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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended June 30,
2001

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


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.     
þ

The aggregate market value of voting stock held
by non-affiliates of the Registrant was approximately
$111,600,000 as of August 31, 2001, based upon the closing
price on the Nasdaq National Market reported for such date. The
Registrant has not issued any non-voting stock.

The Registrants definitive Proxy Statement
for the Annual Meting of Stockholders to be held on
November 14, 2001 is incorporated by reference in
Part III of this Form 10-K to the extent stated herein.



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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 Registrant                                      
|              | Item 11.Executive Compensation                                                              
|              | Item 12.Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13.Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|              |                                                                                              | REPORT OF INDEPENDENT ACCOUNTANTS                                     
|              |                                                                                              | CONSOLIDATED BALANCE SHEETS                                           
|              |                                                                                              | CONSOLIDATED STATEMENTS OF OPERATIONS                                 
|              |                                                                                              | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
|              |                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS                                 
|              |                                                                                              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 10.7 
|EXHIBIT 21.1 
|EXHIBIT 23.2 



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HANDSPRING, INC.

2001 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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|Item  1.   |  | Business                                                                               |    |      | 2  | 
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|Item  2.   |  | Properties                                                                             |    |      | 9  | 
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|Item  3.   |  | Legal Proceedings                                                                      |    |      | 9  | 
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|Item  4.   |  | Submission of Matters to a Vote of Security
	Holders                                   |    |      | 10 | 
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|Item  5.   |  | Market for Registrants Common Equity and
	Related Shareholder Matters                 |    |      | 10 | 
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|Item  6.   |  | Selected Financial Data                                                                |    |      | 11 | 
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|Item  7.   |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |    |      | 12 | 
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|Item  7A.  |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |    |      | 27 | 
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|Item  8.   |  | Financial Statements and Supplementary Data                                            |    |      | 27 | 
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|Item  9.   |  | Changes in and Disagreements With Accountants on
	Accounting and Financial Disclosure  |    |      | 27 | 
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|PART III  
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|Item  10.  |  | Directors and Executive Officers of the Registrant                                     |    |      | 27 | 
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|Item  11.  |  | Executive Compensation                                                                 |    |      | 28 | 
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|Item  12.  |  | Security Ownership of Certain Beneficial Owners
	and Management                        |    |      | 28 | 
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|Item  13.  |  | Certain Relationships and Related Transactions                                         |    |      | 28 | 
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|PART IV   
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|Item  14.  |  | Exhibits, Financial Statements, Financial
	Statement Schedule and Reports on Form 8-K  |    |      | 28 | 
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|SIGNATURES |  |                                                                                        | 53 |     

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PART I




Item 1.     Business

We may make statements in this annual report,
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 and
Section 21E of the Exchange Act. We may identify these
statements by the use of words such as believe,
expect, anticipate, intend,
plan, and similar expressions. These forward-looking
statements involve 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.

Overview

We are a leading provider of handheld computers.
Our first major product, the Visor Deluxe, shipped in October
1999 and since that time we have shipped over two million units
worldwide. Today we offer a full product family of Visor
handheld computers for a broad range of markets and consumers.

The Visor handheld computer is an electronic
organizer that is enhanced by an open expansion slot, which we
refer to as our Springboard platform, which provides a simple
and easy method for adding hardware and software applications.
Today, there are over 60 Springboard modules commercially
available including: communication applications, such as a
mobile telephone and a 802.11b wireless modem; productivity
tools, such as expanded memory and powerful financial and
graphing calculators; consumer applications, such as a MP3
player, a digital camera and a global positioning system
receiver; and content, such as books and games.

Looking forward, we believe that the future of
handheld computing will be focused on integrated wireless
devices offering voice, data and email together with personal
information management. We refer to these devices as wireless
communicators.

To date, we have offered three types of wireless
communication solutions. First, we brought to market VisorPhone,
a compact Springboard module that combines GSM voice and data
capabilities with the benefits of handheld computing. Second,
through our acquisition of BlueLark Systems, we have made
available to end users and licensed to other companies the
Blazer Web browser that enables handheld computers to quickly
access a wide range of Web sites, not just those designed for
mobile content. Third, we have collaborated with third-party
developers to introduce a broad array of wireless communication
Springboard modules that offer email, Internet, instant
messaging and voice capabilities.

We believe that continued product innovation will
be the key to our success in the emerging wireless communicator
market. The challenge will be to combine software, hardware and
communications functionality in compelling products that both
meet the needs of wireless carriers and offer a superior
experience to end user customers.

Products and Services

Handheld Organizers.We sell a family of Visor
handheld, expandable computers. We have introduced Visor
handheld computers in English, French, Italian, German, Spanish
and Japanese. The Visor series uses the Palm OS operating
system that we license from Palm, which allows the Visors to run
built-in organizer applications, including an address book, date
book, to-do list, memo pad, calculator and expense system. We
also have internally developed a number of proprietary software
features for the Visor such as an enhanced date book, an
advanced calculator and a world clock. In our more recent
models, we offer a fast lookup and silent alarm feature.

Our Visor handheld computers are expandable
through our proprietary Springboard expansion platform, which
allows users to quickly and easily add hardware and software
applications through a Springboard

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module to customize the functions of their Visor.
There are currently over 60 Springboard modules available
that extend the Visors capabilities into such areas as
communications, productivity, memory and storage, multimedia,
travel and leisure, games and sports, and eBooks.


Our Visors are compatible with thousands of
software applications developed for the Palm OS operating
system. These applications can be installed through the docking
cradle, over the Internet or through infrared transmission from
another device.

Each Visor includes a stylus writing utensil,
Palms Graffiti text input software, an infrared
transceiver and a backlit display. The Visors docking
cradle, together with bundled HotSync desktop synchronization
software, allows customers to easily and quickly synchronize, or
exchange, data between the Visor and their Microsoft Windows or
Macintosh computer. A microphone is included in each Visor,
allowing customers to use communications modules.

Our Visor handheld computers are available in the
following six different models ranging in price from $169 to
$399:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Visor Pro:Introduced in September 2001, Visor
	Pro is an expandable handheld computer with 16MB of memory and a
	33MHz processor, the fastest Palm OS processor currently
	available. Visor Pro has a rechargeable lithium ion battery that
	charges in the cradle that accompanies the product. The product
	has a backlit monochrome display and silver casing. The product
	is designed to provide memory capacity and high performance for
	business professionals and other users of memory and processor
	intensive applications.                                                                                                                                                                                                     
|
| | Visor Neo:Introduced in September 2001, Visor Neo is our new entry-level,
	expandable handheld computer with 8MB of memory and a
	33MHz processor. Visor Neo requires two AAA alkaline
	batteries. The product has a backlit monochrome display and
	comes in a choice of three colors: smoke, red and blue. Visor
	Neo is designed for students, young professionals and first-time
	handheld owners.                                                                                                                                                                                                                                                                                                                                      
|
| | Visor Edge:Introduced in March 2001, Visor Edge
	is an extremely thin, expandable handheld computer in a sleek,
	lightweight metal casing. It has 8MB of memory, a 33MHz
	processor and a rechargeable lithium ion battery. The product
	has a backlit monochrome display and comes in a choice of three
	metallic colors: silver, red and blue. The product also features
	a detachable Springboard slot that slides onto the back of the
	product. The detachable slot gives users the option of using the
	Springboard expansion platform as needed while offering the
	benefits of a slim design when modules are not in use. Visor
	Edge appeals to customers who desire both performance and a
	stylish design in a handheld computer.
|
| | Visor Prism:Introduced in October 2000, Visor
	Prism is our first product with a color display. It features a
	16-bit active matrix color display that can show over 65,000
	colors. Like all Visors, Visor Prism offers expansion capability
	through the Springboard expansion slot. Visor Prism has 8MB of
	memory, a 33MHz processor and a rechargeable lithium ion
	battery. Visor Prism is well suited for users who want to take
	advantage of applications and Springboard modules that operate
	best with a high quality color display such as digital cameras,
	global positioning systems, Internet browsers and game software.                                                                                                  
|
| | Visor Platinum:Introduced in October 2000, Visor
	Platinum is an expandable handheld computer with 8MB of memory
	and a 33MHz processor. Visor Platinum has a backlit monochrome
	display and requires two AAA alkaline batteries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Visor Deluxe:Introduced in October 1999, Visor
	Deluxe is our best selling product to date. Visor Deluxe
	includes 8MB of memory, a 16MHz processor, and a backlit
	monochrome display and is available in five colors: ice, green,
	blue, orange and graphite.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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Springboard Modules.The Springboard platform consists
of an expansion slot for our Visor handheld computers that
provides an easy and elegant way to add hardware and software
applications. The Springboard expansion slot offers plug
and play operation with the following features:



| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the open face design of the slot
	provides an intuitive and robust mechanism for effortless
	insertion and removal of modules;                                                                                     
|
| |  | the software required to run a module is
	contained within the module itself and can install and run
	automatically, relieving the user from the burden of installing
	special software in order to use a module; and
|
| |  | in most module designs, the software is
	automatically uninstalled when the module is removed, which
	reduces the opportunity for conflict with other software and
	frees up memory for other purposes.              

We provide developers with open access to
underlying technical information regarding our products and the
Springboard platform, including a royalty free online license to
our Handspring Development Kit. As of August 31, 2001, more
than 11,000 developers have registered with Handspring to
receive technical and marketing information.

Today there are over 60 Springboard modules
available that extend the Visors capabilities into such
areas as communications, productivity, memory and storage,
multimedia, travel and leisure, games and sports, and eBooks. A
sampling of these modules is set forth below:

|                                               |  |                                                                                                                |  |                               
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ------------------------------
|Product Name                                   |  | Description                                                                                                    |  | Developer                     
|                                               |  |                                                                                                                |  |                               
|COMMUNICATIONS                                 |  |                                                                                                                |  |                               
|VisorPhone                                     |  | GSM based mobile telephone                                                                                     |  | Handspring                    
|Sprint PCS Wireless Web Digital Link or SB3000 |  | CDMA based mobile telephone                                                                                    |  | Sprint/AirPrime               
|SpringPort Wireless Ethernet Module            |  | Wireless module for connecting to corporate
	networks using the 802.11b standard                               |  | Xircom (an Intel company)     
|Wristband Thinmodem Plus                       |  | Modem with email and Web browsing applications                                                                 |  | Card Access                   
|OmniSky Minstrel Wireless Modem                |  | Enables wireless access to email, corporate
	networks and the Web via the Cellular Digital Packet Data network |  | OmniSky/ Novatel              
|Portsmith Ethernet Cradle                      |  | Ethernet Cradle that connects a Visor to an
	enterprises internal network                                     |  | Portsmith                     
|                                              
|                                              
|                                              
|                                              
|PRODUCTIVITY                                   |  |                                                                                                                |  |                               
|Presenter-to-Go                                |  | Connects a Visor to a digital projector to make
	high-resolution color presentations                           |  | Margi Systems                 
|PowerOne Finance and Graph                     |  | Financial and graphing calculators                                                                             |  | Infinity Softworks            
|DbNow Deluxe                                   |  | Database manager                                                                                               |  | PocketExpress                 
|                                              
|                                              
|                                              
|                                              
|MEMORY AND STORAGE                             |  |                                                                                                                |  |                               
|16MB Step-Up Flash Memory Module               |  | Extra memory to allow storage of upwards of 400
	standard Palm OS applications                                 |  | PalmGear                      
|MemPlug SM                                     |  | Allows Visor user to add standard memory cards                                                                 |  | Portable Innovation Technology
|Flash Plus                                     |  | Allows Visor users to utilize Compact Flash cards
	to store and retrieve databases and applications            |  | InnoPocket                    

