 7, announcing that we
entered into a definitive agreement for Palm, Inc. to acquire
Handspring.

45



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of

Handspring, Inc.


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(1) on page 40 present fairly, in all material
respects, the financial position of Handspring, Inc. and its
subsidiaries at June 28, 2003 and June 29, 2002 and
the results of their operations and their cash flows for the
years ended June 28, 2003, June 29, 2002 and
June 30, 2001, in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) on page 40
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of
the Companys management; our responsibility is to express
an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits
of these statements in accordance with auditing standards
generally accepted in the United States of America which 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, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.



| |                               
| | ------------------------------
| | /s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

July 21, 2003


46



---



##### Table of Contents



HANDSPRING, INC.

CONSOLIDATED BALANCE SHEETS


|                                                           |                                                                                                                                                                                                  |                                            |        |               |        |  |        |          |         | 
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | ------------- | ------ |  | ------ | -------- | ------- | 
|                                                           |                                                                                                                                                                                                  | June 28, 2003                              |        | June 29, 2002
|                                                           |                                                                                                                                                                                                  |                                            |        |              
|                                                           |                                                                                                                                                                                                  |                                           
|                                                           |                                                                                                                                                                                                  | (In thousands, except share               
|                                                           |                                                                                                                                                                                                  | and per share amounts)                    
|ASSETS                                                    
|Current assets:                                            |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         
|                                                           | Cash and cash equivalents                                                                                                                                                                        |                                            | $      | 31,308        |        |  | $      | 85,554   |        
|                                                           | Short-term investments                                                                                                                                                                           |                                            |        | 5,602         |        |  |        | 15,235   |        
|                                                           | Accounts receivable, net of allowance for
    doubtful accounts of $3,106 and $3,711 as of June 28, 2003
    and June 29, 2002, respectively                                                     |                                            |        | 5,290         |        |  |        | 20,491   |        
|                                                           | Prepaid expenses and other current assets                                                                                                                                                        |                                            |        | 2,956         |        |  |        | 3,667    |        
|                                                           | Inventories                                                                                                                                                                                      |                                            |        | 3,841         |        |  |        | 20,084   |        
|                                                           | Restricted investments for committed tenant
    improvements and other                                                                                                                           |                                            |        | 8,185         |        |  |        |         |        
|                                                           |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         
|                                                           |                                                                                                                                                                                                  | Total current assets                       |        |               | 57,182 |  |        |          | 145,031 | 
|Restricted investments                                     |                                                                                                                                                                                                  |                                            |       |               |        |  | 49,482 |         
|Property and equipment, net                                |                                                                                                                                                                                                  |                                            | 5,917  |               |        |  | 12,478 |         
|Construction in progress-Sunnyvale tenant
    improvements |                                                                                                                                                                                                  |                                            |       |               |        |  | 6,614  |         
|Construction in progress-Sunnyvale property (Note
    3)   |                                                                                                                                                                                                  |                                            | 14,291 |               |        |  | 73,979 |         
|Other assets                                               |                                                                                                                                                                                                  |                                            | 3,377  |               |        |  | 2,570  |         
|                                                           |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         
|                                                           |                                                                                                                                                                                                  | Total assets                               |        | $             | 80,767 |  |        | $        | 290,154 | 
|                                                           |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY                  
|Current liabilities:                                       |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         
|                                                           | Accounts payable                                                                                                                                                                                 |                                            | $      | 15,661        |        |  | $      | 44,490   |        
|                                                           | Accrued liabilities                                                                                                                                                                              |                                            |        | 33,853        |        |  |        | 48,779   |        
|                                                           | Provision for committed tenant improvements and
    other                                                                                                                                        |                                            |        | 8,185         |        |  |        |         |        
|                                                           | Non-cash obligations for construction in
    progress-Sunnyvale property                                                                                                                         |                                            |        |              |        |  |        | 73,979   |        
|                                                           |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         
|                                                           |                                                                                                                                                                                                  | Total current liabilities                  |        |               | 57,699 |  |        |          | 167,248 | 
|Long-term liabilities:                                     |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         
|                                                           | Non-cash obligations for construction in
    progress-Sunnyvale property                                                                                                                         |                                            |        | 14,291        |        |  |        |         |        
|                                                           | Sunnyvale note payable                                                                                                                                                                           |                                            |        | 2,150         |        |  |        |         |        
|Commitments and contingencies (Note 8)                     |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         
|Stockholders equity:                                      |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         
|                                                           | Common stock, $0.001 par value per share,
    1,000,000,000 shares authorized; 148,611,942 and 143,126,516
    shares issued and outstanding at June 28, 2003 and
    June 29, 2002 respectively |                                            |        | 149           |        |  |        | 143      |        
|                                                           | Additional paid-in capital                                                                                                                                                                       |                                            |        | 425,983       |        |  |        | 419,256  |        
|                                                           | Deferred stock compensation                                                                                                                                                                      |                                            |        | (1,284        | )      |  |        | (9,468   | )      
|                                                           | Accumulated other comprehensive loss                                                                                                                                                             |                                            |        | (931          | )      |  |        | (793     | )      
|                                                           | Accumulated deficit                                                                                                                                                                              |                                            |        | (417,290      | )      |  |        | (286,232 | )      
|                                                           |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         
|                                                           |                                                                                                                                                                                                  | Total stockholders equity                 |        |               | 6,627  |  |        |          | 122,906 | 
|                                                           |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         
|                                                           |                                                                                                                                                                                                  | Total liabilities and stockholders equity |        | $             | 80,767 |  |        | $        | 290,154 | 
|                                                           |                                                                                                                                                                                                  |                                            |        |               |        |  |        |         

See accompanying notes to consolidated financial
statements.

47



---



##### Table of Contents



HANDSPRING, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                     |                                                                    |                                          |          |               |         |               |         |         |         |   |          |         |         | 
|-------------------------------------------------------------------- | ------------------------------------------------------------------ | ---------------------------------------- | -------- | ------------- | ------- | ------------- | ------- | ------- | ------- | - | -------- | ------- | ------- | 
|                                                                     |                                                                    |                                         
|                                                                     |                                                                    | Year Ended                              
|                                                                     |                                                                    |                                         
|                                                                     |                                                                    | June 28, 2003                            |          | June 29, 2002 |         | June 30, 2001
|                                                                     |                                                                    |                                          |          |               |         |              
|                                                                     |                                                                    |                                         
|                                                                     |                                                                    | (In thousands, except per share amounts)
|Revenue                                                              |                                                                    | $                                        | 147,256  |               |         | $             | 240,651 |         |         | $ | 370,943  |        
|                                                                     |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        
|Costs and operating expenses:                                        |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        
|                                                                     | Cost of revenue                                                    |                                          |          | 112,152       |         |               |         | 205,917 |         |   |          | 292,311 |        
|                                                                     | Research and development                                           |                                          |          | 22,226        |         |               |         | 24,739  |         |   |          | 23,603  |        
|                                                                     | Selling, general and administrative                                |                                          |          | 61,053        |         |               |         | 85,612  |         |   |          | 145,132 |        
|                                                                     | In-process research and development                                |                                          |          |              |         |               |         |        |         |   |          | 12,225  |        
|                                                                     | Amortization of deferred stock compensation and
    intangibles(*) |                                          |          | 8,516         |         |               |         | 20,181  |         |   |          | 32,830  |        
|                                                                     | Sunnyvale lease restructuring                                      |                                          |          | 75,931        |         |               |         |        |         |   |          |        |        
|                                                                     |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        
|                                                                     |                                                                    | Total costs and operating expenses       |          |               | 279,878 |               |         |         | 336,449 |   |          |         | 506,101 | 
|                                                                     |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        
|Loss from operations                                                 |                                                                    |                                          | (132,622 | )             |         |               | (95,798 | )       |         |   | (135,158 | )      
|Interest and other income, net                                       |                                                                    |                                          | 1,802    |               |         |               | 5,259   |         |         |   | 12,195   |        
|                                                                     |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        
|Loss before taxes                                                    |                                                                    |                                          | (130,820 | )             |         |               | (90,539 | )       |         |   | (122,963 | )      
|Income tax provision                                                 |                                                                    |                                          | 238      |               |         |               | 1,050   |         |         |   | 3,000    |        
|                                                                     |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        
|Net loss                                                             |                                                                    | $                                        | (131,058 | )             |         | $             | (91,589 | )       |         | $ | (125,963 | )      
|                                                                     |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        
|Basic and diluted net loss per share                                 |                                                                    | $                                        | (0.91    | )             |         | $             | (0.71   | )       |         | $ | (1.21    | )      
|                                                                     |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        
|Shares used in calculating basic and diluted net
    loss per share  |                                                                    |                                          | 144,444  |               |         |               | 128,221 |         |         |   | 103,896  |        
|                                                                     |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        
|(*) Amortization of deferred stock compensation
    and intangibles: |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        
|                                                                     | Cost of revenue                                                    |                                          | $        | 1,080         |         |               | $       | 2,586   |         |   | $        | 4,521   |        
|                                                                     | Research and development                                           |                                          |          | 1,966         |         |               |         | 4,672   |         |   |          | 6,926   |        
|                                                                     | Selling, general and administrative                                |                                          |          | 5,470         |         |               |         | 12,923  |         |   |          | 21,383  |        
|                                                                     |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        
|                                                                     |                                                                    | $                                        | 8,516    |               |         | $             | 20,181  |         |         | $ | 32,830   |        
|                                                                     |                                                                    |                                          |          |               |         |               |         |         |         |   |          |        

See accompanying notes to consolidated financial
statements.

48



---



##### Table of Contents



HANDSPRING, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                        |                                                                                                                                                        |                |         |            |   |          |     |               |  |               |         |         |   |       |         |        |   |   |      |        |   |   |          |          |   |   |         |          |  
|----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------- | ------- | ---------- | - | -------- | --- | ------------- |  | ------------- | ------- | ------- | - | ----- | ------- | ------ | - | - | ---- | ------ | - | - | -------- | -------- | - | - | ------- | -------- | -
|                        |                                                                                                                                                        |                |         |            |   |          |     | Accumulated   |  |               |         |        
|                        |                                                                                                                                                        | Common Stock   |         | Additional |   | Deferred |     | Other         |  |               |         |        
|                        |                                                                                                                                                        |                |         | Paid-In    |   | Stock    |     | Comprehensive |  | Accumulated   |         |        
|                        |                                                                                                                                                        | Shares         |         | Amount     |   | Capital  |     | Compensation  |  | Income (Loss) |         | Deficit |   | Total
|                        |                                                                                                                                                        |                |         |            |   |          |     |               |  |               |         |         |   |      
|                        |                                                                                                                                                        |               
|                        |                                                                                                                                                        | (In thousands)
|Balances, July 1, 2000  |                                                                                                                                                        |                | 125,437 |            |   | $        | 125 |               |  | $             | 321,116 |         |   | $     | (58,268 | )      |   | $ | (64  | )      |   | $ | (68,680  | )        |   | $ | 194,229 |         
|                        | Net proceeds from issuance of common stock upon
    exercise of underwriters over-allotment                                                           |                |         | 1,500      |   |          |     | 2             |  |               |         | 27,967  |   |       |         |       |   |   |      |       |   |   |          |         |   |   |         | 27,969   |  
|                        | Issuance of common stock under stock option and
    stock purchase plans                                                                               |                |         | 2,796      |   |          |     | 3             |  |               |         | 3,106   |   |       |         |       |   |   |      |       |   |   |          |         |   |   |         | 3,109    |  
|                        | Repurchase of common stock                                                                                                                             |                |         | (185       | ) |          |     |              |  |               |         | (41     | ) |       |         |       |   |   |      |       |   |   |          |         |   |   |         | (41      | )
|                        | Issuance of common stock for acquisition of
    BlueLark                                                                                               |                |         | 402        |   |          |     |              |  |               |         | 16,018  |   |       |         | (3,930 | ) |   |      |       |   |   |          |         |   |   |         | 12,088   |  
|                        | Amortization of deferred stock compensation                                                                                                            |                |         |           |   |          |     |              |  |               |         |        |   |       |         | 32,753 |   |   |      |       |   |   |          |         |   |   |         | 32,753   |  
|                        | Unrealized gain on securities                                                                                                                          |                |         |           |   |          |     |              |  |               |         |        |   |       |         |       |   |   |      | 355    |   |   |          |         |   |   |         | 355      |  
|                        | Foreign currency translation adjustments                                                                                                               |                |         |           |   |          |     |              |  |               |         |        |   |       |         |       |   |   |      | 703    |   |   |          |         |   |   |         | 703      |  
|                        | Net loss                                                                                                                                               |                |         |           |   |          |     |              |  |               |         |        |   |       |         |       |   |   |      |       |   |   |          | (125,963 | ) |   |         | (125,963 | )
|                        |                                                                                                                                                        |                |         |            |   |          |     |               |  |               |         |         |   |       |         |        |   |   |      |        |   |   |          |          |   |   |         |         
|Balances, June 30, 2001 |                                                                                                                                                        |                | 129,950 |            |   |          | 130 |               |  |               | 368,166 |         |   |       | (29,445 | )      |   |   | 994  |        |   |   | (194,643 | )        |   |   | 145,202 |         
|                        | Net proceeds from issuance of common stock in
    private offering, underwritten public offering and upon exercise
    of underwriters over-allotment |                |         | 8,875      |   |          |     | 9             |  |               |         | 47,027  |   |       |         |       |   |   |      |       |   |   |          |         |   |   |         | 47,036   |  
|                        | Issuance of common stock under stock option and
    stock purchase plans                                                                               |                |         | 4,328      |   |          |     | 4             |  |               |         | 4,063   |   |       |         |       |   |   |      |       |   |   |          |         |   |   |         | 4,067    |  
|                        | Repurchase of common stock                                                                                                                             |                |         | (26        | ) |          |     |              |  |               |         |        |   |       |         |       |   |   |      |       |   |   |          |         |   |   |         |         |  
|                        | Amortization of deferred stock compensation                                                                                                            |                |         |           |   |          |     |              |  |               |         |        |   |       |         | 19,977 |   |   |      |       |   |   |          |         |   |   |         | 19,977   |  
|                        | Unrealized loss on securities                                                                                                                          |                |         |           |   |          |     |              |  |               |         |        |   |       |         |       |   |   |      | (203   | ) |   |          |         |   |   |         | (203     | )
|                        | Foreign currency translation adjustments                                                                                                               |                |         |           |   |          |     |              |  |               |         |        |   |       |         |       |   |   |      | (1,584 | ) |   |          |         |   |   |         | (1,584   | )
|                        | Net loss                                                                                                                                               |                |         |           |   |          |     |              |  |               |         |        |   |       |         |       |   |   |      |       |   |   |          | (91,589  | ) |   |         | (91,589  | )
|                        |                                                                                                                                                        |                |         |            |   |          |     |               |  |               |         |         |   |       |         |        |   |   |      |        |   |   |          |          |   |   |         |         
|Balances, June 29, 2002 |                                                                                                                                                        |                | 143,127 |            |   |          | 143 |               |  |               | 419,256 |         |   |       | (9,468  | )      |   |   | (793 | )      |   |   | (286,232 | )        |   |   | 122,906 |         
|                        | Issuance of warrants                                                                                                                                   |                |         |           |   |          |     |              |  |               |         | 3,747   |   |       |         |       |   |   |      |       |   |   |          |         |   |   |         | 3,747    |  
|                        | Issuance of common stock under stock option and
    warrants and stock purchase plans                                                                  |                |         | 5,670      |   |          |     | 6             |  |               |         | 3,035   |   |       |         |       |   |   |      |       |   |   |          |         |   |   |         | 3,041    |  
|                        | Repurchase of common stock                                                                                                                             |                |         | (185       | ) |          |     |              |  |               |         | (55     | ) |       |         |       |   |   |      |       |   |   |          |         |   |   |         | (55      | )
|                        | Amortization of deferred stock compensation                                                                                                            |                |         |           |   |          |     |              |  |               |         |        |   |       |         | 8,184  |   |   |      |       |   |   |          |         |   |   |         | 8,184    |  
|                        | Unrealized loss on securities                                                                                                                          |                |         |           |   |          |     |              |  |               |         |        |   |       |         |       |   |   |      | (128   | ) |   |          |         |   |   |         | (128     | )
|                        | Foreign currency translation adjustments                                                                                                               |                |         |           |   |          |     |              |  |               |         |        |   |       |         |       |   |   |      | (10    | ) |   |          |         |   |   |         | (10      | )
|                        | Net loss                                                                                                                                               |                |         |           |   |          |     |              |  |               |         |        |   |       |         |       |   |   |      |       |   |   |          | (131,058 | ) |   |         | (131,058 | )
|                        |                                                                                                                                                        |                |         |            |   |          |     |               |  |               |         |         |   |       |         |        |   |   |      |        |   |   |          |          |   |   |         |         
|Balances, June 28, 2003 |                                                                                                                                                        |                | 148,612 |            |   | $        | 149 |               |  | $             | 425,983 |         |   | $     | (1,284  | )      |   | $ | (931 | )      |   | $ | (417,290 | )        |   | $ | 6,627   |         
|                        |                                                                                                                                                        |                |         |            |   |          |     |               |  |               |         |         |   |       |         |        |   |   |      |        |   |   |          |          |   |   |         |         

See accompanying notes to consolidated financial
statements.

49



---



##### Table of Contents



HANDSPRING, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                      |                                                                                                          |                                                                               |                                           |                                                         |        |               |         |         |        |         |         |          |        |         |          |  
|------------------------------------- | -------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ------ | ------------- | ------- | ------- | ------ | ------- | ------- | -------- | ------ | ------- | -------- | -
|                                      |                                                                                                          | Year Ended                                                                    |                                           | Year Ended                                              |        | Year Ended   
|                                      |                                                                                                          | June 28, 2003                                                                 |                                           | June 29, 2002                                           |        | June 30, 2001
|                                      |                                                                                                          |                                                                               |                                           |                                                         |        |              
|                                      |                                                                                                          |                                                                              
|                                      |                                                                                                          | (In thousands)                                                               
|Cash flows from operating activities: |                                                                                                          |                                                                               |                                           |                                                         |        |               |         |         |        |         |         |         
|                                      | Net loss                                                                                                 |                                                                               | $                                         | (131,058                                                | )      |               | $       | (91,589 | )      |         | $       | (125,963 | )     
|                                      | Adjustment to reconcile net loss to net cash used
    in operating activities:                           |                                                                               |                                           |                                                         |        |               |         |         |        |         |         |          |       
|                                      |                                                                                                          | Depreciation and amortization                                                 |                                           |                                                         | 7,958  |               |         |         | 8,542  |         |         |          | 7,104  |        
|                                      |                                                                                                          | Amortization of deferred stock compensation and
    intangibles               |                                           |                                                         | 8,516  |               |         |         | 20,181 |         |         |          | 32,830 |        
|                                      |                                                                                                          | In-process research and development                                           |                                           |                                                         |       |               |         |         |       |         |         |          | 12,225 |        
|                                      |                                                                                                          | Write-off of excess and obsolete inventories                                  |                                           |                                                         |       |               |         |         |       |         |         |          | 26,811 |        
|                                      |                                                                                                          | Amortization of premium or discount on
    available-for-sale securities, net |                                           |                                                         | 62     |               |         |         | 83     |         |         |          | (1,313 | )      
|                                      |                                                                                                          | Write-off of fixed assets                                                     |                                           |                                                         | 411    |               |         |         |       |         |         |          |       |        
|                                      |                                                                                                          | Write-off of leases                                                           |                                           |                                                         | 536    |               |         |         |       |         |         |          |       |        
|                                      |                                                                                                          | Sunnyvale lease restructuring                                                 |                                           |                                                         | 75,931 |               |         |         |       |         |         |          |       |        
|                                      |                                                                                                          | Gain on sale of available-for-sale securities                                 |                                           |                                                         |       |               |         |         | (784   | )       |         |          | (277   | )      
|                                      |                                                                                                          | Changes in assets and liabilities:                                            |                                           |                                                         |        |               |         |         |        |         |         |          |        |        
|                                      |                                                                                                          |                                                                               | Accounts receivable                       |                                                         |        | 15,240        |         |         |        | (7,438  | )       |          |        | 6,625   |         
|                                      |                                                                                                          |                                                                               | Prepaid expenses and other current assets |                                                         |        | (1,182        | )       |         |        | 15,518  |         |          |        | (18,219 | )       
|                                      |                                                                                                          |                                                                               | Inventories                               |                                                         |        | 16,280        |         |         |        | (17,030 | )       |          |        | (10,011 | )       
|                                      |                                                                                                          |                                                                               | Other assets                              |                                                         |        | 1,105         |         |         |        | 175     |         |          |        | (40     | )       
|                                      |                                                                                                          |                                                                               | Accounts payable                          |                                                         |        | (25,566       | )       |         |        | 5,409   |         |          |        | 18,701  |         
|                                      |                                                                                                          |                                                                               | Accrued liabilities                       |                                                         |        | (15,176       | )       |         |        | (22,094 | )       |          |        | 34,584  |         
|                                      |                                                                                                          |                                                                               |                                           |                                                         |        |               |         |         |        |         |         |         
|                                      |                                                                                                          |                                                                               |                                           | Net cash used in operating activities                   |        |               | (46,943 | )       |        |         | (89,027 | )        |        |         | (16,943  | )
|                                      |                                                                                                          |                                                                               |                                           |                                                         |        |               |         |         |        |         |         |         
|Cash flows from investing activities: |                                                                                                          |                                                                               |                                           |                                                         |        |               |         |         |        |         |         |         
|                                      | Purchases of available-for-sale securities                                                               |                                                                               |                                           | (7,604                                                  | )      |               |         | (69,989 | )      |         |         | (244,972 | )     
|                                      | Sales and maturities of available-for-sale
    securities                                                |                                                                               |                                           | 17,047                                                  |        |               |         | 118,863 |        |         |         | 186,866  |       
|                                      | Purchases of investments for collateral on
    operating leases                                          |                                                                               |                                           |                                                        |        |               |         |        |        |         |         | (51,287  | )     
|                                      | Reduction of pledged investments                                                                         |                                                                               |                                           | 41,295                                                  |        |               |         |        |        |         |         |         |       
|                                      | Purchases of property and equipment and
    construction in progress  Sunnyvale tenant
    improvements |                                                                               |                                           | (13,378                                                 | )      |               |         | (12,501 | )      |         |         | (14,283  | )     
|                                      | Cash acquired from acquisition                                                                           |                                                                               |                                           |                                                        |        |               |         |        |        |         |         | 29       |       
|                                      |                                                                                                          |                                                                               |                                           |                                                         |        |               |         |         |        |         |         |         
|                                      |                                                                                                          |                                                                               |                                           | Net cash provided by (used in) investing
    activities |        |               | 37,360  |         |        |         | 36,373  |          |        |         | (123,647 | )
|                                      |                                                                                                          |                                                                               |                                           |                                                         |        |               |         |         |        |         |         |         

50



---



##### Table of Contents



|                                                              |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |         |        | 
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------- | ------- | ------------- | ------- | ------------- | ------ | ------ | ------ | - | -------- | ------- | ------ | 
|                                                              |                                                                                                                                                        | Year Ended                                              |         | Year Ended    |         | Year Ended   
|                                                              |                                                                                                                                                        | June 28, 2003                                           |         | June 29, 2002 |         | June 30, 2001
|                                                              |                                                                                                                                                        |                                                         |         |               |         |              
|                                                              |                                                                                                                                                        |                                                        
|                                                              |                                                                                                                                                        | (In thousands)                                         
|Cash flows from financing activities:                         |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        
|                                                              | Net proceeds from issuance of common stock in
    private offering, underwritten public offering and upon exercise
    of underwriters over-allotment |                                                         |         |              |         |               |        | 47,036 |        |   |          |        |       
|                                                              | Proceeds from issuance of common stock                                                                                                                 |                                                         |         | 3,041         |         |               |        | 4,067  |        |   |          | 3,109   |       
|                                                              | Net proceeds from initial public offering and
    exercise of underwriters over-allotment                                                             |                                                         |         |              |         |               |        |       |        |   |          | 27,969  |       
|                                                              | Principal payments on borrowings                                                                                                                       |                                                         |         |              |         |               |        |       |        |   |          | (83     | )     
|                                                              | Repurchase of common stock                                                                                                                             |                                                         |         | (55           | )       |               |        |       |        |   |          | (41     | )     
|                                                              | Repayment of obligations for construction in
    progress                                                                                              |                                                         |         | (48,059       | )       |               |        |       |        |   |          |        |       
|                                                              | Principal payments on notes payable                                                                                                                    |                                                         |         | (250          | )       |               |        |       |        |   |          |        |       
|                                                              |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        
|                                                              |                                                                                                                                                        | Net cash (used in) provided by financing
    activities |         |               | (45,323 | )             |        |        | 51,103 |   |          |         | 30,954 | 
|                                                              |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        
|                                                              |                                                                                                                                                        | Effect of exchange rate changes on cash                 |         |               | 660     |               |        |        | (475   | ) |          |         | 668    | 
|                                                              |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        
|Net decrease in cash and cash equivalents                     |                                                                                                                                                        |                                                         | (54,246 | )             |         |               | (2,026 | )      |        |   | (108,968 | )      
|Cash and cash equivalents:                                    |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        
|                                                              | Beginning of year                                                                                                                                      |                                                         |         | 85,554        |         |               |        | 87,580 |        |   |          | 196,548 |       
|                                                              |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        
|                                                              | End of year                                                                                                                                            |                                                         | $       | 31,308        |         |               | $      | 85,554 |        |   | $        | 87,580  |       
|                                                              |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        
|Supplemental disclosure of cash flow information:             |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        
|                                                              | Cash paid for interest                                                                                                                                 |                                                         | $       | 52            |         |               | $      | 1      |        |   | $        | 6       |       
|                                                              |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        
|                                                              | Cash paid for taxes                                                                                                                                    |                                                         | $       | 239           |         |               | $      | 922    |        |   | $        | 236     |       
|                                                              |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        
|Supplemental non-cash investing and financing
    activities: |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        
|                                                              | Construction in progress  Sunnyvale
    property                                                                                                      |                                                         | $       | (59,688       | )       |               | $      | 73,979 |        |   | $        |        |       
|                                                              |                                                                                                                                                        |                                                         |         |               |         |               |        |        |        |   |          |        

See accompanying notes to consolidated financial
statements.

51



---



##### Table of Contents



HANDSPRING, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




|   |                                                      
|-- | -----------------------------------------------------
|1. | Description of Business and Basis of
    Presentation

Description of
business Handspring, Inc.
(the Company) was incorporated in California on July 29,
1998 under the name of JD Technology, Inc. In November
1998, the Company changed its name to Handspring, Inc., and in
May 2000, the Company reincorporated in Delaware.

The Company is a leading provider of handheld
computing devices which include organizers and integrated,
handheld wireless devices, known as communicators or
smartphones. The Company develops, manufactures and markets
these products for a broad range of markets and customers.
Products are sold through select Internet and retail partners,
both domestically and internationally and over the
Companys website.

Principles of consolidation and basis of
presentation The
consolidated financial statements of Handspring, Inc. include
the accounts of its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.

Fiscal
year The Companys
fiscal year is a 52-53 week fiscal year ending on the
Saturday nearest to June 30. Unless otherwise stated, all
years and dates refer to the fiscal year and fiscal periods.
Fiscal year 2003 ended on June 28, 2003.

Reclassifications
Certain reclassifications have been made to prior year balances
in order to conform to the current year presentation.

Liquidity
From inception through June 28, 2003, the Company has
incurred substantial losses and negative cash flows from
operations and, as of June 28, 2003, the Company had an
accumulated deficit of $417.3 million. For the year ended
June 28, 2003, the Company recorded a net loss of
$131.1 million and cash outflows for operating activities
of $47.0 million.

The Company operates in a highly competitive
market characterized by rapidly changing technology together
with competitors that have significantly greater financial
resources than the Company. In addition, the Company has
substantially completed a significant shift in the focus of its
business from traditional handheld organizers to communicators.
The Company intends to incur significant expenses to continue to
develop and promote new products as well as to support existing
product sales. Failure to generate sufficient revenues from new
and existing products may require the Company to delay, scale
back or eliminate certain research and development or marketing
programs.

The Company believes that available cash
resources, including the credit facility from Palm (see
Notes 2 and 8), will be sufficient to meet the
Companys anticipated working capital and capital
expenditure requirements for the next twelve months. However, if
revenues are lower or expenses are higher than anticipated, or
if inventory, accounts receivable, or other assets require a
greater use of cash than anticipated, the Companys
resources, including the credit facility from Palm, may prove to
be insufficient for working capital and capital expenditure
requirements. In addition, existing and potential customers and
vendors may take actions that could further harm the
Companys liquidity position if they believe that the
Companys cash balances are not adequate. Depending on
market conditions, any additional financing needed may not be
available on terms acceptable to the Company, or at all, and
would require Palms consent. If adequate funds are not
available the Companys business could be harmed.



|   |                             
|-- | ----------------------------
|2. | Agreement and Plan of Merger

On June 4, 2003, the Company announced that
it had entered into a merger agreement with Palm, Inc. under
which it will merge with and into Harmony Acquisition
Corporation, a wholly-owned subsidiary of Palm. Under the merger
agreement, the Companys stockholders will receive
0.09 shares of Palm common stock for each share of
Handspring common stock owned. In addition, the merger agreement
provides that upon completion of the merger, stock options and
warrants to purchase the Companys common stock granted

52



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


to the Companys employees and directors
that are outstanding and not exercised immediately before
completing the merger will become stock options and warrants to
purchase Palm common stock. The replacement options issued in
the merger will generally have the same terms and conditions as
were applicable under the Companys stock option plans,
except that the number of common shares subject to such stock
options, and the exercise price of such stock options, will each
be adjusted according to the exchange ratio in the merger
agreement. The merger is subject to certain closing conditions,
including, among other things, the approval of Handspring
stockholders of the merger, approval of Palm stockholders of the
issuance of Palm common stock in connection with the merger,
distribution of PalmSource, Inc. common stock from Palm and
other customary closing conditions. In connection with the
merger agreement, Palm and the Company entered into a loan
agreement pursuant to which Palm will provide up to an aggregate
of $20.0 million in term loans to the Company.



|   |                                               
|-- | ----------------------------------------------
|3. | Summary of Significant Accounting
    Policies

Cash and cash equivalents and short-term
investments The Company
invests its excess cash in debt instruments of the U.S.
Government and its agencies, and in high-quality corporate
issuers. All highly liquid debt or equity instruments purchased
with an original maturity of three months or less from the date
of purchase are considered to be cash equivalents. Those with
original maturities greater than three months and current
maturities less than twelve months from the balance sheet date
are considered short-term investments.

All short-term investments are classified as
available-for-sale securities and are stated at market value
with any temporary difference between an investments
amortized cost and its market value recorded as a separate
component of stockholders equity until such gains or
losses are realized. Gains or losses on the sales of securities
are determined on a specific identification basis.