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|                                  |        |                                              |               |                                  |              
|--------------------------------- | ------ | -------------------------------------------- | ------------- | -------------------------------- | -------------
|Product Name                      |        | Description                                  |               | Developer                       
|                                  |        |                                              |               |                                 
|MULTIMEDIA                        |        |                                              |               |                                 
|eyemodule2 Digital Camera         |        | VGA resolution color digital camera          |               | Handspring/ Ideo                
|MiniJam MP3 Player                |        | MP3 player and voice recorder                |               | Innogear                        
|My-Vox Digital Voice Recorder     |        | Voice recorder                               |               | Shinei                          
|                                 
|                                 
|                                 
|                                 
|TRAVEL AND LEISURE                |        |                                              |               |                                 
|SkyGolf GPS                       |        | Navigation device optimized for golf courses |               | SkyHawke                        
|Step Keeper                       |        | Pedometer                                    |               | Hagiwara Sys-Com                
|Lonely Planet CitySync USA Travel |        |                                              |               |                                 
|                                  | Guides |                                              | Travel guides |                                  | Lonely Planet
|                                 
|                                 
|                                 
|                                 
|GAMES, SPORTS AND EBOOKS          |        |                                              |               |                                 
|Audible Advisor                   |        | Audible.com content player                   |               | Card Access                     
|PDR 2001                          |        | Medical reference guide                      |               | Franklin Electronics Publishers
|Tiger Woods PGA Golf Tour         |        | Golf game                                    |               | Electronic Arts                 

VisorPhone.VisorPhone is a compact
Springboard module that combines GSM voice and data capabilities
with the benefits of handheld computing and brings two mobile
products together into one. VisorPhones integrated
software takes advantage of the easy-to-use Visor interface to
make functions such as conference calling, caller ID,
programming, speed-dialing numbers, detailed call history and
standard dialing functions fast and intuitive. The simple user
interface of the VisorPhone also allows people to utilize the
advanced capabilities of the GSM network.

While the primary function of VisorPhone is
making and receiving phone calls, it is also designed to be used
for data functions, such as short message service (SMS) which
allows users to create text messages, and as a modem for any
connected Palm OS application, including browsers,
email and instant messaging clients. We have optimized
VisorPhone for data communications by adding a suite of wireless
applications to the VisorPhone package, including our Blazer Web
browser, Yahoo! Messenger, JP Mobile One-Touch Mail and Electric
Pockets BugMe! Messenger.

While VisorPhone sales have been modest, we have
learned a great deal from this product. In particular, the
development and introduction of VisorPhone has increased our
technical expertise in the areas of radio frequency design and
shielding, speaker quality, data transmission over voice
networks and user interface requirements. In addition, our sales
and marketing efforts related to VisorPhone have helped us build
relationships with wireless carriers and to better understand
their specific product and end user customer needs. Our
experience with VisorPhone will facilitate our efforts to
develop and sell wireless communicators in the future.

Blazer.Blazer is a Palm OS Web browser
that enables handheld computers to quickly access a wide range
of Web sites, not just those designed for mobile content. Blazer
is built on our BlueSky proxy technology, which optimizes
Internet content for viewing regardless of origin. For example,
Blazer can optimize and display content that utilizes the HTML,
WAP (WML/HDML), or cHTML (iMode) standards. Blazer also offers
built-in content streaming and progressive rendering that allows
the user to immediately begin viewing content while the rest of
the requested site is downloaded.

The Blazer browser enhances the functionality of
any Palm OS-based handheld computer equipped with a wireline or
wireless modem. With such a solution, our Blazer QuickStart
page, powered by MSN Mobile, provides users with one-touch
access to news, stock quotes, driving directions, weather and
other Web content. Search capability provided by Google enables
Blazer users to conduct fast, accurate Web searches. Blazer also
incorporates encryption technology from Certicom to support
access to secure Web sites.

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Blazer is bundled with VisorPhone and also is
available for download for $19.95 through our software
distribution partners Handango and PalmGear. We also have
licensed Blazer to OmniSky, Sprint and Xircom, an Intel company.
OmniSky offers a wireless email and Internet service for a
variety of Palm OS and Pocket PC handheld computers
and uses Blazer to enhance its wireless Internet browsing
experience. Sprint plans to offer Blazer as part of its wireless
telecommunication service that enables its customers to access
and navigate the Internet. Xircom distributes Blazer along with
its SpringPort 802.11b Springboard module.

Accessories.We offer a full line of
accessories for our products. For example, we sell a selection
of cases, a variety of stylus packs, a snap-on joystick for
handheld game applications and a line of clothing and travel
bags displaying the Handspring name and logo. In addition, third
parties offer accessories for our products, such as the GoType!
keyboard from Landware and the Stowaway portable keyboard from
Targus.

Sales and Marketing

We sell our products through distribution, retail
and online partners in the United States, Asia-Pacific, Canada,
the Middle East and Europe and through our own Web site at
handspring.com. Our largest retailers are Best Buy, Staples and
Wynit (which distributes to CompUSA), which accounted for 14%,
13% and 10%, respectively, of total worldwide revenue during
fiscal 2001.

Handspring.com is a major site for buying our
products on the Internet. The site also includes links to
various third-party module vendors and to Web stores run by
PalmGear and Widget where our customers can purchase Springboard
expansion modules and Visor accessories. We have provided
customers the ability to register for ongoing communications
with us via an e-newsletter and we enable customers to register
their product purchases on our Web site.

Going forward, we will need to develop strong
relationships with wireless carriers in both the United States
and other countries if we are to successfully introduce our
wireless communicator products. To date, we have worked closely
with VoiceStream Wireless and Cingular Wireless in connection
with VisorPhone, as well as with Sprint, which has licensed our
Blazer browser.

Our sales and marketing efforts have been
primarily focused on the broad consumer market consisting of
individuals who purchase handheld computers for their personal
or business use. As our products are designed to provide our
customers with simple, intuitive solutions for their computing,
communication, information and entertainment needs, we believe
we have been successful in selling our products to customers
beyond technology enthusiasts and business professionals.

We also have begun to serve the emerging
enterprise and education markets. We have appointed Ingram Micro
to focus on the enterprise market and they now distribute our
products through more than 600 enterprise-focused resellers. We
also have completed a number of direct enterprise sales where
specific Springboard modules, such as the SpringPort 802.11b
wireless module, have differentiated our Visor line and offered
the enterprise a complete solution. In the education market, we
have appointed D&H Distributing to promote our Visor line on
college campuses.

We believe that there is an opportunity to expand
our market presence through bundling arrangements and private
label partnerships. For example, Franklin Covey is now bundling
Visor handhelds as part of their time management solution.
Similarly, both Dell Computer and Apple Computer have included
Visor handheld computers with certain of their personal computer
offerings.

We believe that building brand awareness is
important to our success. We have used a variety of marketing
programs to build awareness of our products through mass-media
advertising, targeted advertising, end user promotions, public
relations campaigns, strategic promotional efforts and in-store
retail merchandising.

Customer Service and Support

We provide telephone-based customer support and
technical support to our customers through outsource partners
and through our Web site. Our retail and reseller partners
provide first-line customer and technical

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support to their customers. We provide escalation
service and support and technical training for our outsource
providers and reseller partners. We generally sell our products
with a one-year limited warranty and offer a supplemental
extended warranty program.


We currently outsource our repair services to
Jabil. Jabil receives products at its Louisville, Kentucky
facility from customers who need repair, provides replacement or
repaired units to such customers and refurbishes devices for
ongoing service repair stock.

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 improving our existing
products as well as 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. In order to
achieve our objective of being an innovative leader for handheld
computing and wireless communications, we have parallel
development teams working on multiple projects.

We have a formal product release process in which
products must pass established quality benchmarks and
manufacturing guidelines before they are released into
production. We use a quality assurance process that provides
feedback to our manufacturing and engineering organizations, as
well as our outsource manufacturing and materials partners,
allowing them to take corrective actions if defects are reported
after a product has been released into production.

We expect to continue to invest in developing new
products, particularly in the area of wireless communicators.
Our research and development expenditures totaled
$23.6 million in fiscal 2001, $10.3 million in fiscal
2000 and $2.7 million during the period from July 29,
1998 (date of inception) to June 30, 1999. As of
August 31, 2001, we had 93 people engaged in research
and development activities.

Manufacturers and Suppliers

All of our Visor handheld computers are currently
manufactured on a purchase order basis either by Flextronics at
its facilities in Malaysia or by Solectron at its facilities in
Mexico. Flextronics and Solectron procure components and
manufacture, assemble and test our products. VisorPhone was
built in partnership with Option International of Leuven,
Belgium. By outsourcing the manufacturing process, we are able
to focus on our core competencies, including product development
and design, minimize capital expenditures, rely on third parties
with more manufacturing expertise than ourselves and avoid the
need to find and maintain facilities for manufacturing
operations.

The components that make up our products are
purchased from various vendors, including key suppliers such as
Motorola, which supplies microprocessors, and Acura Tech Ltd.,
which supplies connector systems. 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. Power supply
integrated circuits, microprocessors and some discrete
components are examples of key components that are obtained from
a sole or single source.

We and our partners follow a formal manufacturing
quality process that includes qualification of material supplier
sources, product-specific process definition and qualification,
measurement of key manufacturing processes and test metrics, a
closed-loop corrective action process and an outgoing sampling
audit of finished product. In addition, we conduct periodic
on-site audits of our manufacturing partners and key component
suppliers.

7



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End-user direct customers place orders on our Web
site or over the telephone. Retail sales orders are placed in
our internal order processing system. All orders for handheld
computers are transmitted to our fulfillment agent, Modus Media
International. VisorPhone orders are transmitted to BrightPoint
North America. Both of these fulfillment agents complete the
pack-out process by assembling a finished goods box consisting
of the applicable product, software and other assorted materials.

Competition

The market for handheld computer products and
wireless communicators is highly competitive, and we expect
competition to increase in the future. Some 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 handheld computers and wireless
communicators are design, performance, expandability, price and
brand. Factors that we believe will become increasingly
important include wireless connectivity, email and instant
messaging capabilities and voice integration. 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 keyboard-based devices, sub-notebook
computers, smart phones and two-way pagers. Our principal
competitors include:



| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | Palm, from whom we license the Palm OS operating
	system;                                                               
|
| |  | licensees of the Microsofts PocketPC
	operating system for handheld devices such as Casio, Compaq and
	Hewlett-Packard;
|
| |  | licensees of Symbian EPOCH operating system for
	wireless communication devices such as Panasonic and Siemens;          
|
| |  | other Palm OS operating system licensees,
	including Acer, Handera, Sony and Symbol;                                    
|
| |  | smart phone manufacturers such as Ericsson,
	Kyocera, Motorola, Nokia and Samsung;                                      
|
| |  | Research In Motion Limited, a leading provider of
	wireless email, instant messaging and Internet connectivity; and     
|
| |  | a variety of 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
sales and market acceptance of our products, cause intense price
competition resulting in reduced gross margins and loss of
market share. 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 upon 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 Palm. We also license conduit software
from Chapura, Inc. which allows for synchronization with
Microsoft

8



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Outlook, encryption technology from Certicom for
our Blazer browser and CDMA technology from QUALCOMM for
wireless solutions. Our Palm OS operating system license
requires the payment of royalties and maintenance and support
fees to Palm. The license agreement extends until April 2009 and
is non-exclusive.


Employees

As of August 31, 2001, we had a total of 425
employees, of which 93 were in research and development, 50 were
in manufacturing services, 153 were in marketing and sales, 47
were in customer relations and operations and 82 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 86,400 square feet. The lease terms
extend to August 2004 and June 2008. We also have approximately
28,900 square feet of additional office space in Mountain View
subject to a lease that extends to May 2003. However, due to the
reduction in our workforce in the first quarter of fiscal 2002,
we are now seeking to sublease this space. In addition, we
currently lease office space in Singapore, Japan, the United
Kingdom, the Netherlands, Switzerland, France and Italy.

In February 2001, we entered into two operating
lease agreements for our new corporate headquarters, consisting
of approximately 340,000 square feet, to be constructed in
Sunnyvale, California. Both leases have initial terms of twelve
years with options to renew for an additional six years, subject
to certain conditions. The two buildings are expected to be
ready for occupancy in the second quarter of fiscal 2003.

We believe our current office space is adequate
to meet current requirements and suitable additional or
substitute space will be available as needed to accommodate any
further physical expansion of corporate operations.




Item 3.     Legal Proceedings

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 19, 2001, DataQuill Limited filed
suit against Handspring and Kyocera Wireless Corp. in the United
States District Court for the Northern District of Illinois. The
complaint alleges infringement of one U.S. Patent. 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 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 13, 2001, Handspring and two of
our 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. The complaints 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
allege claims against Handspring and two of our 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
also name as defendants the underwriters for Handsprings
initial public offering. We have sought indemnification from our
underwriters pursuant to the Underwriting Agreement dated as of
June 20, 2000 with our underwriters in connection with our
initial public offering. Neither Handspring nor our officers
have responded to the complaints.

9



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##### Table of Contents






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
since June 21, 2000, the date our common stock commenced
trading:

|                 |  |      |       |     |  |   |       | 
|---------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal Year 2001 |  | High |       | Low
|                 |  |      |       |    
|Fourth Quarter   |  | $    | 18.35 |     |  | $ | 4.60  | 
|                
|                
|                
|                
|Third Quarter    |  | $    | 50.38 |     |  | $ | 9.88  | 
|                
|                
|                
|                
|Second Quarter   |  | $    | 99.31 |     |  | $ | 30.25 | 
|                
|                
|                
|                
|First Quarter    |  | $    | 81.25 |     |  | $ | 24.75 | 

|                 |  |      |       |     |  |   |       | 
|---------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal Year 2000 |  | High |       | Low
|                 |  |      |       |    
|Fourth Quarter   |  | $    | 29.56 |     |  | $ | 22.38 | 

On August 31, 2001, there were
341 stockholders of record and over 35,000 beneficial
holders.

We currently intend to retain any earnings for
use in our business and do not anticipate paying any cash
dividends in the foreseeable future.

Use of Proceeds from Sales of Registered
Securities.Our Registration
Statement on Form S-1 (File No. 333-33666) related to
our initial public offering was declared effective by the SEC on
June 20, 2000. A total of 11,500,000 shares of our common
stock were registered with the SEC with an aggregate registered
offering price of $230 million, all of which shares were
registered on our behalf. The offering commenced on
June 20, 2000, and all shares of common stock being offered
were sold for the aggregate registered offering price through a
syndicate of underwriters managed by Credit Suisse First Boston
Corporation; Merrill Lynch, Pierce, Fenner & Smith
Incorporated; Donaldson, Lufkin & Jenrette Securities
Corporation; and U.S. Bancorp Piper Jaffray Inc.

We paid to the underwriters underwriting
discounts and commissions totaling $15.5 million in
connection with the offering. In addition, we incurred
additional expenses of $1.6 million in connection with the
offering, which when added to the underwriting discounts and
commissions paid by us amounts to total expenses of
$17.1 million. Thus the net offering proceeds to us (after
deducting underwriting discounts and commissions and offering
expenses) were approximately $212.9 million. No offering
expenses were made directly or indirectly to any of our
directors or officers (or their associates), or persons owning
ten percent (10%) or more of any class of our equity securities
or to any other affiliates.

We have used and expect to continue to use, the
net proceeds for general working capital. Funds not used for
general working capital are invested in available-for-sale,
interest-bearing, investment-grade securities.

10



---



##### 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 30, 2001 and
July 1, 2000, for the period from July 29, 1998 (date
of inception) to June 30, 1999, and the selected
consolidated balance sheet data at June 30, 2001 and
July 1, 2000, are derived from our audited consolidated
financial statements that have been included elsewhere in this
annual report. The consolidated balance sheet data as of June
30, 1999 are derived from our audited balance sheet not included
herein.

|                                                                 |                                                              |                                       |          |              |         |                     |         |        |         |   |        |       |       | 
|---------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------- | -------- | ------------ | ------- | ------------------- | ------- | ------ | ------- | - | ------ | ----- | ----- | 
|                                                                 |                                                              |                                       |          |              |         | Period From        
|                                                                 |                                                              |                                       |          |              |         | July 29, 1998      
|                                                                 |                                                              | Year Ended                            |          | Year Ended   |         | (date of inception)
|                                                                 |                                                              | June 30, 2001                         |          | July 1, 2000 |         | to June 30, 1999   
|                                                                 |                                                              |                                       |          |              |         |                    
|                                                                 |                                                              |                                      
|                                                                 |                                                              | (In thousands, except per share data)
|                                                                
|                                                                
|                                                                
|                                                                
|Consolidated Statements of Operations
	Data:                     |                                                              |                                       |          |              |         |                     |         |        |         |   |        |      
|                                                                
|                                                                
|                                                                
|                                                                
|Revenue                                                          |                                                              | $                                     | 370,943  |              |         | $                   | 101,937 |        |         | $ |       |      
|                                                                 |                                                              |                                       |          |              |         |                     |         |        |         |   |        |      
|Costs and operating expenses:                                    |                                                              |                                       |          |              |         |                     |         |        |         |   |        |      
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Costs of revenue                                             |                                       |          | 292,311      |         |                     |         | 69,921 |         |   |        |      |      
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Research and development                                     |                                       |          | 23,603       |         |                     |         | 10,281 |         |   |        | 2,738 |      
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Selling, general and administrative                          |                                       |          | 145,132      |         |                     |         | 42,424 |         |   |        | 2,451 |      
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | In-process research and development                          |                                       |          | 12,225       |         |                     |         |       |         |   |        |      |      
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Amortization of deferred stock compensation and
	intangibles |                                       |          | 32,830       |         |                     |         | 40,077 |         |   |        | 3,646 |      
|                                                                 |                                                              |                                       |          |              |         |                     |         |        |         |   |        |      
|                                                                 |                                                              | Total costs and operating expenses    |          |              | 506,101 |                     |         |        | 162,703 |   |        |       | 8,835 | 
|                                                                 |                                                              |                                       |          |              |         |                     |         |        |         |   |        |      
|Loss from operations                                             |                                                              |                                       | (135,158 | )            |         |                     | (60,766 | )      |         |   | (8,835 | )    
|                                                                
|                                                                
|                                                                
|                                                                
|Interest and other income, net                                   |                                                              |                                       | 12,195   |              |         |                     | 675     |        |         |   | 446    |      
|                                                                 |                                                              |                                       |          |              |         |                     |         |        |         |   |        |      
|Loss before taxes                                                |                                                              |                                       | (122,963 | )            |         |                     | (60,091 | )      |         |   | (8,389 | )    
|                                                                
|                                                                
|                                                                
|                                                                
|Income tax provision                                             |                                                              |                                       | 3,000    |              |         |                     | 200     |        |         |   |       |      
|                                                                 |                                                              |                                       |          |              |         |                     |         |        |         |   |        |      
|Net loss                                                         |                                                              | $                                     | (125,963 | )            |         | $                   | (60,291 | )      |         | $ | (8,389 | )    
|                                                                 |                                                              |                                       |          |              |         |                     |         |        |         |   |        |      
|Basic and diluted net loss per share                             |                                                              | $                                     | (1.21    | )            |         | $                   | (1.77   | )      |         | $ | (0.71  | )    
|                                                                 |                                                              |                                       |          |              |         |                     |         |        |         |   |        |      
|Shares used in calculating basic and diluted net
	loss per share |                                                              |                                       | 103,896  |              |         |                     | 34,015  |        |         |   | 11,772 |      
|                                                                 |                                                              |                                       |          |              |         |                     |         |        |         |   |        |      

|                                              |  |                |         |              |  |               |         |  |  |   |        |  
|--------------------------------------------- |  | -------------- | ------- | ------------ |  | ------------- | ------- |  |  | - | ------ | -
|                                              |  | June 30, 2001  |         | July 1, 2000 |  | June 30, 1999
|                                              |  |                |         |              |  |              
|                                              |  |               
|                                              |  | (In thousands)
|                                             
|                                             
|                                             
|                                             
|Consolidated Balance Sheet Data:              |  |                |         |              |  |               |         |  |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Cash, cash equivalents and investments        |  | $              | 201,760 |              |  | $             | 199,212 |  |  | $ | 13,917 |  
|                                             
|                                             
|                                             
|                                             
|Working capital                               |  |                | 48,670  |              |  |               | 182,662 |  |  |   | 13,108 |  
|                                             
|                                             
|                                             
|                                             
|Total assets                                  |  |                | 253,235 |              |  |               | 230,472 |  |  |   | 15,631 |  
|                                             
|                                             
|                                             
|                                             
|Long-term liabilities, net of current portion |  |                |        |              |  |               | 57      |  |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Redeemable convertible preferred stock        |  |                |        |              |  |               |        |  |  |   | 17,972 |  
|                                             
|                                             
|                                             
|                                             
|Total stockholders equity (deficit)          |  |                | 145,202 |              |  |               | 194,229 |  |  |   | (3,616 | )

11



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

Overview

We were incorporated in July 1998 to develop
innovative handheld computers. Our goal is to become a global
market leader in the handheld computing market which includes
the emerging market for integrated wireless devices offering
voice, data, email and personal information management
capabilities.

Shipments of our first Visor products began in
October 1999 for orders received through our Web site. Today we
sell our Visor line of handhelds through select distributors,
retailers and e-commerce partners in the United States, Canada,
Europe, Asia Pacific, Japan and the Middle East and through our
Web site.

Revenue is comprised almost entirely of sales of
our handheld computer devices, modules and related accessories.
Retail sales orders are placed in our internal order processing
system. Product orders placed by end user customers are received
via our Web site or over the telephone via our third-party
customer support partner. All orders are then transmitted to our
logistics partners. We take title at the point of transfer from
the logistics partner to the common carrier. Title generally
then transfers once the carrier has received the products. We
recognize revenue when a purchase order has been received, the
product has been shipped, the sales price is fixed or
determinable and collection of the resulting receivable is
probable. No significant post-delivery obligations exist with
respect to revenue recognized. Provisions are made at the time
the related revenue is recognized for estimated product returns
and warranty.