Fair value of financial
instruments Amounts
reported for cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are considered to
approximate fair value primarily due to their short maturities.

Concentration of credit
risk Financial instruments
that potentially subject the Company to concentrations of credit
risk consist of cash and cash equivalents, short-term and
long-term investments, and accounts receivable. The
Companys accounts receivable are derived from revenue
earned from customers in North America, Europe and certain
countries in Asia Pacific and the Middle East.

Risks associated with cash are mitigated by
banking with creditworthy institutions. The objective of the
Companys investment policy is the preservation of capital,
the maximization of after-tax return, and the maintenance of
liquidity until funds are needed for use in business operations.
Funds are diversified to minimize risk and the inappropriate
concentrations of investments. Under policy guidelines, the
following are considered eligible investments: obligations of
the U.S. government agencies, certain financial institutions and
corporations, as well as investments in money market funds. All
investments are limited to those highly rated by outside
organizations.

At June 28, 2003, two customers accounted
for 37%, and 27% of net receivables and one customer accounted
for 37% of revenue during fiscal 2003. At June 29, 2002,
four customers accounted for 12%, 10%, 10% and 10% of net
receivables and one customer accounted for 15% of revenue during
fiscal 2002. At June 30, 2001, four customers accounted for
40%, 20%, 17%, and 11% of net receivables and three customers
accounted for 14%, 13% and 10% of revenue during fiscal 2001.

Accounts
receivable Accounts
receivable are recorded at face value, less an allowance for
doubtful accounts. The allowance for doubtful accounts is an
estimate calculated based on an analysis of current business and
economic risks, customer credit-worthiness, specific
identifiable risks such as bankruptcies, terminations or
discontinued customers, or other factors that may indicate a
potential loss. The allowance is reviewed on a consistent basis
to ensure that it adequately provides for all reasonably
expected losses in the

53



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


receivable balances. An account may be determined
to be uncollectable if all collection efforts have been
exhausted, the customer has filed for bankruptcy and all
recourse against the account is exhausted, or disputes are
unresolved and negotiations to settle are exhausted. This
uncollectable amount is written off as bad debt against the
allowance.

Inventories
Inventories are stated at the lower of standard cost (which
approximates first-in, first-out cost) or market. Provisions for
potentially obsolete or slow moving inventories are made based
on managements analysis of inventory levels and future
sales forecasts. These provisions are estimates, which could
vary significantly, either favorably or unfavorably, from actual
requirements if future economic conditions, customer inventory
levels or competitive conditions differ from the Companys
expectations.

Property and
equipment Property and
equipment, including leasehold improvements, are stated at cost
less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated
useful lives of the assets, generally one to five years.
Leasehold improvements and assets held under capital leases are
amortized over the term of the lease or estimated useful lives,
whichever is shorter. The Company capitalizes tooling costs to
the extent they relate to ongoing and routine costs of tools and
molds used to manufacture products that the Company markets.
Capitalized tooling is amortized over its estimated useful life
of one year. Assets acquired under capital leases are recorded
at the present value of the related lease obligation.

Other
assets Other assets
include goodwill and other intangible assets carried at cost
less accumulated amortization. Amortization is computed using
the straight-line method over the expected useful life of three
years. In June 2001, the Financial Accounting Standards Board
(FASB) released Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets, which became effective for the Company beginning in
fiscal 2003, under which goodwill is no longer amortized but
instead is subject to impairment tests at least annually. The
Company applied impairment tests in May 2003 and determined
goodwill to be impaired. The unamortized balance of $331,000 was
expensed in the fourth quarter of fiscal 2003. There was no
goodwill, net of accumulated amortization, and other
intangibles, net of accumulated amortization, as of
June 28, 2003 and $331,000 as of June 29. 2002.
Accumulated amortization of goodwill and intangibles totaled
$612,000 and $280,000 as of June 28, 2003 and June 29,
2002, respectively.

Long-lived
assets The Company
evaluates the recoverability of its long-lived assets in
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.SFAS No. 144 requires recognition of impairment of
long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such
assets. The Company assesses the impairment of its long-lived
assets when events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable.

Construction in progress  Sunnyvale
property Emerging Issues
Task Force (EITF) Issue No. 97-10, The Effect of
Lessee Involvement in Asset Construction, is applied to
entities involved with certain structural elements of the
construction of an asset that will be leased when construction
of the asset is completed. EITF No. 97-10 requires us
to be considered the owner (for accounting purposes only) of
these types of projects during the construction period. This is
the case even though we are not obligated to guarantee the
non-recourse mortgage obligation, nor are we involved in the
management of the construction of the building or the management
of the owner-lessor. Therefore, we have recorded such building
costs related to the two new buildings under construction in
Sunnyvale, California that the Company leases (see Note 7)
as construction in progress with a corresponding non-cash
obligation for construction in progress.

Foreign currency
translation The majority
of the Companys operations are denominated in
U.S. dollars. For foreign operations using 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 accumulated other
comprehensive income (loss).

54



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Derivative Financial
Instruments The Company
has entered into foreign exchange forward contracts to minimize
the impact of foreign currency fluctuations on assets and
liabilities denominated in currencies other than the functional
currency of the reporting entity. The Company does not designate
its foreign exchange forward contracts as hedges and
accordingly, gains and losses resulting from exchange rate
fluctuations on foreign exchange forward contracts are recorded
in interest and other income, net and are offset by the
corresponding foreign exchange transaction gains and losses from
the foreign currency denominated assets and liabilities being
hedged. Fair values of foreign exchange forward contracts are
determined using quoted market forward rates. The Company does
not use forward contracts for speculative or trading purposes.

Research and
development Research and
development costs are expensed as incurred. The Company has not
capitalized any costs to date pursuant to SFAS No. 86,
Computer Software to be Sold, Leased or Otherwise
Marketed.

Income
taxes The Company accounts
for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This statement prescribes
the use of the liability method whereby deferred tax assets and
liabilities are determined based on the differences between
financial reporting and tax bases of assets and liabilities and
measured at tax rates that will be in effect when the
differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets where
it is more likely than not that the deferred tax asset will not
be realized.

Stock
compensation The Company
accounts for stock compensation arrangements in accordance with
provisions of Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to
Employees,and FASB Interpretation
(FIN) No. 44, Accounting for Certain Transactions
Involving Stock Compensation (an Interpretation of
APB No. 25), and complies with the disclosure
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Under APB No. 25,
unearned stock compensation is based on the difference, if any,
between the fair value of the Companys common stock, on
the date of the grant, and the exercise price. Unearned stock
compensation is amortized and expensed in accordance with
FIN No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans.The
Company accounts for stock issued to non-employees in accordance
with the provisions of SFAS No. 123 and
EITF Issue No. 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods and Services.

55



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accounting for Stock-Based
Compensation As discussed
above, the Company accounts for its stock compensation using the
method prescribed by APB No. 25. Had the Company
determined its stock compensation cost based on the fair value
at the grant dates for its employee stock options (including
shares granted under the ESPP) according to the method
prescribed by SFAS No. 123, the Companys net
loss would have been the pro forma amounts indicated below:

|                                      |             |                                                                        |                    |               |        |               |   |         |         |          |   |          |         |          |  
|------------------------------------- | ----------- | ---------------------------------------------------------------------- | ------------------ | ------------- | ------ | ------------- | - | ------- | ------- | -------- | - | -------- | ------- | -------- | -
|                                      |             | Year Ended                                                             |                    | Year Ended    |        | Year Ended   
|                                      |             | June 28, 2003                                                          |                    | June 29, 2002 |        | June 30, 2001
|                                      |             |                                                                        |                    |               |        |              
|                                      |             |                                                                       
|                                      |             | (In thousands, except per share data)                                 
|Net loss:                             |             |                                                                        |                    |               |        |               |   |         |         |          |   |         
|                                      | As reported |                                                                        | $                  | (131,058      | )      |               | $ | (91,589 | )       |          | $ | (125,963 | )      
|                                      |             |                                                                        |                    |               |        |               |   |         |         |          |   |         
|                                      |             | Add: Amortization of deferred stock based
    compensation, net of tax |                    |               | 8,184  |               |   |         | 19,977  |          |   |          | 32,754  |         
|                                      |             | Less: Stock based compensation under fair value
    method, net of tax |                    |               | (9,342 | )             |   |         | (56,396 | )        |   |          | (68,168 | )       
|                                      |             |                                                                        |                    |               |        |               |   |         |         |          |   |         
|                                      |             |                                                                        | Pro forma net loss |               | $      | (132,216      | ) |         | $       | (128,008 | ) |          | $       | (161,377 | )
|                                      |             |                                                                        |                    |               |        |               |   |         |         |          |   |         
|Basic and diluted net loss per share: |             |                                                                        |                    |               |        |               |   |         |         |          |   |         
|                                      | As reported |                                                                        | $                  | (0.91         | )      |               | $ | (0.71   | )       |          | $ | (1.21    | )      
|                                      |             |                                                                        |                    |               |        |               |   |         |         |          |   |         
|                                      | Pro forma   |                                                                        | $                  | (0.92         | )      |               | $ | (1.00   | )       |          | $ | (1.55    | )      
|                                      |             |                                                                        |                    |               |        |               |   |         |         |          |   |         

The Company calculated the fair value of each
award on the date of grant using the Black-Scholes option
pricing model and the following weighted average assumptions:

|                         |  |                                       |      |                            |  |            |      |            |  |            |      |            |  |  |      |   |  |  |      |   |  |  |      |  
|------------------------ |  | ------------------------------------- | ---- | -------------------------- |  | ---------- | ---- | ---------- |  | ---------- | ---- | ---------- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                         |  |                                       |      |                           
|                         |  | Employee Stock Options Granted During |      | ESPP Shares Granted During
|                         |  |                                       |      |                           
|                         |  | Year Ended                            |      | Year Ended                 |  | Year Ended |      | Year Ended |  | Year Ended |      | Year Ended
|                         |  | June 28,                              |      | June 29,                   |  | June 30,   |      | June 28,   |  | June 29,   |      | June 30,  
|                         |  | 2003                                  |      | 2002                       |  | 2001       |      | 2003       |  | 2002       |      | 2001      
|                         |  |                                       |      |                            |  |            |      |            |  |            |      |           
|Expected life (in years) |  |                                       | 4    |                            |  |            | 4    |            |  |            | 4    |            |  |  | 1    |   |  |  | 1    |   |  |  | 1    |  
|Risk-free interest rate  |  |                                       | 2.67 | %                          |  |            | 4.22 | %          |  |            | 5.06 | %          |  |  | 2.67 | % |  |  | 2.85 | % |  |  | 4.81 | %
|Expected volatility      |  |                                       | 132  | %                          |  |            | 70   | %          |  |            | 70   | %          |  |  | 132  | % |  |  | 70   | % |  |  | 70   | %
|Dividends                |  |                                       |     |                            |  |            |     |            |  |            |     |            |  |  |     |   |  |  |     |   |  |  |     |  

The Black-Scholes option-pricing 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 volatility of the
stock price. Because the Companys stock based awards have
characteristics significantly different from those of traded
options and because changes in the subjective input assumptions
can materially affect the fair value estimates, in the opinion
of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock based
awards. The weighted average estimated fair value of options
granted during fiscal 2003, 2002, and 2001 was $0.44, $1.31, and
$17.09, respectively. The weighted average estimated fair value
of shares granted under the ESPP was $0.49 during fiscal 2003,
$1.89 during fiscal 2002 and $9.72 during fiscal 2001.

56



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Comprehensive
loss The FASB issued
SFAS No. 130, Reporting Comprehensive Income,
which requires an enterprise to report by major components and
as a single total, the change in its net assets during the
period from non-stockholder sources. The components of
comprehensive loss were as follows:

|                                     |                    |                |          |          |   |          |         |         |   |   |          |          |  
|------------------------------------ | ------------------ | -------------- | -------- | -------- | - | -------- | ------- | ------- | - | - | -------- | -------- | -
|                                     |                    |               
|                                     |                    | Year Ended    
|                                     |                    |               
|                                     |                    | June 28,       |          | June 29, |   | June 30,
|                                     |                    | 2003           |          | 2002     |   | 2001    
|                                     |                    |                |          |          |   |         
|                                     |                    |               
|                                     |                    | (In thousands)
|Net loss                             |                    | $              | (131,058 | )        |   | $        | (91,589 | )       |   | $ | (125,963 | )       
|Currency translation adjustments     |                    |                | (10      | )        |   |          | (1,584  | )       |   |   | 703      |         
|Unrealized gain (loss) on securities |                    |                | (128     | )        |   |          | (203    | )       |   |   | 355      |         
|                                     |                    |                |          |          |   |          |         |         |   |   |          |         
|                                     | Comprehensive loss |                | $        | (131,196 | ) |          | $       | (93,376 | ) |   | $        | (124,905 | )
|                                     |                    |                |          |          |   |          |         |         |   |   |          |         

The components of accumulated other comprehensive
income (loss) were as follows:

|                                   |                                                         |                |      |          |   |          |      |      |   |   |     |     | 
|---------------------------------- | ------------------------------------------------------- | -------------- | ---- | -------- | - | -------- | ---- | ---- | - | - | --- | --- | 
|                                   |                                                         |               
|                                   |                                                         | Year Ended    
|                                   |                                                         |               
|                                   |                                                         | June 28,       |      | June 29, |   | June 30,
|                                   |                                                         | 2003           |      | 2002     |   | 2001    
|                                   |                                                         |                |      |          |   |         
|                                   |                                                         |               
|                                   |                                                         | (In thousands)
|Cumulative translation adjustments |                                                         | $              | (932 | )        |   | $        | (922 | )    |   | $ | 662 |    
|Unrealized gain on securities      |                                                         |                | 1    |          |   |          | 129  |      |   |   | 332 |    
|                                   |                                                         |                |      |          |   |          |      |      |   |   |     |    
|                                   | Total accumulated other comprehensive income
    (loss) |                | $    | (931     | ) |          | $    | (793 | ) |   | $   | 994 | 
|                                   |                                                         |                |      |          |   |          |      |      |   |   |     |    

Revenue
recognition Revenue is
comprised almost entirely of sales of our communicator and
organizer products. The Company recognizes a small portion of
revenue from the sale of software and extended warranty and
support contracts. The Company recognizes revenue pursuant to
applicable accounting standards, including Statement of Position
(SOP) No. 97-2, Software Revenue Recognition,
as amended. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is
fixed or determinable, and collectibility is probable. Product
is considered delivered to the customer once it has been
shipped, and title and risk of loss have been transferred. Sales
of our communicators may also include subsidy revenue from
wireless carriers for new customer service contracts or the
extension of existing customer contracts. In these cases, the
customers have a specified period of time in which they may
cancel their service. All revenue related to these subsidies is
deferred until this specified period of time has elapsed. The
Company records reductions to revenue for estimated commitments
related to price protection and for customer incentive programs,
including reseller and end user rebates and other sales programs
and volume-based incentives.

Revenue from extended warranty and support
contracts is recognized ratably over the contract period.
Amounts billed to customers in excess of revenue recognized on
extended warranty and support contracts are recognized as
deferred revenue until revenue recognition criteria are met.

Revenue on software that includes multiple
elements is allocated to each element based on vendor specific
objective evidence of the fair value of each element pursuant to
SOP 97-2, as amended. Allocated revenue for each element is
recognized when revenue recognition criteria have been met for
each element. Vendor specific objective evidence of fair value
is generally determined based on the price charged when each
element is sold separately.

No significant post-delivery obligations exist
with respect to revenue recognized during fiscal 2003, 2002 or
2001.