As is typical for other companies in our
industry, we have experienced seasonality in the sales of our
products with strong demand occurring in our second fiscal
quarter due in part to increased consumer spending on electronic
devices during the holiday season. Although we did not
experience a sequentially down quarter after the second quarter
holiday season of fiscal 2001, there is no guarantee that this
will be the case next year. In addition, we expect that demand
for our products may sometimes decline during the summer months
because of typical decreased consumer spending patterns during
this period. These seasonal variations in our sales may lead to
fluctuations in our quarterly operating results.

Significant accomplishments during fiscal 2001
included the following:



| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We introduced four major products: Visor
	Platinum, Visor Prism, VisorPhone and Visor Edge.                                                                                
|
| |  | We continued to expand our distribution channels
	by adding new retailers, distributors and e-commerce partners.                                                           
|
| |  | We launched our products in new markets,
	including Australia, Canada, France, Italy, Korea, the Middle
	East, New Zealand and Spain.                                      
|
| |  | We achieved revenue growth of 264% over the prior
	fiscal year, representing our first full year of product
	shipments versus nine months of shipping in the previous year.
|
| |  | We saw strong developer support for our
	Springboard expansion platform with over 60 Springboard
	modules shipping.                                                        
|
| |  | We acquired BlueLark Systems, the creators of the
	Blazer browser, which added to our wireless communications
	capabilities.                                               

Fiscal 2001 also was a challenging year. In our
fourth fiscal quarter, we saw contraction in the handheld market
due to the economic slowdown, excess inventory, aggressive price
reductions and increased competition from both PocketPC and
Palm OS handheld manufacturers. As a result, our revenues
fell by 51% in our fourth fiscal quarter compared to our third
fiscal quarter and our gross margins declined substantially. In
response to these events, we took $26.8 million in charges
for excess and obsolete inventory in the fourth quarter,
decreased our level of spending in all areas other than product
development, and reduced our workforce by 9% in the first
quarter of fiscal 2002.

We believe that the future of handheld computing
will be integrated wireless devices and recognize that continued
innovation in this area is critical to our future success. We
plan to continue to invest heavily in the

12



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##### Table of Contents



development of wireless products. These products
will offer integrated voice, data, email and personal
information management capabilities for both the consumer and
enterprise markets.


Results of Operations

Revenue.Fiscal 2001 revenue totaled
$370.9 million, a 264% increase from fiscal 2000 revenue of
$101.9 million. There was no revenue recorded during the
period from July 29, 1998 (date of inception) to
June 30, 1999 when Handspring was developing but not
selling products. The increase in revenue between both periods
was primarily due to the following factors:



| |   |                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We began shipping products during the second
	quarter of fiscal 2000. Therefore, on a comparative basis, there
	were no product shipments during the period from July 29,
	1998 (date of inception) to June 30, 1999, a partial year
	of product shipments during fiscal 2000 and a full year of
	product shipments during fiscal 2001.                                             
|
| |  | We expanded our distribution channels. Our first
	product shipments were only for orders received through our Web
	site. Toward the end of the third quarter of fiscal 2000 we
	began selling our products through select retailers. During the
	following five quarters we added additional retailers,
	distributors and e-commerce partners throughout the United
	States.        
|
| |  | We entered a number of international markets.
	During the fourth quarter of fiscal 2000 and throughout fiscal
	2001, we launched our products in Asia Pacific, Canada, Europe,
	Japan and the Middle East. As a result of this global expansion,
	revenue outside North America represented 19.5% of revenue
	during fiscal 2001 as compared to 3.9% of revenue during fiscal
	2000.
|
| |  | We added several new products to our Visor family
	of handheld computers during fiscal 2001, including Visor Prism,
	Visor Platinum and Visor Edge all with higher average selling
	prices than our initial Visor and Visor Deluxe products that
	first shipped in fiscal 2000.                                                                                                     

Cost of revenue.Cost of revenue consists primarily
of materials, labor, royalty expenses, warranty expenses and
shipping and handling. Cost of revenue was $292.3 million
during fiscal 2001 and $69.9 million during fiscal 2000.
There was no cost of revenue recorded during the period from
July 29, 1998 (date of inception) to June 30, 1999, as
no products were shipped during this period. Cost of revenue,
excluding amortization of deferred stock compensation, resulted
in a gross margin which declined from 31.4% in fiscal 2000 to
21.2% in fiscal 2001. This decline was primarily attributable to
three factors. First, we incurred a $26.8 million charge in
the fourth fiscal quarter for excess and obsolete inventory and
changes in our product development plans. Second, we took
pricing and product promotion actions in order to increase
demand and reduce inventory. Third, retail sales made up a
larger percentage of fiscal 2001 revenue, which generated lower
gross margins, as compared to the prior fiscal year where we
experienced a higher percentage of direct sales through our Web
site, which typically generate higher gross margins. These
factors that adversely affected gross margin were partially
offset by our introduction of new products with higher average
sales prices and higher gross margins during fiscal 2001. Gross
margin may be adversely affected by new product introductions by
our competitors, competitor pricing actions and higher inventory
balances. We also expect our gross margin to fluctuate in the
future due to channel mix, geographic mix, new product
introductions and seasonal effects.

Research and development.Research and development expenses
consist principally of salaries and related personnel expenses
for engineering personnel, consultant fees and the cost of
materials and software used in product development. Research and
development expenses were $23.6 million, $10.3 million
and $2.7 million during fiscal 2001, fiscal 2000 and during
the period from July 29, 1998 (date of inception) to
June 30, 1999, respectively. These increases in absolute
dollars were primarily associated with the hiring of personnel
and related expenses required to develop new products. We
believe that continued investment in research and development is
critical to our plans to develop wireless communication products
and we expect these expenses to increase in both absolute
dollars and as a percent of revenue in fiscal 2002.

Selling, general and administrative.Selling, general and
administrative expenses consist primarily of promotional and
advertising costs, salaries and related expenses, customer and
technical support, accounting and administrative expenses, costs
for legal and professional services and general corporate
expenses. Selling,

13



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general and administrative expenses were
$145.1 million, $42.4 million and $2.5 million
during fiscal 2001, fiscal 2000 and during the period from
July 29, 1998 (date of inception) to June 30, 1999,
respectively. These increases in absolute dollars reflect the
additional costs and expenses relating to the overall expansion
in our level of operations required to support our revenue
growth, including increased sales and marketing activities for
our initial products that first shipped in the second quarter of
fiscal 2000 and for four new products introduced in fiscal 2001,
expenses related to our efforts to increase recognition of our
brand name and expenses related to putting in place the
infrastructure required for a rapidly growing public company. As
a result of our cost reduction efforts, we expect that selling,
general and administrative expenses will be lower in fiscal 2002
compared to fiscal 2001 both in absolute dollars and as a
percent of revenue.


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
mobile handheld devices, including PDAs, smartphones and
large-screen pagers. 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 during fiscal 2001 for projects that
had not reached technological feasibility and had no alternative
future use. An independent valuation was performed to assist us
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.

Amortization of deferred stock compensation
and intangibles.We recognized
$32.8 million, $40.1 million and $3.6 million of
amortization of deferred stock compensation and intangibles
during fiscal 2001, fiscal 2000 and during the period from
July 29, 1998 (date of inception) to June 30, 1999,
respectively. This amount is primarily related to the 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.

As part of the acquisition of BlueLark Systems,
we also recorded goodwill and other intangible assets of
$612,000. The goodwill and intangibles are being amortized on a
straight-line basis over three years.

Future amortization of deferred stock
compensation and intangibles is estimated to be
$20.2 million, $8.2 million and $1.3 million for
the fiscal years ending 2002, 2003 and 2004, respectively.
However, the amortization of deferred stock compensation and
intangibles may be higher than these expected amounts if we
acquire additional companies or technologies.

Interest and other income, net.Interest and other income, net
consists primarily of interest income. Interest and other
income, net was $12.2 million, $675,000 and $446,000 during
fiscal 2001, fiscal 2000 and during the period from
July 29, 1998 (date of inception) to June 30, 1999,
respectively. These increases were a

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result of increased interest income from higher
average cash and cash equivalents, short-term investments and
long-term investments balances primarily resulting from our
financing activities, including $10.0 million received from
the sale of Series B preferred stock in July 1999,
$184.9 million of net proceeds received from our initial
public offering on June 20, 2000, and $28.0 million of
net proceeds received in July 2000, when our underwriters
exercised their over-allotment option.


Also, included within interest and other income,
net during fiscal 2000 and during the period from July 29,
1998 (date of inception) to June 30, 1999 is the
amortization of costs associated with a subordinated debt
facility agreement that we entered into in June 1999. These
costs relate to the inclusion of a right granted to our lender
to purchase 198,965 shares of Series A preferred
stock. The total cost was amortized over the 12-month term of
the agreement.

Income Tax Provision.The provision for income taxes was
$3.0 million during fiscal 2001 and $200,000 during fiscal
2000. There was no provision for income taxes during the period
from July 29, 1998 (date of inception) to June 30,
1999. The provision for income taxes consists of foreign taxes
that were provided for when we generated our first international
revenues during the fourth quarter of fiscal 2000. No provision
for federal and state income taxes was recorded because we have
experienced significant net losses, which have resulted in
deferred tax assets. In light of our recent history of operating
losses, we provided a full valuation allowance for all deferred
tax assets as 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

Prior to our initial public offering on
June 20, 2000, we funded our operations primarily from the
sale of preferred stock, through which we raised net proceeds of
$28.0 million. Net proceeds from the initial public
offering and the exercise of the underwriters
over-allotment option were $184.9 million and
$28.0 million, respectively. As of June 30, 2001, we
had $121.5 million in cash and cash equivalents and
short-term investment compared with $196.5 million at
July 1, 2000. The decrease was mainly attributable to a
long-term investment made in connection with the operating lease
for our new corporate headquarters, offset in part by the net
proceeds received from the underwriters exercise of their
over-allotment option.

Net cash used in operating activities was
$16.9 million, $3.4 million and $3.9 million
during fiscal 2001, fiscal 2000 and during the period from
July 19, 1998 (date of inception) to June 30, 1999,
respectively. Net cash used in operating activities was
primarily attributable to our net losses offset significantly by
the non-cash charge for amortization of deferred stock
compensation and intangibles. During fiscal 2001, our net losses
were also offset by the charges for the write-off of excess and
obsolete inventories as well as in-process research and
development associated with our acquisition of BlueLark Systems.
During fiscal 2001, the increase in prepaid expenses and other
current assets and inventories contributed to the net cash used
in operating activities. These increases were primarily a result
of the prepayment of foreign taxes, prepayments made to our
suppliers for inventory that they hold on our behalf and
purchases of long lead-time, Handspring specific, product
components. During fiscal 2000, the increase in accounts
receivable contributed to the uses of cash in operating
activities, reflecting the commencement of product sales. There
was a decrease in accounts receivable during fiscal 2001 due to
reduced revenue during the last quarter of the fiscal year. A
significant offset to the cash used in operations for all
periods presented was the increase in current liabilities due to
a general increase in the level of operations.

In February 2001, we entered into two operating
lease agreements for our new corporate headquarters, consisting
of approximately 340,000 square feet, to be constructed in
Sunnyvale, California. Both leases have initial terms of twelve
years with options to renew for an additional six years, subject
to certain conditions. Rent obligations of $1.7 million per
month are expected to commence during the second quarter of
fiscal 2003, with annual increases determined in part by the
Consumer Price Index. In conjunction with these lease
transactions, we pledged a portion of our investment securities
as collateral for specified obligations of the lessor under the
leases. A total of $54.2 million was pledged as of
June 30, 2001. Of this amount $54.0 million has been
classified as a long-term investment in the accompanying
consolidated balance sheets at June 30, 2001, with the
remainder classified as a short-term investment based on the
scheduled expiration dates of the

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related leases. The pledged assets for the new
leases will be reduced upon completion of our build-out
obligation for the new corporate headquarters. In addition, the
pledged assets may be further reduced if certain financial
criteria are met.


Net cash used for investing activities was
$123.6 million, $6.0 million and $7.1 million
during fiscal 2001, fiscal 2000 and during the period from
July 29, 1998 (date of inception) to June 30, 1999,
respectively. The uses of cash primarily consisted of purchases
of property and equipment, available-for-sale securities and
purchases of investments for collateral on our operating leases,
partially offset by proceeds received from maturities or sales
of available-for-sale securities.

Net cash provided by financing activities was
$31.0 million, $198.4 million and $18.5 million
during fiscal 2001, fiscal 2000 and during the period from
July 29, 1998 (date of inception) to June 30, 1999,
respectively. The $31.0 million provided by financing
activities 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. During fiscal 2000, the
most significant component of cash provided by financing
activities was $184.9 million received from our initial
public offering, as well as $10.0 million of net proceeds
that we received from the issuance of Series B preferred
stock earlier in the year. In addition, we received
$1.5 million when our subordinated debt lender exercised
its option to purchase 198,965 shares of Series A preferred
stock at $7.539 per share. The net cash provided by financing
activities during the period from July 19, 1998 (date of
inception) to June 30, 1999 was primarily attributable to
$18.0 million received from the issuance of Series A
preferred stock. In addition, we received proceeds of
$3.1 million, $2.0 million and $519,000 from the
issuance of common stock during fiscal 2001, fiscal 2000 and
during the period from July 29, 1998 (date of inception) to
June 30, 1999, respectively.

Our future capital requirements will depend upon
many factors, including whether our revenues meet our plans, the
timing of research and product development efforts and expansion
of our marketing efforts. We believe that our cash and cash
equivalents will be sufficient to meet our working capital needs
for at least the next 12 months. To the extent that we grow
more rapidly than expected in the future or if cash generated
from operations is insufficient to satisfy our liquidity
requirements, we may need additional cash to finance our
operating and investing needs. However, depending on market
conditions, any additional financing we need may not be
available on terms acceptable to us, or at all. We intend to
invest the cash in excess of current operating requirements in
interest-bearing, investment-grade securities with maturities no
greater than two years.

Recently Issued Accounting
Pronouncements

In June 2001, the FASB issued SFAS No. 141,
Business Combinationsand SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 141 eliminates
the pooling-of-interest method of accounting for business
combinations as well as providing guidance for accounting under
the purchase method. This statement is effective for all
transactions initiated after June 30, 2001. SFAS
No. 142 establishes accounting standards for recording
goodwill. It prohibits the periodic recording of amortization
expense on goodwill and requires new methods of reviewing all
intangible assets for impairments. SFAS No. 142 is
effective for all fiscal years beginning after December 15,
2001, and accordingly, we will adopt this standard at the
beginning of fiscal 2003. The adoption is not expected to have a
material impact on our financial position and results of
operations.

Factors Affecting Future Results



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Fluctuations in our quarterly revenues and
	operating results might lead to reduced prices for our
	stock.

Given our lack of operating history, you should
not rely on quarter-to-quarter comparisons of our results of
operations as an indication of our future performance. In some
future periods, our results of operations could be below the
expectations of investors and public market analysts. In this
event, the price of our

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common stock would likely decline. Factors that
are likely to cause our results to fluctuate include the
following:




| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | uncertain economic conditions and declining
	consumer confidence;                                                                          
|
| |  | increased competition from new devices such as
	those from Compaq, Palm and Sony;                                                          
|
| |  | further price reductions by Palm or other
	competitors on their older devices that could cause reduced
	sales of Handspring Visor products;
|
| |  | the timely introduction of new products by us and
	our competitors;                                                                        
|
| |  | market acceptance of existing and future versions
	of our products;                                                                        
|
| |  | the seasonality of our product sales;                                                                                                      
|
| |  | our success in developing and marketing products
	for the wireless voice and data markets;                                                 
|
| |  | the price of products that both we and our
	competitors offer;                                                                             
|
| |  | fluctuations in manufacturing costs we pay to
	produce our handheld computers; and                                                         
|
| |  | the mix of products that we offer.                                                                                                         



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | A general decline in economic conditions
	could lead to reduced demand for our products.

The current downturn in general economic
conditions has led to reduced demand for a variety of goods and
services, including many technology products. If conditions
continue to decline, or fail to improve, we could see a
significant additional decrease in the overall demand for our
products that could harm our operating results. The risk that
economic conditions will not improve in the near term has been
compounded by the terrorist attack on the World Trade Center and
the Pentagon that occurred in September 2001.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | We have a history of losses, we expect
	losses to continue and we might not achieve or maintain
	profitability.

Our accumulated deficit as of June 30, 2001
was approximately $194.6 million. We had net losses of
approximately $126.0 million during fiscal 2001,
$60.3 million during fiscal 2000 and $8.4 million
during the period from July 29, 1998 (date of inception) to
June 30, 1999. We also expect to continue to incur
substantial non-cash costs relating to the amortization of
deferred compensation and intangibles , which will contribute to
our net losses. As of June 30, 2001, we had a total of
$30.0 million of deferred compensation and intangibles to
be amortized. Even if we ultimately do achieve profitability, we
may not be able to sustain or increase profitability on a
quarterly or annual basis. If our revenue grows more slowly than
we anticipate, or if our operating expenses exceed our
expectations and cannot be adjusted accordingly, our business
will be harmed.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend heavily upon our license from
	Palm and its focus on its licensing business. Our failure to
	maintain this license or a change in Palms business focus
	could seriously harm our business.

Our license of the Palm OS operating system is
critical to our Visor handheld computers. If the license is not
maintained or if Palm changes its business focus, it could
seriously harm our business. This could happen several ways.
First, we could breach the license agreement in which case Palm
would be entitled to terminate the license. Second, if Palm were
to be acquired, the new licensor may not be as strategically
aligned with us as Palm. Third, Palm has announced that it is
separating its software business into a new division, which may
be spun off as a separate entity. It is unclear how that
restructuring will affect us. Moreover, we are dependent upon
Palm to continuously upgrade the Palm OS to operate on
faster processors and otherwise remain competitive with other
handheld operating systems.

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

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operating system. In addition, there are
limitations on our ability to assign the Palm license agreement
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 competitors of
Palm from acquiring us.


While we are not required to exclusively license
the Palm OS operating system, to license a substitute operating
system could be less desirable and could be costly in terms of
cash and other resources. We may also develop our own operating
system, which would take considerable time, resources and
expense.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | The development of new products and
	services is lengthy and costly and requires high levels of
	innovation.

If we fail to anticipate our end users
needs and technological trends accurately or are otherwise
unable to complete the development of products and services in a
timely fashion, we will be unable to introduce new products and
services into the market, which will affect our ability to
successfully compete. We cannot guarantee that we will be able
to introduce new products on a timely or cost-effective basis or
that customer demand will meet our expectations.



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our efforts to reduce our expenses
	following contraction in the handheld computer market that we
	experienced in the fourth quarter of fiscal year 2001 may not be
	successful.

In the fourth quarter of fiscal year 2001, we saw
contraction in the handheld market that caused our revenue to
decline by 51% from our third fiscal quarter and our gross
margins to decline substantially. Following this quarter, we
implemented a cost reduction program to lower overall costs and
expenses. Cost reduction measures included decreasing our work
force by approximately 45 employees, canceling certain projects,
reducing marketing activities, changing our business model in
some international markets and altering our technical support
and repair strategies.

In the event that we are not able to achieve the
planned expense reductions, our operating results and ability to
operate the business could be adversely impacted. It is possible
that a worsening economy, new competitive developments, or
changes in our business may require additional cost reduction
activities in the future that in turn may affect our operations
and limit our future product development opportunities.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business could be harmed by lawsuits
	that have been filed or may in the future be filed against Palm
	involving the Palm OS operating system.

Suits against Palm involving the Palm OS
operating system, which we license from Palm, could adversely
affect us. Palm is a defendant in several intellectual property
lawsuits involving the Palm OS operating system. Although we are
not a party to these cases and we are indemnified by Palm for
damages arising from lawsuits of this type, 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.



| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are highly dependent on retailers and
	distributors to sell our products and disruptions in these
	channels and other effects of selling through retailers and
	distributors would harm our ability to sell our handheld
	computers.

We sell our products through retailers and
distributors as well as online through our handspring.com Web
site and e-commerce partners. We began using retailers in March
2000 to resell our products in their stores in the United
States. Currently, our three largest retail partners are Best
Buy, Staples and Wynit (which distributes to CompUSA), which
accounted for 14%, 13% and 10%, respectively, of total worldwide
revenue during fiscal 2001. Since that time we have added
numerous additional retail and online partners within the United
States. We also have expanded into international markets and now
offer our products through distributors in Asia Pacific, Canada,
Japan, Europe and the Middle East. Disruptions to these channels
would adversely affect our ability to generate revenues from the
sale of our handheld devices.

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



| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if we reduce the prices of our products, as we
	did for the first time in the fourth quarter of fiscal year
	2001, we may have to compensate retailers and distributors for
	the difference between the higher price they paid to buy their
	inventory and the new lower prices;
|
| |  | product returns from retailers and distributors
	could increase as a result of our strategic interest in
	assisting retailers and distributors in maintaining appropriate
	inventory levels;                                                                                    
|
| |  | retailers and distributors may not maintain
	inventory levels sufficient to meet customer demand;                                                                                                                                                                               
|
| |  | retailers and distributors may emphasize our
	competitors products or decline to carry our products; and                                                                                                                                                                       
|
| |  | conflicts may develop between the retail and
	distribution channels and direct sales of our products through
	our handspring.com Web site and by our e-commerce partners.                                                                                                       

In addition, to the extent our revenues through
the retail and distribution channels increase as a percentage of
total revenue, our gross margin may decrease because sales
through retailers and distributors typically are made at lower
margins than sales through our Web site and by our e-commerce
partners. A higher percentage of sales by retailers and
distributors also could negatively impact our cash flow cycle.
This is due to the fact that we offer payment terms to retailers
and distributors, but our sales on the Web site are for cash.



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A portion of our revenue has been derived
	from sales on our Web site and system failures or delays have in
	the past and might in the future harm our
	business.

A portion of our revenue is generated through our
Web site. As a result, we must maintain our computer systems in
good operating order and protect them against damage from fire,
water, power loss, telecommunications failures, computer
viruses, vandalism and other malicious acts and similar
unexpected adverse events. Our servers currently are co-located
with Exodus Communications, which recently has filed for
Chapter 11 bankruptcy protection due to its financial
difficulties. Any disruption in the co-location services
provided by Exodus or its failure to handle current or higher
volumes of use could have a material adverse effect on our
business. Any blackouts due to the energy crisis in California
also could put our productivity at risk or cause delay in our
production timetables. Despite precautions we have taken and
improvements that we have made, unanticipated problems affecting
our systems have in the past and could in the future cause
temporary interruptions or delays in the services we provide.
Sustained or repeated system failures or delays would affect our
reputation, which would harm our business. While we carry
business interruption insurance, it might not be sufficient to
cover any serious or prolonged emergencies.