Returns
reserve The Company offers
limited return rights on its products and accordingly, at the
time the related sale is recorded, revenue is reduced for
estimated returns. The estimates for returns are adjusted
periodically and are based upon various factors including
historical rates of returns and inventory levels in the

57



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


channel. The Company also estimates and reserves
for rebates and price protection based upon specific programs.
Actual results may differ from these estimates.

Warranty
reserve The cost of
product warranties is estimated and accrued at the time revenue
is recognized. While the Company engages in extensive product
quality programs and processes, its warranty obligation is
affected by product failure rates, component costs and repair
service costs incurred in correcting a product failure. Should
actual product failure rates, component costs or repair service
costs differ from estimates, revisions to the estimated warranty
costs would be required.

Shipping and handling fees and costs and
royalty expenses The
Company classifies amounts billed to customers for shipping and
handling as revenue. Costs incurred by the Company for shipping
and handling have been classified as cost of revenue. Cost of
revenue also includes royalty expenses (primarily to PalmSource,
Inc.) pursuant to software technology license agreements. In
accordance with those agreements, the Company sublicenses the
software to its end-users.

Advertising
costs The cost of
advertising is expensed as incurred. For fiscal years 2003, 2002
and 2000 advertising costs totaled $1.8 million,
$3.0 million and $31.0 million, respectively.

Net loss per
share Net loss per share
is calculated in accordance with SFAS No. 128,
Earnings per Share. Under the provisions of
SFAS No. 128, basic net loss per share is computed by
dividing the net loss applicable to common stockholders for the
period by the weighted average number of common shares
outstanding during the period (excluding shares subject to
repurchase). Diluted net loss per share is computed by dividing
the net loss applicable to common stockholders for the period by
the weighted average number of common and potential common
shares outstanding during the period if their effect is dilutive.

The following table sets forth the computation of
basic and diluted net loss per share for the periods indicated:

|                                                         |                                                                                         |                                          |          |               |  |               |         |         |  |   |          |         | 
|-------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------------------------------- | -------- | ------------- |  | ------------- | ------- | ------- |  | - | -------- | ------- | 
|                                                         |                                                                                         |                                         
|                                                         |                                                                                         | Year Ended                              
|                                                         |                                                                                         |                                         
|                                                         |                                                                                         | June 28, 2003                            |          | June 29, 2002 |  | June 30, 2001
|                                                         |                                                                                         |                                          |          |               |  |              
|                                                         |                                                                                         |                                         
|                                                         |                                                                                         | (In thousands, except per share amounts)
|Net loss                                                 |                                                                                         | $                                        | (131,058 | )             |  | $             | (91,589 | )       |  | $ | (125,963 | )      
|                                                         |                                                                                         |                                          |          |               |  |               |         |         |  |   |          |        
|Basic and diluted:                                       |                                                                                         |                                          |          |               |  |               |         |         |  |   |          |        
|Weighted average common shares outstanding               |                                                                                         |                                          | 144,875  |               |  |               | 137,391 |         |  |   | 128,004  |        
|Weighted average common shares subject to
    repurchase |                                                                                         |                                          | (431     | )             |  |               | (9,170  | )       |  |   | (24,108  | )      
|                                                         |                                                                                         |                                          |          |               |  |               |         |         |  |   |          |        
|                                                         | Weighted average common shares used to compute
    basic and diluted net loss per share |                                          |          | 144,444       |  |               |         | 128,221 |  |   |          | 103,896 | 
|                                                         |                                                                                         |                                          |          |               |  |               |         |         |  |   |          |        
|Basic and diluted net loss per share                     |                                                                                         | $                                        | (0.91    | )             |  | $             | (0.71   | )       |  | $ | (1.21    | )      
|                                                         |                                                                                         |                                          |          |               |  |               |         |         |  |   |          |        

Diluted net loss per share does not include the
effect of the following potential common shares at the dates
indicated as their effect is anti-dilutive:

|                                    |  |                |        |               |  |               |        |  |  |  |        | 
|----------------------------------- |  | -------------- | ------ | ------------- |  | ------------- | ------ |  |  |  | ------ | 
|                                    |  | June 28, 2003  |        | June 29, 2002 |  | June 30, 2001
|                                    |  |                |        |               |  |              
|                                    |  |               
|                                    |  | (In thousands)
|Common stock subject to repurchase  |  |                | 75     |               |  |               | 2,067  |  |  |  | 16,556 | 
|Shares issuable under stock options |  |                | 21,037 |               |  |               | 16,463 |  |  |  | 31,544 | 
|Shares issuable under warrants      |  |                | 9,150  |               |  |               |       |  |  |  |       | 

The weighted average repurchase price of unvested
stock was $0.71, $0.17, and $0.06 as of June 28, 2003,
June 29, 2002 and June 30, 2001, respectively. The
weighted-average exercise price of stock options outstanding was
$1.17, $1.47 and $11.30 as of June 28, 2003, June 29,
2002 and June 30, 2001, respectively.

58



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


As part of our lease restructurings (see
Note 7), in the third quarter of fiscal year 2003 we issued
warrants to purchase a total of 10,150,000 shares of common
stock. The weighted-average exercise price of warrants
outstanding was $1.08 as of June 28, 2003.

Recently issued accounting
pronouncements In August
2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and
APB No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. Under
SFAS No. 144 a single accounting model for long-lived
assets to be disposed of is established. The accounting model is
based on the framework established in SFAS No. 121 and
resolves certain implementation issues. SFAS No. 144
was adopted by the Company at the beginning of fiscal 2003, and
did not have a material impact on the Companys financial
position or results of operations.

In July 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 requires
that a liability for costs associated with an exit or disposal
activity be recognized and measured initially at fair value only
when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of
SFAS No. 146 did not have a material impact on the
Companys accounting for restructuring actions initiated
during the third quarter of fiscal year 2003. However, the
provisions of SFAS No. 146 may affect the timing and
amount of future exit or disposal activities.

In November 2002, the FASB issued
FIN No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN No. 45
requires that a liability be recorded in the guarantors
balance sheet upon issuance of a guarantee. In addition,
FIN No. 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes
in the entitys product warranty liabilities. The initial
recognition and initial measurement provisions of
FIN No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The
disclosure requirements of FIN No. 45 are effective
for financial statements of interim or annual periods ending
after December 15, 2002. The adoption of
FIN No. 45 did not have a material impact on the
Companys financial position or results of operations.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which
amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
to the fair value method of accounting for stock-based employee
compensation, and also amends the disclosure provisions of
SFAS No. 123 to require disclosure in the summary of
significant accounting policies the effects of an entitys
accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in
annual and interim financial statements. The disclosure
provisions are applicable for all companies with stock-based
employee compensation, regardless of whether the company
utilizes the fair value method of accounting described in
SFAS No. 123 or the intrinsic value method described
in APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 148s amendment of the
transition and annual disclosure provisions of
SFAS No. 123 are effective for fiscal years ending
after December 15, 2002. The disclosure requirements for
interim financial statements containing condensed consolidated
financial statements are effective for interim periods beginning
after December 15, 2002. The Company currently uses the
intrinsic value method of accounting for stock-based employee
compensation described by APB Opinion No. 25. The Company
adopted the disclosure provisions of SFAS 148 in the third
quarter of fiscal year 2003 and has included the new disclosure
requirements in these notes to the consolidated financial
statements.

In January 2003, the FASB issued
FIN No. 46, Consolidation of Variable Interest
Entities. FIN No. 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling
financial interest or do

59



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


not have sufficient equity at risk for the entity
to finance its activities without additional subordinated
financial support from other parties. FIN No. 46
applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It
applies to the first fiscal year or interim period beginning
after June 15, 2003 to variable interest entities in which
an enterprise holds a variable interest that is acquired before
February 1, 2003. The adoption is not expected to have a
material impact on the Companys financial position or
results of operations.

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, which provides guidance on the timing and
method of revenue recognition for arrangements that include the
delivery of more than one product or service.
EITF No. 00-21 is effective for arrangements entered
into in periods beginning after June 15, 2003. The adoption
of EITF No. 00-21 did not have a material impact on
the Companys financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149,
Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities under
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. In particular, this Statement clarifies
under what circumstances a contract with an initial net
investment meets the characteristic of a derivative. It also
clarifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows.
SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and is not
expected to have a material impact on the Companys
financial position or results of operations.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how
an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within
the scope of SFAS No. 150 as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for interim
periods beginning after June 15, 2003. The adoption of
SFAS No. 150 is not expected to have a material impact
on the Companys financial position or results of operations

Use of
estimates The preparation
of financial statements in conformity with generally accepted
accounting principles requires management 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 financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.



|   |             
|-- | ------------
|4. | Acquisitions

In February 2001, the Company completed its
acquisition of BlueLark Systems, Inc. (BlueLark), a provider of
software designed to power the delivery of content and services
to mobile handheld devices, notably a Palm OS proxy-based
browser. Under the terms of the agreement related to this
acquisition, the Company issued 450,000 shares and options
to purchase the Companys common stock in exchange for all
of BlueLarks outstanding shares and options for a total
purchase price of $16.4 million. The acquisition was
accounted for as a purchase in accordance with the provisions of
APB Opinion No. 16, Business Combinations.

The Company considered various factors in
determining the fair value of the total purchase price to
allocate to the assets acquired and liabilities assumed from
BlueLark, including in-process research and development. The
amount allocated to in-process research and development was
determined by assessing the stage and expected date of
completion of the research and development efforts at the
acquisition date, and calculating the net present value of cash
flows expected to result from the new technology. The estimated
net present value of cash flows took into account the
characteristics and applications of the technologies, the size

60



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


and growth rate of existing and future markets
and an evaluation of past and anticipated technology and product
life cycles. These cash flows included the after-tax effects of
future revenues, cost of revenues, operating expenses, working
capital charge, and expenditures for capital and intangibles.
Both the estimated stage of completion and the discount rate
used to calculate the net present value factored into account
the uncertainty surrounding the successful deployment of the new
technology resulting from the in-process research and
development effort.

Of the total purchase price of
$16.4 million, $82,000 was allocated to the net tangible
assets acquired offset by $177,000 of liabilities assumed,
$3.9 million was recorded as deferred compensation,
$300,000 was recorded as assembled workforce, $12.0 million
was allocated to in-process research and development and the
remainder of $312,000 was recorded as goodwill. The deferred
compensation charge relates to the intrinsic value of unvested
stock options and restricted stock assumed in the transaction.
This amount is being amortized, using the multiple option
method, over the vesting period of the related options or
restricted stock. The total amount allocated to goodwill and
assembled workforce was being amortized on a straight-line basis
over three years; however, with the adoption of
SFAS No. 142 in fiscal 2003, amortization ceased and
the value of assembled workforce was reclassified to goodwill.
In accordance with SFAS No. 142, the Company applied
impairment tests in May 2003 and determined the remaining
goodwill to be impaired. The unamortized balance of $331,000 was
expensed in the fourth quarter of fiscal 2003. In-process
research and development was immediately expensed as of the date
of the acquisition. The historical operations of BlueLark were
not material to the Companys financial position or results
of operations and accordingly, proforma information has not been
presented. Results of operations for BlueLark have been included
with those of the Company subsequent to the acquisition date.



|   |                         
|-- | ------------------------
|5. | Balance Sheet Components



| |            
| | -----------
| | Investments

Available-for-sale securities consists of the
following:

|                         |  |                |        |                      |  |                       |     |            |  |   |     |   |  |   |        | 
|------------------------ |  | -------------- | ------ | -------------------- |  | --------------------- | --- | ---------- |  | - | --- | - |  | - | ------ | 
|                         |  |                |        | Gains in Accumulated |  | Losses in Accumulated |     |           
|                         |  |                |        | Other Comprehensive  |  | Other Comprehensive   |     |           
|                         |  | Amortized Cost |        | Income (Loss)        |  | Income (Loss)         |     | Fair Value
|                         |  |                |        |                      |  |                       |     |           
|                         |  |               
|                         |  | (In thousands)
|June 28, 2003            |  |                |        |                      |  |                       |     |            |  |   |     |   |  |   |        | 
|Corporate obligations    |  | $              | 2,007  |                      |  | $                     |    |            |  | $ | (1  | ) |  | $ | 2,006  | 
|Commercial paper         |  |                | 3,594  |                      |  |                       | 2   |            |  |   |    |   |  |   | 3,596  | 
|Money market             |  |                | 8,186  |                      |  |                       |    |            |  |   |    |   |  |   | 8,186  | 
|                         |  |                |        |                      |  |                       |     |            |  |   |     |   |  |   |        | 
|                         |  | $              | 13,787 |                      |  | $                     | 2   |            |  | $ | (1  | ) |  | $ | 13,788 | 
|                         |  |                |        |                      |  |                       |     |            |  |   |     |   |  |   |        | 
|June 29, 2002            |  |                |        |                      |  |                       |     |            |  |   |     |   |  |   |        | 
|Corporate obligations    |  | $              | 14,955 |                      |  | $                     | 168 |            |  | $ | (39 | ) |  | $ | 15,084 | 
|Certificates of deposits |  |                | 550    |                      |  |                       |    |            |  |   |    |   |  |   | 550    | 
|Money market             |  |                | 50,245 |                      |  |                       |    |            |  |   |    |   |  |   | 50,245 | 
|                         |  |                |        |                      |  |                       |     |            |  |   |     |   |  |   |        | 
|                         |  | $              | 65,750 |                      |  | $                     | 168 |            |  | $ | (39 | ) |  | $ | 65,879 | 
|                         |  |                |        |                      |  |                       |     |            |  |   |     |   |  |   |        | 

All available-for-sale debt securities had
maturities of one year or less as of June 28, 2003 and
June 29, 2002.

There were no available-for-sale securities sold
during fiscal 2003. Available-for-sale securities were sold for
total proceeds of $73.9 million during fiscal 2002 with
gross realized gains of $785,000 and gross realized losses of
$1,000.

61



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


As of fiscal 2003, available-for-sale securities
included $8.2 million of pledges securities as collateral
for lease payments. As of fiscal 2002, available-for-sale
securities included $49.5 million of pledges securities as
collateral for lease payments.



| |            
| | -----------
| | Inventories

The components of inventories are as follows:

|               |  |                |       |               |  |   |        | 
|-------------- |  | -------------- | ----- | ------------- |  | - | ------ | 
|               |  | June 28, 2003  |       | June 29, 2002
|               |  |                |       |              
|               |  |               
|               |  | (In thousands)
|Raw materials  |  | $              |      |               |  | $ | 380    | 
|Finished goods |  |                | 3,841 |               |  |   | 19,704 | 
|               |  |                |       |               |  |   |        | 
|               |  | $              | 3,841 |               |  | $ | 20,084 | 
|               |  |                |       |               |  |   |        | 



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment consists of the following:

|                               |                                                              |                |         |               |  |   |         |        | 
|------------------------------ | ------------------------------------------------------------ | -------------- | ------- | ------------- |  | - | ------- | ------ | 
|                               |                                                              | June 28, 2003  |         | June 29, 2002
|                               |                                                              |                |         |              
|                               |                                                              |               
|                               |                                                              | (In thousands)
|Tooling                        |                                                              | $              | 9,547   |               |  | $ | 8,577   |       
|Computer and office equipment  |                                                              |                | 8,923   |               |  |   | 9,111   |       
|Furniture and fixtures         |                                                              |                | 2,862   |               |  |   | 3,036   |       
|Software                       |                                                              |                | 7,589   |               |  |   | 7,107   |       
|Leasehold improvements         |                                                              |                | 2,182   |               |  |   | 2,334   |       
|                               |                                                              |                |         |               |  |   |         |       
|                               | Total property and equipment                                 |                |         | 31,103        |  |   |         | 30,165 | 
|Less: Accumulated depreciation |                                                              |                | (25,186 | )             |  |   | (17,687 | )     
|                               |                                                              |                |         |               |  |   |         |       
|                               | Property and equipment, net                                  |                | $       | 5,917         |  |   | $       | 12,478 | 
|                               |                                                              |                |         |               |  |   |         |       
|                               | Construction in progress  Sunnyvale
    tenant improvements |                | $       |              |  |   | $       | 6,614  | 
|                               |                                                              |                |         |               |  |   |         |       
|                               | Construction in progress  Sunnyvale
    property            |                | $       | 14,291        |  |   | $       | 73,979 | 
|                               |                                                              |                |         |               |  |   |         |       

Property and equipment did not include any assets
acquired under capital leases at June 28, 2003 or
June 29, 2002. Depreciation and amortization expense for
property and equipment was approximately $8.0 million for
fiscal 2003, $8.5 million for fiscal 2002 and $7.1 million
for fiscal 2001.



| |                    
| | -------------------
| | Accrued Liabilities

Accrued liabilities consist of the following:

|                                          |  |                |        |               |  |   |        | 
|----------------------------------------- |  | -------------- | ------ | ------------- |  | - | ------ | 
|                                          |  | June 28, 2003  |        | June 29, 2002
|                                          |  |                |        |              
|                                          |  |               
|                                          |  | (In thousands)
|Accrued product warranty                  |  | $              | 12,153 |               |  | $ | 14,436 | 
|Provision for committed inventory         |  |                | 2,875  |               |  |   | 7,141  | 
|Accrued compensation and related benefits |  |                | 3,827  |               |  |   | 4,990  | 
|Income taxes payable                      |  |                | 3,219  |               |  |   | 3,330  | 
|Other                                     |  |                | 11,779 |               |  |   | 18,882 | 
|                                          |  |                |        |               |  |   |        | 
|                                          |  | $              | 33,853 |               |  | $ | 48,779 | 
|                                          |  |                |        |               |  |   |        | 

62



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


6.     Construction
in progress  Sunnyvale property

Under EITF No. 97-10, The Effect of
Lessee Involvement in Asset Construction, the Company is
considered to be the owner (for accounting purposes only) of the
two new buildings in Sunnyvale, California that the Company
leases (see Note 7), during the construction period. The
application of the provisions of EITF No. 97-10 resulted in
the inclusion of $14.3 million and $74.0 million as
construction in progress with a corresponding non-cash
obligation for construction in progress of $14.3 million
and $74.0 million as of June 28, 2003 and
June 29, 2002, respectively.

7.     Restructurings

In September 2002, the Board of Directors
approved a restructuring plan to align expenses with the current
size of the Company. In connection with the restructuring plan,
the Company recorded a restructuring charge to operating
expenses of $2.3 million. This charge included
$1.2 million for workforce reduction for both U.S. and
International operations, $0.5 million to downsize and
close excess facilities and $0.4 million of asset-related
charges related to certain long-lived assets that were
abandoned. The restructuring activities resulted in the
termination of 77 employees, of which all were designated
for termination and were terminated in fiscal 2003.

On January 29, 2003, the Company
restructured the leases for two new buildings in Sunnyvale,
California (the Sunnyvale leases) that were entered into in
February 2001. The Sunnyvale leases had initial terms of twelve
years each, with monthly rent expense of approximately
$1.7 million, plus monthly operating expenses of
approximately $300,000 per month, for a total monthly expense of
approximately $2.0 million. Including annual increases, the
Company estimates that the total obligation to the landlord
would have been approximately $350.0 million over twelve
years.

As a result of the restructuring of the Sunnyvale
leases, the Company took a charge of $75.9 million in the
third quarter of fiscal 2003. The components of this charge
include $15.3 million paid from cash, cash equivalents and
short-term investments, $40.9 million paid from the release
of certain letters of credit which had secured the obligations
under the Sunnyvale leases, $5.0 million for future lease
payments and note payable obligations, $3.7 million for
warrants to purchase 10 million shares of common stock (see
Note 9), $10.4 million net write-off of tenant improvements
and rent expenses and $600,000 for legal fees and expenses. Of
the $40.9 million of restricted cash, the landlord has
drawn down $32.7 million. A provision for the remaining
$8.2 million has been set up to account for this
commitment. Of the $5.0 million obligation for future lease
and note payable payments, $4.0 million will be paid over
the next five years in monthly installments of principal and
interest, and $1.0 million without interest will be paid in
a lump sum on January 28, 2004, all pursuant to the terms
of the Amended and Restated Lease Agreement that was entered
into in connection with the restructuring. This restructuring
also resulted in the impairment of construction in progress for
the Sunnyvale property and the corresponding liability.

On January 31, 2003, the Company amended its
lease agreement with EOP-Industrial, Portfolio, LLC for the
leased property located in Mountain View, California. As a
result of this amendment, in the third quarter of fiscal 2003,
Handspring surrendered a letter of credit for $2.1 million
held in the landlords name and a security deposit of
$200,000. Handspring also issued warrants to purchase 150,000
shares of common stock valued at $46,500 (see Note 9).

63



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Details of the restructuring charges in fiscal
2003, included in accrued liabilities, are as follows:

|                       |                  |                |       |            |   |             |     |         |   |               |        |         |   |   |     |      |   |   |     |     |   |   |        |         |  
|---------------------- | ---------------- | -------------- | ----- | ---------- | - | ----------- | --- | ------- | - | ------------- | ------ | ------- | - | - | --- | ---- | - | - | --- | --- | - | - | ------ | ------- | -
|                       |                  | Severance      |       |            |   | Sunnyvale   |     |         |   |               |        |        
|                       |                  | and            |       | Excess     |   | Lease       |     | Asset-  |   | Other         |        |        
|                       |                  | Benefits       |       | Facilities |   | Restructure |     | Related |   | Restructuring |        | Total  
|                       |                  |                |       |            |   |             |     |         |   |               |        |        
|                       |                  |               
|                       |                  | (In thousands)
|Restructuring charges  |                  | $              | 1,242 |            |   | $           | 536 |         |   | $             | 75,930 |         |   | $ | 411 |      |   | $ | 155 |     |   | $ | 78,274 |        
|                       | Cash charges     |                |       | (1,242     | ) |             |     | (192    | ) |               |        | (48,997 | ) |   |     |     |   |   |     | (69 | ) |   |        | (50,500 | )
|                       | Non-cash charges |                |       |           |   |             |     |        |   |               |        | (14,081 | ) |   |     | (411 | ) |   |     |    |   |   |        | (14,492 | )
|                       |                  |                |       |            |   |             |     |         |   |               |        |         |   |   |     |      |   |   |     |     |   |   |        |        
|Balance, June 28, 2003 |                  | $              |      |            |   | $           | 344 |         |   | $             | 12,852 |         |   | $ |    |      |   | $ | 86  |     |   | $ | 13,282 |        
|                       |                  |                |       |            |   |             |     |         |   |               |        |         |   |   |     |      |   |   |     |     |   |   |        |        

During the fourth quarter of fiscal 2001 the
Company recorded a $26.8 million charge for excess and
obsolete inventory. This charge resulted from the overall
economic slowdown and high levels of channel inventory, which in
turn drove aggressive price reductions and increased competition.

8.     Commitments
and Contingencies

The Company leases its facilities under various
operating leases which expire through February 2011. Under the
terms of the leases, the Company is responsible for its share of
common area and operating expenses. Collateral for lease
payments consists of a $400,000 standby letter of credit
established on August 3, 1999. The standby letter of credit
is required until the expiration of the related leases in August
2004. The letter of credit is included in other assets at
June 28, 2003 and June 29, 2002.

As of June 28, 2003 the future minimum lease
commitments under all operating leases were as follows (in
thousands):

|                     |                              |   |       |       | 
|-------------------- | ---------------------------- | - | ----- | ----- | 
|Fiscal Years Ending, |                              |  
|                     |                              |  
|2004                 |                              | $ | 2,678 |      
|2005                 |                              |   | 1,202 |      
|2006                 |                              |   | 927   |      
|2007                 |                              |   | 713   |      
|2008                 |                              |   | 644   |      
|Thereafter           |                              |   | 124   |      
|                     |                              |   |       |      
|                     | Total minimum lease payments |   | $     | 6,288 | 
|                     |                              |   |       |      

Rent expense under operating leases, net of
sublease income, was $5.7 million, $4.0 million and
$4.1 million for fiscal 2003, 2002, and 2001, respectively.

In June 2002, the Company renewed its purchase
agreement with a manufacturer in Mexico. The agreement provides
for the manufacturer to supply certain levels of handheld
computer products according to rolling forecasts and purchase
orders provided by the Company. The Company guarantees a minimum
production commitment based on this rolling forecast. The
Company is liable for the purchase price of products scheduled
to be delivered within 30 days after the date of
cancellation. In addition, the Company is liable for the actual
cost of materials for orders cancelled within 31-90 days
before the date of scheduled delivery. The Company may cancel
orders with scheduled delivery more than 90 days after the
date of cancellation without liability. The initial term of the
agreement with the manufacturer in Mexico was for one year, with
automatic renewal for separate but successive one-year terms
subsequent to the expiration of the initial term. The agreement
with the manufacturer in Mexico is cancelable upon 90 days
and 180 days notice by either party. Had the Company
cancelled such orders, its maximum liability at June 28,
2003 under the cancellation provisions of the purchase
agreements would have approximated $21.5 million.

64



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                   
| | ------------------
| | Product Warranties

The Company accrues for warranty costs based on
historical trends in product failure rates and the expected
material and labor costs to provide warranty services. The
majority of products sold are generally covered by a warranty
for periods up to one year. The following table summarizes the
activity related to the product warranty liability, included in
accrued liabilities, during the year ended June 28, 2003
and June 29, 2002:

|                           |                                               |                |        |               |   |   |        |         |  
|-------------------------- | --------------------------------------------- | -------------- | ------ | ------------- | - | - | ------ | ------- | -
|                           |                                               | June 28, 2003  |        | June 29, 2002
|                           |                                               |                |        |              
|                           |                                               |               
|                           |                                               | (In thousands)
|Balance, beginning of year |                                               | $              | 14,436 |               |   | $ | 13,202 |        
|                           | Accrual for warranties issued during the year |                |        | 12,429        |   |   |        | 19,801  |  
|                           | Payments                                      |                |        | (14,712       | ) |   |        | (18,567 | )
|                           |                                               |                |        |               |   |   |        |        
|Balance, end of year       |                                               | $              | 12,153 |               |   | $ | 14,436 |        
|                           |                                               |                |        |               |   |   |        |        



| |                    
| | -------------------
| | Palm Loan Agreement

On June 4, 2003, Palm and Handspring entered
into a loan agreement pursuant to which Palm will provide up to
an aggregate of $20 million in term loans to Handspring.
The term loans will be secured by a first priority security
interest against substantially all of the assets and property of
Handspring. Interest will accrue on the term loans at an annual
interest rate equal to the prime rate (4% at June 28, 2003)
plus 3% and be payable at the end of each calendar quarter. The
term loans will mature upon the earliest of:



| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the execution of an agreement (other than the
    merger agreement), the consummation of which would constitute a
    change of control of Handspring pursuant to the terms of the
    loan agreement;
|
| |  | if a maturity event of extension, as defined in
    the loan agreement, occurs, then the term loans will mature nine
    months from the termination of the merger agreement;                         
|
| |  | if a maturity event of extension has not
    occurred, then the term loans will mature two business days
    following the date of termination of the merger agreement; and                           
|
| |  | the occurrence of an event of default pursuant to
    the terms of the loan agreement.                                                                                                                

Handspring may prepay the term loans at any time
without penalty or premium. Handspring is required to prepay the
term loans under certain circumstances. Handspring must meet
certain conditions in order to borrow under the term loans.

The loan agreement contains customary events of
default for a credit facility of this type, including, among
others, failure to make payments when due, breaches of
covenants, breaches of representations and warranties,
cross-default to other indebtedness, bankruptcy and insolvency
defaults, unsatisfied judgment defaults, and ERISA defaults.



| |                                          
| | -----------------------------------------
| | Officer and Director
    Indemnifications

As permitted and/or required under Delaware law
and to the maximum extent allowable under that law, the Company
has agreements whereby the Company indemnifies its current and
former officers and directors for certain events or occurrences
while the officer or director is, or was serving, at the
Companys request in such capacity. These indemnifications
are valid as long as the director or officer acted in good faith
and in a manner that a reasonable person believed to be in or
not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The maximum
potential amount of future payments the Company could be
required to make under these indemnification agreements is
unlimited; however, the Company has a director and officer
insurance policy that limits the Companys exposure and
enables the Company to recover a portion of any amounts paid.

65



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


As a result of the Companys insurance
policy coverage, the Company believes the estimated fair value
of these indemnification obligations is minimal.



| |                       
| | ----------------------
| | Other Indemnifications

As is customary in the Companys industry,
as provided for in local law in the U.S. and other
jurisdictions, the Companys standard contracts provide
remedies to its customers, such as defense, settlement, or
payment of judgment for intellectual property claims related to
the use of the Companys products. From time to time, the
Company indemnifies customers against combinations of loss,
expense, or liability arising from various trigger events
related to the sale and the use of the Companys products
and services. In addition, from time to time the Company also
provides protection to customers against claims related to
undiscovered liabilities, additional product liability or
environmental obligations. In the Companys experience,
claims made under such indemnifications are rare and the
associated estimated fair value of the liability is not material.

9.     Stockholders
Equity



| |                
| | ---------------
| | Preferred Stock

The Company is authorized to issue 10,000,000
shares of preferred stock, none of which was outstanding at
June 28, 2003 or June 29, 2002.



| |             
| | ------------
| | Common Stock

Common stock issued to the founders is subject to
repurchase agreements whereby the Company has the option to
repurchase unvested shares upon termination of employment at the
original issue price. These shares vest 20% at the date of the
agreements, an additional 20% on July 13, 1999, 1.667% per
month thereafter and an additional 25% in the event of an
acquisition or merger of the Company. There were no shares of
the founders common stock subject to repurchase by the
Company at June 28, 2003. There were 1,050,000 and
13,650,000 shares of the founders common stock subject to
repurchase by the Company at June 29, 2002 and
June 30, 2001, respectively.



| |                                       
| | --------------------------------------
| | Common Stock Reserved for
    Issuance

The Company has 1,000,000,000 shares of common
stock authorized, of which 148,611,942, 143,126,516, and
129,949,768 were issued and outstanding as of June 28,
2003, June 29, 2002, and June 30, 2001, respectively.
Common stock reserved for future issuances is as follows:

|                                            |                       |                |        |               |  |               |        |        |  |  |        |        | 
|------------------------------------------- | --------------------- | -------------- | ------ | ------------- |  | ------------- | ------ | ------ |  |  | ------ | ------ | 
|                                            |                       | June 28, 2003  |        | June 29, 2002 |  | June 30, 2001
|                                            |                       |                |        |               |  |              
|                                            |                       |               
|                                            |                       | (In thousands)
|Issuance under stock options                |                       |                | 41,899 |               |  |               | 43,681 |        |  |  | 47,111 |       
|Issuance under employee stock purchase plan |                       |                | 1,238  |               |  |               | 2,461  |        |  |  | 1,943  |       
|Issuance under warrants                     |                       |                | 9,150  |               |  |               |       |        |  |  |       |       
|                                            |                       |                |        |               |  |               |        |        |  |  |        |       
|                                            | Total shares reserved |                |        | 52,287        |  |               |        | 46,142 |  |  |        | 49,054 | 
|                                            |                       |                |        |               |  |               |        |        |  |  |        |       



| |                              
| | -----------------------------
| | Stock Option Exchange Program

During April 2002, the Company announced a
voluntary stock option exchange program for its employees. Under
the program, employees were given the opportunity, if they
chose, to cancel outstanding stock options previously granted to
them in exchange for an equal number of replacement options to
be granted at a future date, at least six months and a day from
the cancellation day, which was May 17, 2002. Under the
exchange program, options for 11,677,415 shares of the
Companys common stock were tendered and cancelled. Each
participant employee who was still employed by the Company on
the replacement grant

66



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


date received, for each option included in the
exchange, a one-for-one replacement option. The exercise price
of each replacement option was equal to the current fair market
value of the Companys common stock on the day the
replacement options were granted. On November 18, 2002, the
Company granted options for 10,257,926 shares of the
Companys common stock at the exercise price of $1.01 per
share.