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

Our products contain components, including liquid
crystal displays, touch panels, connectors, memory chips and
microprocessors, that are procured from a variety of suppliers.
We rely on our suppliers to deliver necessary components to our
contract manufacturers in a timely manner based on forecasts
that we provide. At various times, some of the key components
for handheld computers 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.

In addition, some components, such as power
supply integrated circuits, microprocessors and certain discrete
components, come from sole or single source suppliers.
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, our ability to maintain timely and
cost-effective production of our products would be seriously
harmed.

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| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to keep up with rapid
	technological change and evolving industry standards, our
	products could become less competitive or
	obsolete.

The market for our products is characterized by
rapidly changing technology, evolving industry standards,
changes in customer needs, intense competition and frequent new
product introductions. If we fail to modify or improve our
products in response to changes in technology or industry
standards, 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;                                                                                                                     
|
| |  | enhance our current products and develop new
	products that meet changing customer needs;                                                                        
|
| |  | time new product introductions in a way that
	minimizes the impact of customers delaying purchases of existing
	products in anticipation of new product releases;
|
| |  | adjust the prices of our existing products to
	increase customer demand; and                                                                                     
|
| |  | influence and respond to emerging industry
	standards and other technological changes.                                                                           

We must respond to changing technology and
industry standards in a timely and cost-effective manner. We may
not be successful in effectively using new technologies,
developing new products or enhancing our existing products on a
timely basis. These new technologies or enhancements may not
achieve market acceptance. Our pursuit of necessary technology
may require substantial time and expense. We may need to license
new technologies to respond to technological change. These
licenses may not be available to us on terms that we can accept.
Finally, we may not succeed in adapting our products to new
technologies as they emerge.



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | If we are not successful in the development
	and introduction of new products, demand for our products could
	decrease.

We depend on our ability to develop new or
enhanced products that achieve rapid and broad market
acceptance. We may fail to identify new product opportunities
successfully and develop and bring to market new products in a
timely manner. In addition, our product innovations may not
achieve the market penetration or price stability necessary for
profitability. If we are unsuccessful at developing and
introducing new products that are appealing to customers, our
business and operating results would be negatively impacted.

As the use of handheld computers and wireless
communication devices continue to evolve, we plan to develop
products that compliment our existing ones and products and
services in new areas where we see technology trends moving. In
particular, our development efforts are now primarily focused on
wireless communicators as opposed to more traditional handheld
electronic organizers where we have more extensive experience.
If we fail to successfully develop and commercialize wireless
communicators, our business would be harmed.



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Our reputation could be harmed if the
	Springboard modules developed by third parties are
	defective.

Because we offer an open development environment,
third-party developers are free to design, market and sell
modules for our Springboard slot without our consent,
endorsement or certification. Nevertheless our reputation is
tied to the Springboard modules designed for our Visor handheld
computers. If modules sold by third parties are defective or are
of poor quality, our reputation could be harmed and the demand
for our Visor handheld computers and modules could decline.



| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 handheld computers.

The demand for our products depends on many
factors and is difficult to forecast, particularly given that we
have multiple products, increased competition and a difficult
economic environment. Significant unanticipated fluctuations in
demand could cause problems in our operations.

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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 incur cancellation charges or other
liabilities to our manufacturing partners 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.

We experienced significant excess capacity for
the first time in the fourth quarter of fiscal 2001 when the
slowing global economy, aggressive price reductions by Palm and
increased competition resulted in our sales falling
substantially below our forecasts. As a result, our inventory
balances and inventory commitments were higher than our
forecasted future sales causing us to take a charge of
$26.8 million for excess inventory and related costs.

If demand exceeds our expectations, we will need
to rapidly increase production at our third-party manufacturers.
Our suppliers will also need to provide additional volumes of
components, which may not be possible within our timeframes.
Even if our third-party manufacturers are able to obtain enough
components, they might not be able to produce enough of our
products as fast as we need them. The inability of either our
manufacturers 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 any of our manufacturing partners fail
	to produce quality products on time and in sufficient
	quantities, our reputation and results of operations would
	suffer.

We depend on third-party manufacturers to produce
sufficient volume of our handheld devices, modules and
accessories in a timely fashion and at satisfactory quality
levels. The cost, quality and availability of third-party
manufacturing operations are essential to the successful
production and sale of our products. We currently have
manufacturing agreements with Flextronics and Solectron under
which we order products on a purchase order basis in accordance
with a forecast. The absence of dedicated capacity under our
manufacturing agreements means that, with little or no notice,
our manufacturers 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. If they were to
stop manufacturing our devices, it could take from three to six
months to secure alternative manufacturing capacity and our
results of operations could be harmed. In addition, if our
manufacturers 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 third-party manufacturers exposes
us to risks outside our control, including the following:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | unexpected increases in manufacturing and repair
	costs;                                 
|
| |  | interruptions in shipments if one of our
	manufacturers is unable to complete production;
|
| |  | inability to control quality of finished products;                                       
|
| |  | inability to control delivery schedules;                                                 
|
| |  | unpredictability of manufacturing yields; and                                            
|
| |  | potential lack of adequate capacity to fill all
	or a part of the services we require.   



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on third parties for order
	fulfillment, repair services and technical support. Our
	reputation and results of operations could be harmed by our
	inability to control their operations.

We rely on third parties to package and ship
customer orders, repair units and provide technical support. If
our order fulfillment services, repair services or technical
support services are interrupted or experience quality problems,
our ability to meet customer demands would be harmed, causing a
loss of revenue and harm to our reputation. Although we have the
ability to add new service providers or replace existing ones,
transition

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difficulties and lead times involved in
developing additional or new third-party relationships could
cause interruptions in services and harm our business.




| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not accurately forecast the demand
	for our products, it could result in excess inventory being held
	by our logistics partners, which if not sold, would result in
	our repurchasing such inventory from our logistics
	partners.

Our logistics partners purchase product on our
behalf directly from the manufacturers based on our demand
forecast in order to maintain sufficient product to fulfill
customer orders. We are required to pay for all components or
finished good that have been in inventory at our logistics
providers for a specified period of time ranging from 120 to
180 days. We are also contingently liable for any inventory
purchased that is in excess of customer fulfillment
requirements. Our failure to accurately forecast demand could
result in our paying the logistics providers for such excess
inventory.



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The success of our wireless communicator
	products and related services that we develop in the future is
	dependent on our ability to evolve our business beyond
	traditional handheld computers and effectively market and sell
	such products and services in a new market.

As we expand our business beyond traditional
handheld computers to wireless communicator products and related
services, we are presented with many significant risks and
uncertainties, including our need to develop additional
marketing and engineering expertise and establish appropriate
relationships with wireless carriers on reasonable terms. Many
of the risks relating to wireless carriers are beyond our
control, such as the timing of the build-out of their networks
to include General Packet Radio Service (GPRS, also known as
2.5G), the coverage area of their voice and data service, the
quality and pricing of their end user service plans, and the
degree to which wireless carriers will facilitate the successful
introduction of our wireless products. Also, we face
uncertainties as we evolve our business to include licensing of
our Blazer Web browser, including our ability to support a much
larger user base. The success of our wireless communicator
products and services that we plan to develop in the future
would be impaired if we are not able to evolve our business to
effectively compete in this new market.



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | We face seasonality in our sales, which
	could cause our quarterly operating results to
	fluctuate.

Seasonal variations in our sales may lead to
fluctuations in our quarterly operating results. As is typical
for other companies in our industry, we have experienced
seasonality in the sales of our products with strong demand
occurring in our second fiscal quarter due in part to increased
consumer spending on electronic devices during the holiday
season. Although we did not experience a sequentially down
quarter after the second quarter holiday season of fiscal 2001,
there is no guarantee that this will be the case next year. In
addition, we expect that demand for our products may sometimes
decline during the summer months because of typical decreased
consumer spending patterns during this period. These seasonal
variations in our sales may lead to fluctuations in our
quarterly operating results.



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

We believe that continuing to strengthen our
brand will be critical to increasing demand for and achieving
widespread acceptance of our products. Some of our competitors
and potential competitors have better name recognition and
powerful brands. Promoting and positioning our brand will depend
largely on the success of our marketing efforts and our ability
to produce well received new products. However, currently we
have only limited marketing resources given our focus on
reducing our overall costs while increasing research and
development expenditures for new wireless communicator products.
Moreover, brand promotion activities may not yield increased
revenues or customer loyalty and, even if they do, any increased
revenues may not offset the expenses we incur in building and
maintaining our brand.

22



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| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 market for handheld computing and wireless
communication products is highly competitive and we expect
competition to increase in the future. Some 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.

Our products compete with a variety of handheld
devices, including keyboard-based devices, sub-notebook
computers, smart phones and two-way pagers. Our principal
competitors, and possible new competitors, include:



| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | Palm, from whom we license our operating system;                                                                        
|
| |  | licensees of the Microsofts PocketPC
	operating system for handheld devices such as Casio, Compaq and
	Hewlett-Packard;
|
| |  | licensees of Symbian EPOCH operating systems for
	wireless communication devices such as Panasonic and Siemens;         
|
| |  | other Palm OS operating system licensees,
	including Acer, Handera, Sony and Symbol;                                    
|
| |  | smart phone manufacturers such as Ericsson,
	Kyocera, Motorola, Nokia and Samsung;                                      
|
| |  | Research In Motion Limited, a leading provider of
	wireless email, instant messaging and Internet connectivity; and     
|
| |  | a variety of 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, cause intense
price competition and result in reduced gross margins and loss
of market share.

Our failure to compete successfully against
current or future competitors could seriously harm our business.
To be competitive, we must continue to invest significant
resources in research and development, 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.



| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 changing handheld computing and
communications 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. In the future, we may experience delays in
releasing new products 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 our products, damage to our reputation, lost
revenues, diverted development resources and increased customer
service and support costs and warranty claims. In addition, we
warrant that our hardware will be free of defects for one year
after the date of purchase. Delays, costs and damage to our
reputation due to product defects could harm our business.

23



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##### Table of Contents





| |                                                                    
| | -------------------------------------------------------------------
| | Our products also could be affected by
	viruses and security risks.

There have been reports of computer viruses and
security risks impacting handheld device operating systems and
wireless networks. It is possible that these viruses and
security risks may become more prevalent, particularly as
handheld computers and communication devices are more commonly
used for wireless applications that facilitate the sharing of
files and other information. Such viruses and security risks and
their attendant publicity, may adversely impact sales of our
products.



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | 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 Chief Operating
Officer. The loss of the services of any of our senior level
management, or other key employees, could harm our business.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | 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 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. Further, 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. In order
to help retain employees, we implemented a program pursuant to
which we will grant new options to existing employees on an
ongoing basis where the size of each grant will be determined
based on performance and grade level. If we fail to retain, hire
and integrate qualified employees and contractors, we will not
be able to maintain and expand our business.



| |                                                                        
| | -----------------------------------------------------------------------
| | 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 no 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 may be required to spend significant resources
to protect, monitor and police our intellectual property rights.
We may not be able to detect infringement and may lose
competitive position in the market before we do so. In addition,
competitors may design around our technology or develop
competing technologies.