The terms of the replacement options are
substantially the same as the cancelled options, except that in
most circumstances, there was an additional cliff period of up
to six months imposed on the vesting schedule of the option that
limited the ability of the option holder to exercise the option.

The exchange program complies with FASB
Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, and did not
result in any additional compensation charges or variable plan
accounting. Members of the Companys Board of Directors
were not eligible to participate in this program.



| |                                      
| | -------------------------------------
| | 2000 Employee Stock Purchase
    Plan

Effective June 21, 2000, the Company adopted
the 2000 Employee Stock Purchase Plan (ESPP). An initial
750,000 shares of common stock were originally reserved for
issuance under the ESPP. In addition, subject to the Board of
Directors discretion, on January 1, 2001 and on each
anniversary thereafter, the aggregate number of shares reserved
for issuances under the ESPP was and will be increased
automatically by the numbers of shares equal to 1% of the total
number of outstanding shares of the Companys common stock
on the immediately preceding December 31, provided that the
aggregate shares reserved under the ESPP shall not exceed
22,500,000 shares.

Under the ESPP, eligible employees may have up to
10% of their earnings withheld, subject to certain limitations,
to be used to purchase shares of the Companys common
stock. Unless the Board of Directors shall determine otherwise,
each offering period provides for consecutive 24-month periods
commencing on each February 1 and August 1, except that the
first offering period commenced on June 21, 2000 and ended
on July 31, 2002. Each offering period is comprised of four
6-month purchase periods, except for the first purchase period
which was from June 21, 2000 to January 31, 2001. An
offering period may end earlier than its scheduled term. The
price at which common stock may be purchased under the ESPP is
equal to 85% of the lower of the fair market value of common
stock on the commencement date of each offering period or the
specified purchase date. Under the ESPP, the Company issued
approximately 2,676,000 shares to employees in fiscal 2003
for $2.2 million, 898,000 shares in fiscal 2002 for
$2.6 million and 78,000 shares in fiscal 2001 for
$1.3 million.



| |                           
| | --------------------------
| | 2000 Equity Incentive Plan

The 2000 Equity Incentive Plan (2000 Plan) was
adopted by the Board of Directors on April 26, 2000 and
became effective on June 20, 2000. The 2000 Plan provides
for the issuance of either incentive options (ISO) to its
employees (including officers and directors who are also
employees) or non-qualified options (NSO) to its employees,
officers, directors, consultants, independent contractors and
advisors of the Company. The options may be granted at prices no
less than 85% of the estimated fair value of the shares at the
date of grant, provided, however, that (i) the exercise
price of an ISO shall not be less than 100% of the fair value of
the shares on the date of grant, and (ii) the exercise
price of any option granted to a 10% shareholder shall not be
less than 110% of the fair value of the shares on the date of
grant, respectively. Options generally vest 25% one year from
the vest start date and ratably over the next 36 months and
expire 10 years (five years in certain instances) after the
date of grant. An initial 15,000,000 shares of common stock
were originally reserved for issuance under the 2000 Plan. In
addition, subject to the Board of Directors discretion, on
January 1, 2001 and on each anniversary thereafter, the
aggregate number of shares reserved for issuances under the 2000
Plan will be increased automatically by the number of shares
equal to 5% of the total outstanding shares of the
Companys common stock on the immediately preceding
December 31, provided

67



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


that no more than 20,000,000 shares shall be
issued as ISOs. The Board of Directors elected not to
increase the shares reserved for issuances under the 2000 Plan
during fiscal 2003 and 2002.



| |                         
| | ------------------------
| | Prior Stock Option Plans

The Companys 1999 Executive Equity
Incentive Plan (1999 Plan) provided for the issuance of options
to acquire 10,350,000 shares of common stock. The 1998 Plan
provides for the issuance of either ISOs to its employees
or NSOs to its employees, officers, directors and
consultants of the Company. Options generally vest 25% one year
from the vest start date and ratably over the next
36 months and expire 10 years (five years in certain
instances) after the date of grant.

The Companys 1998 Equity Incentive Plan
(1998 Plan) provided for the issuance of options to acquire
28,707,693 shares of common stock. The 1998 Plan provides
for the issuance of either ISOs to its employees or
NSOs to its employees, officers, directors and consultants
of the Company. Options generally vest 25% one year from the
vest start date and ratably over the next 36 months and
expire 10 years (five years in certain instances) after the
date of grant.

Under the 1999 Plan and the 1998 Plan, options
granted prior to December 1999 are immediately exercisable and
options granted on or after December 1999 are generally
exercisable only as the shares underlying the option become
vested. Shares issued upon exercise of options that are unvested
are subject to repurchase by the Company upon termination of
that option recipients services to the Company. The
Company is not obligated to repurchase such unvested shares. The
repurchase price is the original exercise price, proportionately
adjusted for any stock split or similar change in the capital
structure of the Company. A stockholder who holds unvested
shares is entitled to vote those shares and is entitled to
receive dividends declared on those shares, but may not freely
sell the shares until they become vested. There were 58,281,
232,664 and 685,939 shares issued under the 1999 Plan that
were subject to repurchase at June 28, 2003, June 29,
2002 and June 30, 2001, respectively. There were 15,376,
724,866 and 2,066,329 shares issued under the 1998 Plan at
June 28, 2003, June 29, 2002 and June 30, 2001
that were subject to repurchase, respectively. Upon adoption of
the 2000 Plan, the Company transferred all shares available for
grant under the 1999 Plan and the 1998 Plan to the 2000 Plan.



| |                                        
| | ---------------------------------------
| | BlueLark 2000 Equity Incentive
    Plan

As part of the acquisition of BlueLark described
in Note 4, the Company assumed incentive stock options and
restricted stock awards granted under BlueLarkss 2000
Equity Incentive Plan (BlueLark Plan). The incentive stock
options generally vest 25% one year from the vest start date and
ratably over the next 36 months and expire 10 years
after the date of grant. The restricted stock awards were 16.67%
vested at the date of grant, with the remaining shares vesting
ratably over 40 months. The Company has reserved
47,615 shares of its common stock for issuance upon
exercise of the outstanding options under the BlueLark Plan. No
shares are available for future grants under the BlueLark Plan.
There were 59,697 and 153,899 shares of the Companys
common stock issued pursuant to the BlueLark Plan that were
subject to repurchase by the Company as of June 29, 2002
and June 30, 2001, respectively. There were no shares of
the Companys common stock issued pursuant to the BlueLark
Plan subject to repurchase by the Company as of June 28,
2003.

68



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Option activity under the Companys Equity
Incentive Plans is as follows:

|                       |                             |           |            |                     |   |                |            |             |   |   |       |       | 
|---------------------- | --------------------------- | --------- | ---------- | ------------------- | - | -------------- | ---------- | ----------- | - | - | ----- | ----- | 
|                       |                             |           |            |                    
|                       |                             |           |            | Options Outstanding
|                       |                             |           |            |                    
|                       |                             | Options   |            |                     |   | Weighted      
|                       |                             | Available |            |                     |   | Average       
|                       |                             | for Grant |            | Shares              |   | Exercise Price
|                       |                             |           |            |                     |   |               
|Balance, July 1, 2000  |                             |           | 16,615,812 |                     |   |                | 26,622,180 |             |   | $ | 4.68  |      
|                       | Authorized                  |           |            | 6,404,715           |   |                |            |            |   |   |       |      | 
|                       | Options granted             |           |            | (7,990,382          | ) |                |            | 7,990,382   |   |   | $     | 30.67 | 
|                       | Options assumed             |           |            | (47,615             | ) |                |            | 47,615      |   |   | $     | 0.88  | 
|                       | Options exercised           |           |            |                    |   |                |            | (2,717,781  | ) |   | $     | 0.65  | 
|                       | Options canceled            |           |            | 398,855             |   |                |            | (398,855    | ) |   | $     | 29.03 | 
|                       | Unvested shares repurchased |           |            | 185,625             |   |                |            |            |   |   | $     | 0.22  | 
|                       |                             |           |            |                     |   |                |            |             |   |   |       |      
|Balance, June 30, 2001 |                             |           | 15,567,010 |                     |   |                | 31,543,541 |             |   | $ | 11.30 |      
|                       | Options granted             |           |            | (2,699,442          | ) |                |            | 2,699,442   |   |   | $     | 2.44  | 
|                       | Options exercised           |           |            |                    |   |                |            | (3,429,157  | ) |   | $     | 0.44  | 
|                       | Options canceled            |           |            | 14,350,974          |   |                |            | (14,350,974 | ) |   | $     | 23.47 | 
|                       | Unvested shares repurchased |           |            | 25,602              |   |                |            |            |   |   |       |      | 
|                       |                             |           |            |                     |   |                |            |             |   |   |       |      
|Balance, June 29, 2002 |                             |           | 27,244,144 |                     |   |                | 16,462,852 |             |   | $ | 1.47  |      
|                       | Authorized                  |           |            |                    |   |                |            |            |   |   |       |      | 
|                       | Options granted             |           |            | (12,377,426         | ) |                |            | 12,377,426  |   |   | $     | 0.99  | 
|                       | Options exercised           |           |            |                    |   |                |            | (1,992,796  | ) |   | $     | 0.40  | 
|                       | Options canceled            |           |            | 5,810,692           |   |                |            | (5,810,692  | ) |   | $     | 1.90  | 
|                       | Unvested shares repurchased |           |            | 185,044             |   |                |            |            |   |   |       |      | 
|                       |                             |           |            |                     |   |                |            |             |   |   |       |      
|Balance, June 28, 2003 |                             |           | 20,862,454 |                     |   |                | 21,036,790 |             |   | $ | 1.17  |      
|                       |                             |           |            |                     |   |                |            |             |   |   |       |      

The following table summarizes information
concerning options outstanding and exercisable at June 28,
2003:

|                         |  |                     |            |                  |  |                     |      |             |  |          |       |  |  |  |            |  |  |   |       | 
|------------------------ |  | ------------------- | ---------- | ---------------- |  | ------------------- | ---- | ----------- |  | -------- | ----- |  |  |  | ---------- |  |  | - | ----- | 
|                         |  |                     |            |                  |  |                    
|                         |  | Options Outstanding |            |                  |  | Options Exercisable
|                         |  |                     |            |                  |  |                    
|                         |  |                     |            | Weighted Average |  | Weighted            |      |             |  | Weighted
|                         |  |                     |            | Remaining        |  | Average             |      |             |  | Average 
|                         |  | Number              |            | Contractual Life |  | Exercise            |      | Number      |  | Exercise
|Range of Exercise Prices |  | Outstanding         |            | (Years)          |  | Price               |      | Exercisable |  | Price   
|                         |  |                     |            |                  |  |                     |      |             |  |         
|$0.05                    |  |                     | 4,839,082  |                  |  |                     | 5.29 |             |  | $        | 0.05  |  |  |  | 4,839,082  |  |  | $ | 0.05  | 
|$0.11 - $ 0.44           |  |                     | 1,704,975  |                  |  |                     | 6.15 |             |  | $        | 0.40  |  |  |  | 1,577,847  |  |  | $ | 0.40  | 
|$0.58 - $ 0.78           |  |                     | 1,462,377  |                  |  |                     | 8.08 |             |  | $        | 0.72  |  |  |  | 630,227    |  |  | $ | 0.67  | 
|$0.81 - $ 0.99           |  |                     | 2,113,178  |                  |  |                     | 8.04 |             |  | $        | 0.91  |  |  |  | 789,453    |  |  | $ | 0.89  | 
|$1.01 - $ 1.01           |  |                     | 7,214,743  |                  |  |                     | 7.26 |             |  | $        | 1.01  |  |  |  | 3,838,814  |  |  | $ | 1.01  | 
|$1.06 - $ 2.11           |  |                     | 1,558,941  |                  |  |                     | 6.71 |             |  | $        | 1.62  |  |  |  | 1,193,271  |  |  | $ | 1.63  | 
|$2.14 - $ 2.73           |  |                     | 1,478,242  |                  |  |                     | 8.21 |             |  | $        | 2.24  |  |  |  | 665,777    |  |  | $ | 2.24  | 
|$3.00 - $17.56           |  |                     | 665,252    |                  |  |                     | 7.55 |             |  | $        | 11.52 |  |  |  | 406,621    |  |  | $ | 12.34 | 
|                         |  |                     |            |                  |  |                     |      |             |  |          |       |  |  |  |            |  |  |   |       | 
|$0.05 - $17.56           |  |                     | 21,036,790 |                  |  |                     |      |             |  |          |       |  |  |  | 13,941,092 |  |  |   |       | 
|                         |  |                     |            |                  |  |                     |      |             |  |          |       |  |  |  |            |  |  |   |       | 

69



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |         
| | --------
| | Warrants

In March 2003, in connection with its facility
lease restructuring, the Company issued warrants to purchase up
to 150,000 shares of Common Stock at an exercise price of $0.719
per share. The fair value of these warrants, as determined using
the Black-Scholes option pricing model, was $46,500, using the
following assumptions: the contractual life between 1.0 and
4.5 years, risk-free interest rate of 1.20%, 108% expected
volatility and no dividend yield. These warrants expire in March
2010.

In January 2003, in connection with its facility
lease restructuring, the Company issued warrants to purchase up
to 1,000,000 shares of Common Stock at an exercise price of
$0.01 per share. The fair value of these warrants, as determined
using the Black-Scholes option pricing model, was $910,000,
using the following assumptions: the contractual life of
0.6 years, risk-free interest rate of 1.20%, 108% expected
volatility and no dividend yield. In January 2003, the Company
issued 1,000,000 shares of common stock pursuant to the exercise
of the warrants.

In January 2003, in connection with its facility
lease restructuring, the Company issued warrants to purchase up
to 9,000,000 shares of Common Stock at an exercise price of
$1.09 per share. The fair value of these warrants, as determined
using the Black-Scholes option pricing model, was $2,790,000,
using the following assumptions: the contractual life between
1.0 and 4.5 years, risk-free interest rate of 1.20%, 108%
expected volatility and no dividend yield. These warrants expire
in January 2008.



| |                            
| | ---------------------------
| | Deferred Stock Compensation

During the period from July 29, 1998 (date
of inception) to June 30, 1999 and during fiscal 2000, the
Company issued stock options under the 1998 Plan and the 1999
Plan at exercise prices deemed by the Board of Directors at the
date of grant to be the fair value. The Company recorded
deferred compensation for the difference between the purchase
price of the stock issued to employees under stock options and
the subsequently deemed fair value of the Companys stock
at the date of grant. The total amount of deferred stock
compensation recorded in relation to these stock options issued
was $102.0 million, of which $88.6 million was
recorded during fiscal 2000. In addition, during fiscal 2001,
the Company recorded $3.9 million of deferred compensation
in relation to the unvested stock options and restricted stock
assumed in the acquisition of BlueLark Systems, Inc. Deferred
compensation is amortized to expense over the vesting period of
the related options and restricted stock, generally four years.
The Company amortized $8.2 million, $20.0 million and
$32.8 million of deferred stock compensation during fiscal
2003, 2002, and 2001, respectively.

10.     Income
Taxes

The provision for income taxes consists of the
following:

|                   |         |                         |   |               |     |               |   |     |       |  |   |       |       | 
|------------------ | ------- | ----------------------- | - | ------------- | --- | ------------- | - | --- | ----- |  | - | ----- | ----- | 
|                   |         | Year Ended              |   | Year Ended    |     | Year Ended   
|                   |         | June 28, 2003           |   | June 29, 2002 |     | June 30, 2001
|                   |         |                         |   |               |     |              
|                   |         |                        
|                   |         | (In thousands)         
|Current provision: |         |                         |   |               |     |               |   |     |       |  |   |      
|                   | State   |                         | $ | 7             |     |               | $ | 250 |       |  | $ | 250   |      
|                   | Foreign |                         |   | 231           |     |               |   | 800 |       |  |   | 2,750 |      
|                   |         |                         |   |               |     |               |   |     |       |  |   |      
|                   |         | Total current provision |   | $             | 238 |               |   | $   | 1,050 |  |   | $     | 3,000 | 
|                   |         |                         |   |               |     |               |   |     |       |  |   |      

70



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The difference between the provision for income
taxes and the amount computed by applying the federal statutory
income tax rate (35%) to loss before taxes is explained below:

|                                                             |       |                |         |               |  |               |         |       |  |   |         |       | 
|------------------------------------------------------------ | ----- | -------------- | ------- | ------------- |  | ------------- | ------- | ----- |  | - | ------- | ----- | 
|                                                             |       | Year Ended     |         | Year Ended    |  | Year Ended   
|                                                             |       | June 28, 2003  |         | June 29, 2002 |  | June 30, 2001
|                                                             |       |                |         |               |  |              
|                                                             |       |               
|                                                             |       | (In thousands)
|Tax benefit at federal statutory rate                        |       | $              | (43,727 | )             |  | $             | (31,689 | )     |  | $ | (43,037 | )    
|Foreign taxes                                                |       |                | 231     |               |  |               | 800     |       |  |   | 2,750   |      
|State taxes                                                  |       |                | 7       |               |  |               | 250     |       |  |   | 250     |      
|In-process research and development                          |       |                |        |               |  |               |        |       |  |   | 4,279   |      
|Unbenefitted net operating losses, reserves and
    accruals |       |                | 43,727  |               |  |               | 31,689  |       |  |   | 38,758  |      
|                                                             |       |                |         |               |  |               |         |       |  |   |         |      
|                                                             | Total |                | $       | 238           |  |               | $       | 1,050 |  |   | $       | 3,000 | 
|                                                             |       |                |         |               |  |               |         |       |  |   |         |      

Significant components of the Companys
deferred tax assets are as follows:

|                                               |                        |                |          |               |  |   |         |   | 
|---------------------------------------------- | ---------------------- | -------------- | -------- | ------------- |  | - | ------- | - | 
|                                               |                        | June 28, 2003  |          | June 29, 2002
|                                               |                        |                |          |              
|                                               |                        |               
|                                               |                        | (In thousands)
|Net operating loss carryforwards               |                        | $              | 79,196   |               |  | $ | 54,359  |  
|Reserves and accruals not currently deductible |                        |                | 37,368   |               |  |   | 19,019  |  
|Deferred compensation                          |                        |                |         |               |  |   |        |  
|Research credit carryforwards                  |                        |                | 10,942   |               |  |   | 7,754   |  
|Other                                          |                        |                | 4,456    |               |  |   | 4,309   |  
|                                               |                        |                |          |               |  |   |         |  
|                                               |                        |                | 131,962  |               |  |   | 85,441  |  
|Valuation allowance                            |                        |                | (131,962 | )             |  |   | (85,441 | )
|                                               |                        |                |          |               |  |   |         |  
|                                               | Net deferred tax asset |                | $        |              |  |   | $       |  | 
|                                               |                        |                |          |               |  |   |         |  

SFAS No. 109, Accounting for Income
Taxes, provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based
upon the weight of available evidence, which includes historical
operating performance and the reported cumulative net losses in
prior years, the Company has provided a full valuation allowance
against its deferred tax assets.

The net valuation allowance increased by $46.5,
$19.1 million, and $39.4 million during fiscal 2003,
2002, and 2001, respectively.

As of June 28, 2003, the Company had net
operating loss carryforwards for federal and state purposes of
$206.0 million and $124.0 million, respectively. The
Company also had federal and state research and development tax
credit carryforwards of $6.4 million and $6.5 million,
respectively. The federal and state net operating loss
carryforwards will expire at various dates beginning in 2007 if
not utilized.

Utilization of the net operating losses and tax
credits may be subject to a substantial annual limitation due to
the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses
and tax credits before utilization.

11.     401(k)
Plan

Effective January 1, 1999, the Company
adopted a 401(k) tax-deferred savings plan (the 401k Plan)
for essentially all of its employees. Eligible employees may
make voluntary contributions to the 401k Plan of up to 15% of
their annual eligible compensation subject to certain
limitations prescribed by the Internal Revenue Code. The Company
does not make any matching contributions to the 401k Plan.

71



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


12.     Business
Segment Reporting

The Company adopted the provisions of
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which requires the
reporting of segment information using the management
approach. Under this approach operating segments are
identified in substantially the same manner as they are reported
internally and used by the Companys chief operating
decision makers for purposes of evaluating performance and
allocating revenue. Based on this approach, the Company has one
reportable segment, handheld computing, as the chief operating
decision makers review financial information on a basis
consistent with that presented in these consolidated financial
statements. The Company operates its operating segment, handheld
computing, which includes organizers and integrated wireless
devices known as communicators, from its headquarters.

The following summarizes revenues by major
product lines category:

|              |       |                |         |               |  |               |         |         |  |   |         |         | 
|------------- | ----- | -------------- | ------- | ------------- |  | ------------- | ------- | ------- |  | - | ------- | ------- | 
|              |       | Year Ended     |         | Year Ended    |  | Year Ended   
|              |       | June 28, 2003  |         | June 29, 2002 |  | June 30, 2001
|              |       |                |         |               |  |              
|              |       |               
|              |       | (In thousands)
|Organizers    |       | $              | 46,500  |               |  | $             | 197,200 |         |  | $ | 370,900 |        
|Communicators |       |                | 100,800 |               |  |               | 43,500  |         |  |   |        |        
|              |       |                |         |               |  |               |         |         |  |   |         |        
|              | Total |                | $       | 147,300       |  |               | $       | 240,700 |  |   | $       | 370,900 | 
|              |       |                |         |               |  |               |         |         |  |   |         |        

Although most of the Companys operations
are located in the United States, the Company also conducts
sales, marketing and customer service activities throughout the
world. 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. Revenue from unaffiliated customers and long-lived
assets by geographic region are as follows:

|         |                   |                |   |            |         |            |   |         |         |  |   |         |         | 
|-------- | ----------------- | -------------- | - | ---------- | ------- | ---------- | - | ------- | ------- |  | - | ------- | ------- | 
|         |                   | Year Ended     |   | Year Ended |         | Year Ended
|         |                   | June 28,       |   | June 29,   |         | June 30,  
|         |                   | 2003           |   | 2002       |         | 2001      
|         |                   |                |   |            |         |           
|         |                   |               
|         |                   | (In thousands)
|Revenue: |                   |                |   |            |         |            |   |         |         |  |   |        
|         | North America     |                | $ | 120,351    |         |            | $ | 202,435 |         |  | $ | 298,688 |        
|         | Rest of the world |                |   | 26,905     |         |            |   | 38,216  |         |  |   | 72,255  |        
|         |                   |                |   |            |         |            |   |         |         |  |   |        
|         |                   | Total          |   | $          | 147,256 |            |   | $       | 240,651 |  |   | $       | 370,943 | 
|         |                   |                |   |            |         |            |   |         |         |  |   |        

|                   |                   |                |   |          |        |  |   |        |        | 
|------------------ | ----------------- | -------------- | - | -------- | ------ |  | - | ------ | ------ | 
|                   |                   | June 28,       |   | June 29,
|                   |                   | 2003           |   | 2002    
|                   |                   |                |   |         
|                   |                   |               
|                   |                   | (In thousands)
|Long-Lived Assets: |                   |                |   |          |        |  |   |       
|                   | North America     |                | $ | 21,974   |        |  | $ | 92,632 |       
|                   | Rest of the world |                |   | 317      |        |  |   | 1,847  |       
|                   |                   |                |   |          |        |  |   |       
|                   |                   | Total          |   | $        | 22,291 |  |   | $      | 94,479 | 
|                   |                   |                |   |          |        |  |   |       

During fiscal 2003 one customer accounted for 37%
of revenue. During fiscal 2002 one customer accounted for 15% of
revenue. The same customer plus two others accounted for 14%,
13%, and 10% of revenue during fiscal 2001.

Long-lived assets do not include securities
included in other assets in the amount of $1.3 million and
$1.1 million for fiscal year ended June 28, 2003 and
June 29, 2002, respectively.

72



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


13.     Litigation

The Company is subject to legal proceedings,
claims and litigation, including those described below, arising
in the ordinary course of business. While the outcome of those
matters that have not been fully adjudicated is currently not
determinable, management does not expect that the ultimate costs
to resolve these matters will have a material adverse effect on
the Companys financial position, results of operations or
cash flows. No estimate can be made of the possible loss or
possible range of loss, if any associated with the resolution of
these legal proceedings, claims and litigation. As a result, no
loss has been accrued in the financial statements as of
June 28, 2003. However, the results of legal proceedings
cannot be predicted with certainty. Should we fail to prevail in
any of these legal matters or should several of these legal
matters be resolved against the Company in the same reporting
period, the operating results of a particular reporting period
could be materially adversely affected.

On March 14, 2001, NCR Corporation filed
suit against Handspring and Palm, Inc. in the United States
District Court for the District of Delaware. The complaint
alleges infringement of two U.S. patents. The complaint seeks
unspecified compensatory and treble damages and to permanently
enjoin the defendants from infringing the patents in the future.
Handspring filed an answer on April 30, 2001, denying
NCRs allegations and asserting counterclaims for
declaratory judgments that it does not infringe the patents in
suit, that the patents in suit are invalid, and that they are
unenforceable. On June 14, 2002, following the retirement
of the judge hearing the case, the case was referred to a
magistrate. On July 11, 2002, the magistrate granted the
Companys motion for summary judgment finding that the
Company did not infringe the patents. On August 29, 2002,
NCR filed an objection to the magistrates ruling. On
August 28, 2003, the new district judge rejected NCRs
objection and affirmed the magistrates ruling.

On June 19, 2001, DataQuill Limited filed
suit against Handspring in the United States District Court for
the Northern District of Illinois, case no. 01-CV-4635. The
complaint alleges infringement of one U.S. patent. The
complaint seeks unspecified compensatory and treble damages and
to permanently enjoin Handspring from infringing the patent in
the future. The Company filed an answer on August 1, 2001,
denying DataQuills allegations and asserting counterclaims
for declaratory judgments that the Company does not infringe the
patent in suit, that the patent in suit is invalid, and that it
is unenforceable. On August 7, 2002, the Company filed
motions for summary judgment for non-infringement and
invalidity, which were renewed in filings made on
October 29, 2002. On February 28, 2003, the Court
granted in part and denied in part the Companys summary
judgment motions. DataQuill then filed a motion for this ruling
to be reconsidered, which on April 16, 2003 the Court
granted in part and denied in part.

On August 13, 2001, Handspring and two of
its officers were named as defendants in a purported securities
class action lawsuit filed in United States District Court for
the Southern District of New York. On September 6, 2001, a
substantially identical suit was filed. These cases have been
consolidated with hundreds of other so called
laddering cases brought on similar grounds in the
United States District Court for the Southern District of New
York. The complaints against Handspring assert that the
prospectus for the Companys June 20, 2000 initial
public offering failed to disclose certain alleged actions by
the underwriters for the offering. The complaints against
Handspring allege claims against Handspring and two of its
officers under Sections 11 and 15 of the Securities Act of
1933, as amended, and under Section 10(b) and
Section 20(a) of the Securities Exchange Act of 1934, as
amended. The complaints against Handspring also name as
defendants the underwriters for the Handsprings initial
public offering. Handspring has sought indemnification from its
underwriters pursuant to the Underwriting Agreement dated as of
June 20, 2000 with the underwriters in connection with the
Companys initial public offering. On October 9, 2002,
the Handspring officers named as defendants were dismissed
without prejudice from these cases by court order. On
July 9, 2003, a committee of Handsprings Board of
Directors conditionally approved a proposed partial settlement
with the plaintiffs in this matter. The settlement would
provide, among other things, a release of Handsprings and its
officers, and Handsprings agreement to assign to the
plaintiffs certain potential claims Handspring may

73



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


have against its underwriters. Any direct
financial impact of the proposed settlement is expected to be
borne by Handsprings insurers.

On November 6, 2002, MLR, LLC filed an
amended complaint in the United States District Court for the
Northern District of Illinois in a patent lawsuit that had been
pending against other defendants, adding additional defendants,
including Handspring. As to Handspring, the complaint alleges
infringement of one U.S. patent. On February 5, 2003,
the Company filed an answer denying infringement, and asserting
counterclaims for declaratory judgments that the Company does
not infringe the patents in suit and that the patents in suit
are invalid. On January 24, 2003, the Company filed a
related lawsuit in the United States District Court for the
Northern District of California, seeking declaratory judgments
that the MLR patents are invalid and not infringed by
Handspring, and that MLR, by seeking to coerce businesses to buy
unwanted and unneeded patent licenses, is engaged in conduct in
violation of California Business & Professions Code
section 17200. This second case was stayed pending a ruling
on MLRs motion before the Joint Panel on Multidistrict
Litigation to consolidate various cases relating to the patent
in question. On July 15, 2003, Handspring and MLR entered
into an agreement whereby in exchange for a one time payment
from Handspring, MLR agreed to grant Handspring a royalty-free,
fully paid-up irrevocable license under the patent in dispute as
well as MLRs other issued and pending patents worldwide.
The amount of this settlement is included in the Companys
consolidated financial statements as of June 28, 2003. In
conjunction with that agreement, the litigation between the two
companies was dismissed with prejudice. Settlement of this
matter did not have a material effect on our financial position
or results of operations.

On February 28, 2003, Credit Suisse First
Boston Corporation and approximately 50 of its clients,
including Handspring, were named as defendants in a securities
class action lawsuit filed in United States District Court for
the Southern District of Florida. The complaint also names as
defendants numerous officers of CSFB and its clients including
one current and one former Handspring officer. The complaint
asserts wrongdoing relating to various initial public offerings
in which Credit Suisse First Boston was involved between 1999
and 2001. Among other things, the complaint alleges that
Handspring and/or its named current and former officers,
violated Section 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and under Section 15 of the
Securities Act of 1933, as amended. On July 16, 2003,
Handspring, its current and former officer, and numerous other
defendants were dismissed from the case due to the
plaintiffs failure to effectuate service of process.