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. 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. We filed an answer on
April 30, 2001, denying NCRs allegations and
asserting counterclaims. On June 19, 2001, DataQuill
Limited filed suit against Handspring and Kyocera

24



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##### Table of Contents



Wireless Corp. in the United States District
Court for the Northern District of Illinois. The complaint
alleges infringement of one U.S. patent. We filed an answer on
August 1, 2001, denying DataQuills allegations and
asserting counterclaims. We believe that the claims in both
lawsuits are without merit and intend to defend vigorously
against them.


We may in the future receive other notices of
claims that our products infringe or may infringe upon
intellectual property rights. Any litigation to determine the
validity of such claims, including claims arising through our
contractual indemnification of our business partners, regardless
of their merit or resolution, would likely be costly and time
consuming and divert the efforts and attention of our management
and technical personnel. 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.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Our future results could be harmed by
	economic, political, regulatory and other risks associated with
	international sales and operations.

We now sell our products in Asia Pacific, Canada,
Europe, Japan and the Middle East in addition to the United
States. We expect to enter additional international markets over
time. If our revenue from international operations increases as
a percentage of our total revenue, we will be subject to
increased exposure to international risks. In addition, the
facilities where our products are and will be, manufactured are
located outside the United States. A substantial number of our
material suppliers also are based outside of the United States
and are subject to a wide variety of international risks.
Accordingly, our future results could be harmed by a variety of
factors, including:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | changes in foreign currency exchange rates;                                                                      
|
| |  | development risks and expenses associated with
	customizing our products for local languages;                    
|
| |  | difficulty in managing widespread sales and
	manufacturing operations;                                           
|
| |  | potentially negative consequences from changes in
	tax laws;                                                     
|
| |  | trade protection measures and import or export
	licensing requirements;                                          
|
| |  | less effective protection of intellectual
	property; and                                                         
|
| |  | changes in a specific countrys or
	regions political or economic conditions, particularly in
	emerging markets.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | We may pursue strategic acquisitions and we
	could fail to successfully integrate acquired
	businesses.

In February 2001, we completed the acquisition of
BlueLark Systems. We expect to evaluate future acquisition
opportunities that could provide us with additional product or
services offerings, technologies or industry expertise.
Integration of acquired companies may result in problems
relating to integrating technology and management teams.
Managements attention may also be diverted away from other
business issues and opportunities while focusing on the
acquisitions. If we fail to integrate the operations, personnel
or products that we may acquire in the future, our business
could be materially harmed.

25



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##### Table of Contents





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

We currently anticipate that our available cash
resources will be sufficient to meet our anticipated working
capital and capital expenditure requirements for at least the
next 12 months. However, our resources may prove to be
insufficient for these working capital and capital expenditure
requirements. We may need to raise additional funds through
public or private debt or equity financing in order to:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | take advantage of opportunities, including the
	purchase of technologies or acquisitions of complementary
	businesses;
|
| |  | develop new products or services; or                                                                                  
|
| |  | respond to competitive pressures.                                                                                     

Depending on market conditions, any additional
financing we need may not be available on terms acceptable to
us, or at all. If adequate funds are not available or are not
available on acceptable terms, we might not be able to take
advantage of unanticipated opportunities, develop new products
or services or otherwise respond to unanticipated competitive
pressures and our business could be harmed.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | The price of our common stock has been and
	is likely to continue to be volatile and subject to wide
	fluctuations.

The market price of our common stock has been and
is likely to continue to be subject to wide fluctuations,
particularly given that securities of technology-related
companies are typically volatile and only a small portion of our
outstanding shares currently are publicly traded. Our stock
price fell below our initial public offering price for the first
time in the third quarter of the 2001 fiscal year.

Among the factors that could affect our stock
price are:



| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | quarterly variations in our operating results;                                                                                       
|
| |  | changes in revenues or earnings estimates or
	publication of research reports by analysts;                                           
|
| |  | speculation in the press or investment community;                                                                                    
|
| |  | reactions to events that affect other companies
	in our industry, particularly Palm, even if these events do not
	directly affect us;
|
| |  | actions by institutional stockholders;                                                                                               
|
| |  | negative developments in the market for
	technology related stock or the stock market in general; and                                
|
| |  | domestic and international economic factors
	unrelated to our performance.                                                           

In the past, companies that have experienced
volatility in the market price of their stock have been the
subject of securities class action litigation. We recently have
been named as a party in several purported securities class
action lawsuits that 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. We have sought indemnification from our
underwriters pursuant to the Underwriting Agreement that we
entered into with our underwriters in connection with our
initial public offering.



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

We have a classified board of directors. In
addition, 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 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.

26



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##### Table of Contents





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



| |                                                                               
| | ------------------------------------------------------------------------------
| | Future sales of shares by existing
	stockholders could affect our stock price.

If our existing stockholders sell substantial
amounts of our common stock in the public market, the market
price of our common stock could decline. The lock-up agreements
pertaining to our initial public offering expired in December
2000, and a large number of our shares now are eligible for sale
in the public market. Many of these shares are held by
directors, executive officers and other affiliates and are
subject to volume limitations under Rule 144 of the
Securities Act of 1933 and various vesting agreements. In
addition, shares subject to outstanding options and shares
reserved for future issuance under our stock option and purchase
plans, will continue to become eligible for sale in the public
market to the extent permitted by the provisions of various
vesting agreements and the securities rules and regulations
applicable to these shares.




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 enter into
foreign exchange forward contracts to hedge certain balance
sheet exposures and intercompany balances against future
movements in foreign exchange rates. 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, a
sudden or significant change in foreign exchange rates is not
expedited 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

Not applicable.




PART III






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

The information concerning our directors required
by this item, which will be set forth in the section entitled
Proposal No. 1  Election of
Directors of our definitive proxy statement for our 2001
annual stockholders meeting, is incorporated into this
annual report by reference. The information concerning our
executive officers required by this item, which will be set
forth in the section entitled Executive Officers of
our definitive proxy statement for our 2001 annual
stockholders meeting, is incorporated into this annual
report by reference.

27



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##### Table of Contents



Compliance With Section 16(a) of the
Exchange Act. 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
2001.




Item 11.     Executive Compensation

The information required by this item, which will
be set forth in the sections entitled Executive
Compensation and Proposal No. 1 
Election of Directors of our definitive proxy statement
for our 2001 annual stockholders meeting, is incorporated
into this annual report by reference.






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

The information required by this item, which will
be set forth in the section entitled Security Ownership of
Certain Beneficial Owners and Management of our definitive
proxy statement for our 2001 annual stockholders meeting,
is incorporated into this annual report by reference.






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

The information required by this item, which will
be set forth in the section entitled Certain
Transactions of our definitive proxy statement for our
2001 annual stockholders meeting, is incorporated into
this annual report by reference.






PART IV





Item 14.     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 Accountants                                                                                                                                                                       |  |      | 31 | 
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Consolidated Balance Sheets at June 30, 2001
	and July 1, 2000                                                                                                                                          |  |      | 32 | 
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Consolidated Statements of Operations for the
	Years Ended June 30, 2001 and July 1, 2000 and for the
	Period from July 29, 1998 (date of inception) to
	June 30, 1999                                  |  |      | 33 | 
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Consolidated Statements of Stockholders
	Equity and Comprehensive Loss for the Years Ended June 30,
	2001 and July 1, 2000 and for the Period from July 29,
	1998 (date of inception) to June 30, 1999 |  |      | 34 | 
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Consolidated Statements of Cash Flows for the
	Years Ended June 30, 2001 and July 1, 2000 and for the
	Period from July 29, 1998 (date of inception) to
	June 30, 1999                                  |  |      | 35 | 
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Notes to Consolidated Financial Statements                                                                                                                                                              |  |      | 36 | 

(a)(2)  Financial Statement Schedule.

Schedule II

Valuation and Qualifying Accounts

(In thousands)


|                                |  |              |       |                   |  |            |        |            |  |   |         |   |  |   |        | 
|------------------------------- |  | ------------ | ----- | ----------------- |  | ---------- | ------ | ---------- |  | - | ------- | - |  | - | ------ | 
|                                |  | 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 | 

28



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##### Table of Contents



|                                |  |              |   |                   |  |            |        |            |  |   |        |   |  |   |       | 
|------------------------------- |  | ------------ | - | ----------------- |  | ---------- | ------ | ---------- |  | - | ------ | - |  | - | ----- | 
|                                |  | Balance at   |   | Additions Charged |  |            |        | Balance at
|                                |  | Beginning of |   | To Costs And      |  |            |        | End of    
|Year Ended July 1, 2000:        |  | Period       |   | Expenses          |  | Deductions |        | Period    
|                                |  |              |   |                   |  |            |        |           
|Allowance for doubtful accounts |  | $            |  |                   |  | $          | 138    |            |  | $ | (88    | ) |  | $ | 50    | 
|                               
|                               
|                               
|                               
|Product return reserve          |  |              |  |                   |  |            | 6,732  |            |  |   | (4,368 | ) |  |   | 2,364 | 
|                               
|                               
|                               
|                               
|Accrued product warranty        |  |              |  |                   |  |            | 10,024 |            |  |   | (1,991 | ) |  |   | 8,033 | 

(a)(3)  Exhibits.

|        |       |  |  |               |  |                                                                                                                                                                                                                                     
|------- | ----- |  |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |              
|Number  |       |  |  | Exhibit Title
|        |       |  |  |              
|        | 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)                                                                                                                                                         
|        | 4.1   |  |  |              |  | Specimen Common Stock Certificate(1)                                                                                                                                                                                                
|        | 4.2   |  |  |              |  | Amended and Restated Investors Rights
	Agreement, dated July 7, 1999(1)                                                                                                                                                            
|        | 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                                                                                                                                    
|        | 10.8  |  |  |              |  | Reserved                                                                                                                                                                                                                            
|        | 10.9  |  |  |              |  | International Manufacturing Contract between
	Registrant and Flextronics (Malaysia) SDN.BHD, dated
	June 29, 1999(1)                                                                                                              
|        | 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 |  |  |              |  | Reserved                                                                                                                                                                                                                            
|        | 10.17 |  |  |              |  | Retail Distribution Agreement between Registrant
	and CompUSA, Inc., dated March 13, 2000(2)                                                                                                                                       
|        | 10.18 |  |  |              |  | Retail Distribution Agreement between Registrant
	and Staples, Inc., dated March 14, 2000, as amended(2)                                                                                                                           
|        | 10.19 |  |  |              |  | Reseller Agreement between Registrant and Best
	Buy Co., Inc., dated March 21, 2000(2)                                                                                                                                             
|        | 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)                                                                                                          

29



---



##### Table of Contents



|        |       |  |  |               |  |                                                                                                                                                                                                                                                                         
|------- | ----- |  |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |              
|Number  |       |  |  | Exhibit Title
|        |       |  |  |              
|        | 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)                                                                                                                                        
|        | 21.1  |  |  |              |  | List of Subsidiaries of Registrant                                                                                                                                                                                                                                      
|        | 23.2  |  |  |              |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                   



---



|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|* | 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 29, 2000.                                                  
|   
|(3) | Incorporated by reference to the exhibit with the
	same number to our Report on Form 10-Q, filed on
	May 4, 2001.                                                         
|   
|(b) | Reports on Form 8-K.                                                                                                                                                      

No such reports were filed in the fourth quarter
of 2001.



|    |                              
|--- | -----------------------------
|(c) | Exhibits  See (a)(3)
	above.

30



---



##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of

Handspring, Inc.