On June 17, 2003 and June 19, 2003,
purported class action lawsuits were filed in Delaware Chancery
Court, New Castle County, on behalf of the Companys
stockholders against Handspring, Palm, and a number of
individuals alleged to be directors of Handspring. Both actions
contain substantially identical allegations that the individual
defendants breached their fiduciary duties to the Company and
its stockholders in connection with the proposed merger of the
Company and Palm that was publicly announced on June 4,
2003, and that Palm aided and abetted these breaches of
fiduciary duty. On June 23, 2003, an amended complaint was
filed in one the two lawsuits. This amended complaint did not
change the substantive allegations, but omitted as individual
defendants persons who were not directors of the Company. The
complaints seek to enjoin the proposed merger, to rescind the
merger if it is not enjoined, to recover unspecified
compensatory damages, and award unspecified attorneys fees
and costs. There is no date fixed for the defendants to respond
either to the complaints or to plaintiffs written
discovery requests. Plaintiffs have not filed a motion for
preliminary injunction, and there is no trial date.

74



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


14.     Selected
Quarterly Financial Data (Unaudited)

The following table presents unaudited quarterly
financial information for each of the quarters of the fiscal
years ended June 28, 2003 and June 29, 2002. The
Company believes this information reflects a fair presentation
of such interim information in accordance with generally
accepted accounting principles and the rules and regulations of
the Securities and Exchange Commission. The results of any
quarter are not necessarily indicative of the operating results
for any future period. Selected unaudited quarterly results were
as follows:

|                                     |  |                                       |         |           |  |          |         |           |  |          |         |           |  |          |         |           |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------ |  | ------------------------------------- | ------- | --------- |  | -------- | ------- | --------- |  | -------- | ------- | --------- |  | -------- | ------- | --------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                     |  |                                      
|                                     |  | Three Months Ended                   
|                                     |  |                                      
|                                     |  | June 28,                              |         | March 29, |  | Dec. 28, |         | Sept. 28, |  | June 29, |         | March 30, |  | Dec. 29, |         | Sept. 29,
|                                     |  | 2003                                  |         | 2003      |  | 2002     |         | 2002      |  | 2002     |         | 2002      |  | 2001     |         | 2001     
|                                     |  |                                       |         |           |  |          |         |           |  |          |         |           |  |          |         |          
|                                     |  |                                      
|                                     |  | (In thousands, except per share data)
|Revenue                              |  | $                                     | 14,463  |           |  | $        | 30,848  |           |  | $        | 47,807  |           |  | $        | 54,138  |           |  | $ | 49,010  |   |  | $ | 59,715  |   |  | $ | 70,512  |   |  | $ | 61,414  |  
|Gross profit                         |  |                                       | 3,076   |           |  |          | 5,370   |           |  |          | 12,777  |           |  |          | 12,801  |           |  |   | 11,548  |   |  |   | 4,892   |   |  |   | 11,225  |   |  |   | 4,483   |  
|Net loss                             |  |                                       | (13,048 | )         |  |          | (90,434 | )         |  |          | (12,262 | )         |  |          | (15,314 | )         |  |   | (15,393 | ) |  |   | (23,660 | ) |  |   | (19,828 | ) |  |   | (32,708 | )
|Basic and diluted net loss per share |  |                                       | (0.09   | )         |  |          | (0.62   | )         |  |          | (0.08   | )         |  |          | (0.11   | )         |  |   | (0.11   | ) |  |   | (0.18   | ) |  |   | (0.16   | ) |  |   | (0.28   | )

75



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                 
| | ----------------
| | HANDSPRING, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ DONNA L. DUBINSKY

| |                        
| | -----------------------
| |                        
| | Donna L. Dubinsky      
| | Chief Executive Officer

Date: August 26, 2003

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated:

|                                                |  |                                                |  |                 |  | 
|----------------------------------------------- |  | ---------------------------------------------- |  | --------------- |  | 
|                                                |  |                                                |  |                
|Signature                                       |  | Title                                          |  | Date           
|                                                |  |                                                |  |                
|Principal Executive Officer:                    |  |                                                |  |                
|/s/ DONNA L. DUBINSKYDonna L. Dubinsky          |  | Chief Executive Officer
    and a Director     |  | August 26, 2003
|                                               
|Principal Financial and Accounting
    Officer: |  |                                                |  |                
|                                               
|/s/ WILLIAM R. SLAKEYWilliam R. Slakey          |  | Vice President and
    Chief Financial Officer |  | August 26, 2003
|                                               
|Additional Directors:                           |  |                                                |  |                
|                                               
|/s/ BRUCE W. DUNLEVIEBruce W. Dunlevie          |  | Director                                       |  | August 26, 2003
|                                               
|/s/ L. JOHN DOERRL. John Doerr                  |  | Director                                       |  | August 26, 2003
|                                               
|/s/ JEFFREY C. HAWKINSJeffrey C. Hawkins        |  | Director                                       |  | August 26, 2003
|                                               
|/s/ WILLIAM E. KENNARDWilliam E. Kennard        |  | Director                                       |  | August 26, 2003
|                                               
|/s/ MITCHELL E. KERTZMANMitchell E. Kertzman    |  | Director                                       |  | August 26, 2003

76



---



##### Table of Contents






EXHIBIT INDEX

|        |    |     |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | --- |  | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |              
|Number  |    |     |  | Exhibit Title
|        |    |     |  |              
|        | 2  | .1  |  |              |  | Agreement and Plan of Reorganization by and among
    the Registrant, Palm, Inc., Peace Separation Corporation and
    Harmony Acquisition Corporation, dated as of June 4, 2003(7)                                                                                                                                                                                                                                                                                                                              
|        | 2  | .2  |  |              |  | Form of Voting Agreement by and between Palm,
    Inc. and each of certain individual stockholders of the
    Registrant, dated as of June 4, 2003(7)                                                                                                                                                                                                                                                                                                                                                            
|        | 3  | .1  |  |              |  | Second Amended and Restated Certificate of
    Incorporation (incorporated herein by reference to exhibit 3.3
    to our Registration Statement on Form S-1 (File
    No. 333-33666) which became effective on June 20, 2000
    (the Form S-1))                                                                                                                                                                                                                                                                 
|        | 3  | .2  |  |              |  | Restated Bylaws (incorporated by reference to
    Exhibit 3.5 to the Form S-1)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 3  | .3  |  |              |  | Certificate of Designations specifying the terms
    of the Series A Junior Participating Preferred Stock of the
    Registrant, as filed with the Secretary of State of the State of
    Delaware on June 11, 2003 (incorporated by reference to
    Exhibit 3.2 of the Form 8-A)                                                                                                                                                                                                                               
|        | 4  | .1  |  |              |  | Specimen Common Stock Certificate(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 4  | .2  |  |              |  | Amended and Restated Investors Rights
    Agreement, dated July 7, 1999(1)                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 4  | .3  |  |              |  | Rights Agreement dated June 5, 2003 between
    the Registrant and EquiServe Trust Company, N.A., as Rights
    Agent, which includes as Exhibit A the Form of Certificate
    of Designations of Series A Junior Participating Preferred
    Stock, as Exhibit B the Summary of Stock Purchase Rights
    and as Exhibit C the Form of Right Certificate
    (incorporated by reference to Exhibit 4.1 to our
    Registration Statement on Form 8-A (File
    No. 000-30719) filed June 11, 2003 (the Form 8-A)
|        | 10 | .1  |  |              |  | Form of Indemnity Agreement entered into between
    Registrant and all executive officers and directors(1)                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .2  |  |              |  | 1998 Equity Incentive Plan*(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .3  |  |              |  | 1999 Executive Equity Incentive Plan*(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .4  |  |              |  | Form of 2000 Equity Incentive Plan*(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .5  |  |              |  | Form of 2000 Employee Stock Purchase Plan*(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .6  |  |              |  | Single Tenant Absolute Net Lease between
    Registrant and Chan-Paul Partnership, dated June 22, 1999(1)                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .7  |  |              |  | Software License Agreement between Palm
    Computing, Inc. and Registrant, dated April 10,
    2001(2)                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .8  |  |              |  | Standard Manufacturing Agreement between
    Registrant and Solectron (de Mexico), dated June 11,
    2002(4)                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .9  |  |              |  | Offer Letter of Employment between Registrant and
    William Slakey, dated July 26, 2002*(4)                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .10 |  |              |  | Founders Restricted Stock Purchase
    Agreement between Registrant and Donna Dubinsky, dated
    August 21, 1998*(1)                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .11 |  |              |  | Founders Restricted Stock Purchase
    Agreement between Registrant and Jeff Hawkins, dated
    August 20, 1998*(1)                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .12 |  |              |  | Offer Letter of Employment between Registrant and
    Bernard Whitney, dated May 31, 1999*(1)                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .13 |  |              |  | Stock Option Agreement between Registrant and
    Edward Colligan, dated October 12, 1998*(1)                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .14 |  |              |  | Lease between Registrant and Spieker Properties,
    L.P., dated April 24, 2000(1)                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .15 |  |              |  | Form of Outside Director Stock Option
    Agreement*(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .16 |  |              |  | Master Purchase Agreement For Subscriber
    Equipment between Registrant and Sprint Spectrum L.P., dated
    March 14, 2002(5)                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .17 |  |              |  | Master Purchase Agreement between Registrant and
    Wavecom Inc., dated June 12, 2001(4)                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .18 |  |              |  | Amendment 1 to Master Purchase Agreement between
    Registrant and Wavecom Inc., dated January 22, 2002(4)                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .19 |  |              |  | Master Purchase Agreement between Registrant and
    AirPrime, Inc., dated September 10, 2002(5)                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .20 |  |              |  | Lease Agreement (Building 2) between
    Registrant and M-F Downtown Sunnyvale, LLC, dated as of February
    14, 2001(3)                                                                                                                                                                                                                                                                                                                                                                                       



---



##### Table of Contents



|        |    |     |  |               |  |                                                                                                                                                                                                                                                                                         
|------- | -- | --- |  | ------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |              
|Number  |    |     |  | Exhibit Title
|        |    |     |  |              
|        | 10 | .21 |  |              |  | Lease Agreement (Building 3) between
    Registrant and M-F Downtown Sunnyvale, LLC, dated as of February
    14, 2001(3)                                                                                                                                                              
|        | 10 | .22 |  |              |  | Standby Letter Of Credit (Building 2,
    Security Deposit) between Registrant And Wells Fargo Bank,
    National Association(3)                                                                                                                                                        
|        | 10 | .23 |  |              |  | Standby Letter of Credit (Building 2, Tenant
    Improvements) between Registrant and Wells Fargo Bank, National
    Association(3)                                                                                                                                                     
|        | 10 | .24 |  |              |  | Standby Letter of Credit (Building 3,
    Security Deposit) between Registrant and Wells Fargo Bank,
    National Association(3)                                                                                                                                                        
|        | 10 | .25 |  |              |  | Standby Letter of Credit (Building 3, Tenant
    Improvements) between Registrant and Wells Fargo Bank, National
    Association(3)                                                                                                                                                     
|        | 10 | .26 |  |              |  | Form of Addendum to Standby Letter of Credit
    between Registrant and Wells Fargo Bank, National Association(3)                                                                                                                                                                       
|        | 10 | .27 |  |              |  | Securities Account Control Agreement among
    Registrant, Wells Fargo Bank, National Association, acting
    through its Investment Group and Wells Fargo Bank, National
    Association, acting through its Peninsula Technology RCBO
    Office, dated as of February 16, 2001(3)    
|        | 10 | .28 |  |              |  | Security Agreement between Registrant and Wells
    Fargo Bank, National Association, dated as of February 16,
    2001(3)                                                                                                                                                              
|        | 10 | .29 |  |              |  | Addendum to Security Agreement between Registrant
    and Wells Fargo Bank, National Association, dated as of
    February 16, 2001(3)                                                                                                                                                  
|        | 10 | .30 |  |              |  | Amendment to Lease Agreement (Building 2)
    between Registrant and M-F Downtown Sunnyvale, LLC, dated as of
    July 12, 2002(4)                                                                                                                                                      
|        | 10 | .31 |  |              |  | Amendment to Lease Agreement (Building 3)
    between Registrant and M-F Downtown Sunnyvale, LLC, dated as of
    July 12, 2002(4)                                                                                                                                                      
|        | 10 | .32 |  |              |  | Limited Liability Company Agreement of Handspring
    Facility Company, LLC, dated as of January 15, 2003(6)                                                                                                                                                                            
|        | 10 | .33 |  |              |  | Property Purchase and Lease Modification
    Agreement between Registrant and M-F Downtown Sunnyvale, LLC,
    dated as of January 16, 2003(6)                                                                                                                                          
|        | 10 | .34 |  |              |  | Amended and Restated Lease Agreement
    (Building 3) between Registrant and M-F Downtown Sunnyvale,
    LLC, dated as of January 29, 2003(6)                                                                                                                                           
|        | 10 | .35 |  |              |  | Guaranty by and between Registrant and M-F
    Downtown Sunnyvale, LLC, dated as of January 29, 2003(6)                                                                                                                                                                                 
|        | 10 | .36 |  |              |  | Promissory Note between Registrant and Handspring
    Facility Company, LLC, dated as of January 29, 2003(6)                                                                                                                                                                            
|        | 10 | .37 |  |              |  | Warrant to Purchase Common Stock
    (1,000,000 shares) between Registrant and M-F Downtown
    Sunnyvale, LLC, dated as of January 29, 2003(6)                                                                                                                                         
|        | 10 | .38 |  |              |  | Warrant to Purchase Common Stock
    (9,000,000 shares) between Registrant and M-F Downtown
    Sunnyvale, LLC, dated as of January 29, 2003(6)                                                                                                                                         
|        | 10 | .39 |  |              |  | Warrant to Purchase Common Stock
    (150,000 shares) between Registrant and EOP-Industrial
    Portfolio, L.L.C., dated as of March 15, 2003 (incorporated
    by reference to Exhibit 4.9 to our Registration Statement
    on Form S-3 (File No. 333-106136) filed June 13,
    2003)
|        | 10 | .40 |  |              |  | Loan Agreement by and between the Registrant and
    Palm, Inc., dated as of June 4, 2003 (7)                                                                                                                                                                                           
|        | 21 | .1  |  |              |  | List of Subsidiaries of Registrant                                                                                                                                                                                                                                                      
|        | 23 | .1  |  |              |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                   
|        | 31 | .1  |  |              |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                               
|        | 31 | .2  |  |              |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                               
|        | 32 | .1  |  |              |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                               
|        | 32 | .2  |  |              |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                               



---



##### Table of Contents





---



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| | * | Management contracts or compensatory plans
    required to be filed as an exhibit to Form 10-K.



| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment has been granted with
    respect to certain information contained in this document.
    Confidential portions have been omitted from this public filing
    and have been filed separately with the Securities and Exchange
    Commission.



| |    |                                                                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment has been requested for
    certain portions of this document pursuant to an application for
    confidential treatment sent to the Securities and Exchange
    Commission. Such portions are omitted from this filing and are
    filed separately with the Securities and Exchange Commission.



|    |                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the exhibit with the
    same number to our Registration Statement on Form S-1 (File
    No. 333-33666), which became effective on June 20,
    2000.
|   
|(2) | Incorporated by reference to the exhibit with the
    same number to our Report on Form 10-K, filed on
    September 28, 2001.                                                    
|   
|(3) | Incorporated by reference to the exhibit with the
    same number to our Report on Form 10-Q, filed on
    May 4, 2001.                                                           
|   
|(4) | Incorporated by reference to the exhibit with the
    same number to our Report on Form 10-K, filed on
    September 27, 2002.                                                    
|   
|(5) | Incorporated by reference to the exhibit with the
    same number to our Report on Form 10-Q, filed on
    November 12, 2002.                                                     
|   
|(6) | Incorporated by reference to the exhibit with the
    same number to our Current Report on Form 8-K, filed on
    January 31, 2003.                                               
|   
|(7) | Incorporated by reference to the exhibit with the
    same number to our Current Report on Form 8-K, filed on
    June 11, 2003.