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 14(a)(1) on page 28 present fairly, in all
material respects, the financial position of Handspring, Inc.
and its subsidiaries at June 30, 2001 and July 1, 2000
and the results of their operations and their cash flows for the
years ended June 30, 2001 and July 1, 2000 and for the
period from July 29, 1998 (date of inception) to
June 30, 1999, 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 14(a)(2) on page 28
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 18, 2001, except for


Note 14 as to which


the date is September 6, 2001


31



---



##### Table of Contents



HANDSPRING, INC.






CONSOLIDATED BALANCE SHEETS


(In thousands, except share and per share
amounts)


|                                       |                                                                                                                                                                                         |                                            |        |          |         |  |       |         |         | 
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | -------- | ------- |  | ----- | ------- | ------- | 
|                                       |                                                                                                                                                                                         | June 30,                                   |        | July 1, 
|                                       |                                                                                                                                                                                         | 2001                                       |        | 2000    
|                                       |                                                                                                                                                                                         |                                            |        |         
|ASSETS                                
|                                      
|                                      
|                                      
|                                      
|Current assets:                        |                                                                                                                                                                                         |                                            |        |          |         |  |       |        
|                                      
|                                      
|                                      
|                                      
|                                       | Cash and cash equivalents                                                                                                                                                               |                                            | $      | 87,580   |         |  | $     | 196,548 |        
|                                      
|                                      
|                                      
|                                      
|                                       | Short-term investments                                                                                                                                                                  |                                            |        | 33,943   |         |  |       |        |        
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts receivable, net of allowance for
	doubtful accounts of $2,239 and $50 as of June 30, 2001 and
	July 1, 2000, respectively                                                      |                                            |        | 12,850   |         |  |       | 20,484  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Prepaid expenses and other current assets                                                                                                                                               |                                            |        | 19,473   |         |  |       | 1,776   |        
|                                      
|                                      
|                                      
|                                      
|                                       | Inventories                                                                                                                                                                             |                                            |        | 2,857    |         |  |       | 40      |        
|                                       |                                                                                                                                                                                         |                                            |        |          |         |  |       |        
|                                       |                                                                                                                                                                                         | Total current assets                       |        |          | 156,703 |  |       |         | 218,848 | 
|                                      
|                                      
|                                      
|                                      
|Long-term investments                  |                                                                                                                                                                                         |                                            | 80,237 |          |         |  | 2,664 |        
|                                      
|                                      
|                                      
|                                      
|Property and equipment, net            |                                                                                                                                                                                         |                                            | 15,041 |          |         |  | 8,280 |        
|                                      
|                                      
|                                      
|                                      
|Intangibles and other assets           |                                                                                                                                                                                         |                                            | 1,254  |          |         |  | 680   |        
|                                       |                                                                                                                                                                                         |                                            |        |          |         |  |       |        
|                                       |                                                                                                                                                                                         | Total assets                               |        | $        | 253,235 |  |       | $       | 230,472 | 
|                                       |                                                                                                                                                                                         |                                            |        |          |         |  |       |        
|LIABILITIES AND STOCKHOLDERS
	EQUITY 
|                                      
|                                      
|                                      
|                                      
|Current liabilities:                   |                                                                                                                                                                                         |                                            |        |          |         |  |       |        
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts payable                                                                                                                                                                        |                                            | $      | 37,881   |         |  | $     | 20,152  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Accrued liabilities                                                                                                                                                                     |                                            |        | 70,152   |         |  |       | 16,034  |        
|                                       |                                                                                                                                                                                         |                                            |        |          |         |  |       |        
|                                       |                                                                                                                                                                                         | Total current liabilities                  |        |          | 108,033 |  |       |         | 36,186  | 
|                                      
|                                      
|                                      
|                                      
|Long-term liabilities                  |                                                                                                                                                                                         |                                            |       |          |         |  | 57    |        
|Commitments and contingencies (Note 9) |                                                                                                                                                                                         |                                            |        |          |         |  |       |        
|                                      
|                                      
|                                      
|                                      
|Stockholders equity:                  |                                                                                                                                                                                         |                                            |        |          |         |  |       |        
|                                      
|                                      
|                                      
|                                      
|                                       | Preferred stock, $0.001 par value per share,
	10,000,000 shares authorized; nil shares issued and outstanding
	at June 30, 2001 and July 1, 2000                                        |                                            |        |         |         |  |       |        |        
|                                      
|                                      
|                                      
|                                      
|                                       | Common stock, $0.001 par value per share,
	1,000,000,000 shares authorized; 129,949,768 and 125,436,978
	shares issued and outstanding at June 30, 2001 and
	July 1, 2000, respectively |                                            |        | 130      |         |  |       | 125     |        
|                                      
|                                      
|                                      
|                                      
|                                       | Additional paid-in capital                                                                                                                                                              |                                            |        | 368,166  |         |  |       | 321,116 |        
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred stock compensation                                                                                                                                                             |                                            |        | (29,445  | )       |  |       | (58,268 | )      
|                                      
|                                      
|                                      
|                                      
|                                       | Accumulated other comprehensive income (loss)                                                                                                                                           |                                            |        | 994      |         |  |       | (64     | )      
|                                      
|                                      
|                                      
|                                      
|                                       | Accumulated deficit                                                                                                                                                                     |                                            |        | (194,643 | )       |  |       | (68,680 | )      
|                                       |                                                                                                                                                                                         |                                            |        |          |         |  |       |        
|                                       |                                                                                                                                                                                         | Total stockholders equity                 |        |          | 145,202 |  |       |         | 194,229 | 
|                                       |                                                                                                                                                                                         |                                            |        |          |         |  |       |        
|                                       |                                                                                                                                                                                         | Total liabilities and stockholders equity |        | $        | 253,235 |  |       | $       | 230,472 | 
|                                       |                                                                                                                                                                                         |                                            |        |          |         |  |       |        

See accompanying notes to consolidated
financial statements.

32



---



##### Table of Contents



HANDSPRING, INC.






CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except per share
amounts)


|                                                                  |                                                                 |                                    |          |            |         |             |         |        |         |   |        |       |       | 
|----------------------------------------------------------------- | --------------------------------------------------------------- | ---------------------------------- | -------- | ---------- | ------- | ----------- | ------- | ------ | ------- | - | ------ | ----- | ----- | 
|                                                                  |                                                                 |                                    |          |            |         | Period From
|                                                                  |                                                                 |                                    |          |            |         | July 29,   
|                                                                  |                                                                 |                                    |          |            |         | 1998       
|                                                                  |                                                                 |                                    |          |            |         | (date of   
|                                                                  |                                                                 | Year Ended                         |          | Year Ended |         | inception) 
|                                                                  |                                                                 | June 30,                           |          | July 1,    |         | to June 30,
|                                                                  |                                                                 | 2001                               |          | 2000       |         | 1999       
|                                                                  |                                                                 |                                    |          |            |         |            
|Revenue                                                           |                                                                 | $                                  | 370,943  |            |         | $           | 101,937 |        |         | $ |       |      
|                                                                  |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      
|Costs and operating expenses:                                     |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Cost of revenue                                                 |                                    |          | 292,311    |         |             |         | 69,921 |         |   |        |      |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Research and development                                        |                                    |          | 23,603     |         |             |         | 10,281 |         |   |        | 2,738 |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Selling, general and administrative                             |                                    |          | 145,132    |         |             |         | 42,424 |         |   |        | 2,451 |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | In-process research and development                             |                                    |          | 12,225     |         |             |         |       |         |   |        |      |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Amortization of deferred stock compensation and
	intangibles(*) |                                    |          | 32,830     |         |             |         | 40,077 |         |   |        | 3,646 |      
|                                                                  |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      
|                                                                  |                                                                 | Total costs and operating expenses |          |            | 506,101 |             |         |        | 162,703 |   |        |       | 8,835 | 
|                                                                  |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      
|Loss from operations                                              |                                                                 |                                    | (135,158 | )          |         |             | (60,766 | )      |         |   | (8,835 | )    
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Interest and other income, net                                    |                                                                 |                                    | 12,195   |            |         |             | 675     |        |         |   | 446    |      
|                                                                  |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      
|Loss before taxes                                                 |                                                                 |                                    | (122,963 | )          |         |             | (60,091 | )      |         |   | (8,389 | )    
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Income tax provision                                              |                                                                 |                                    | 3,000    |            |         |             | 200     |        |         |   |       |      
|                                                                  |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      
|Net loss                                                          |                                                                 | $                                  | (125,963 | )          |         | $           | (60,291 | )      |         | $ | (8,389 | )    
|                                                                  |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      
|Basic and diluted net loss per share                              |                                                                 | $                                  | (1.21    | )          |         | $           | (1.77   | )      |         | $ | (0.71  | )    
|                                                                  |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      
|Shares used in calculating basic and diluted net
	loss per share  |                                                                 |                                    | 103,896  |            |         |             | 34,015  |        |         |   | 11,772 |      
|                                                                  |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|(*) Amortization of deferred stock
	compensation and intangibles: |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Cost of revenue                                                   |                                                                 | $                                  | 4,521    |            |         | $           | 5,904   |        |         | $ | 526    |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Research and development                                          |                                                                 |                                    | 6,926    |            |         |             | 8,059   |        |         |   | 1,217  |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Selling, general and administrative                               |                                                                 |                                    | 21,383   |            |         |             | 26,114  |        |         |   | 1,903  |      
|                                                                  |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      
|                                                                  |                                                                 | $                                  | 32,830   |            |         | $           | 40,077  |        |         | $ | 3,646  |      
|                                                                  |                                                                 |                                    |          |            |         |             |         |        |         |   |        |      

See accompanying notes to consolidated
financial statements.

33



---



##### Table of Contents



HANDSPRING, INC.






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE LOSS


(In thousands)


|                                                                                                                       |  |              |         |            |  |          |     |               |  |               |         |         |  |       |         |   |  |   |     |   |  |   |          |   |  |   |          |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---------- |  | -------- | --- | ------------- |  | ------------- | ------- | ------- |  | ----- | ------- | - |  | - | --- | - |  | - | -------- | - |  | - | -------- | -
|                                                                                                                       |  |              |         |            |  |          |     | Accumulated   |  |               |         |        
|                                                                                                                       |  | Common Stock |         | Additional |  | Deferred |     | Other         |  |               |         |        
|                                                                                                                       |  |              |         | Paid-In    |  | Stock    |     | Comprehensive |  | Accumulated   |         |        
|                                                                                                                       |  | Shares       |         | Amount     |  | Capital  |     | Compensation  |  | Income (Loss) |         | Deficit |  | Total
|                                                                                                                       |  |              |         |            |  |          |     |               |  |               |         |         |  |      
|Issuance of common stock                                                                                               |  |              | 63,000  |            |  | $        | 63  |               |  | $             | 7       |         |  | $     |        |   |  | $ |    |   |  | $ |         |   |  | $ | 70       |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Issuance of common stock for services                                                                                  |  |              | 90      |            |  |          |    |               |  |               | 15      |         |  |       |        |   |  |   |    |   |  |   |         |   |  |   | 15       |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Issuance of common stock on exercise of stock
	options                                                                 |  |              | 6,275   |            |  |          | 6   |               |  |               | 443     |         |  |       |        |   |  |   |    |   |  |   |         |   |  |   | 449      |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Issuance of right to purchase Series A
	redeemable convertible preferred stock in connection with
	financing agreement |  |              |        |            |  |          |    |               |  |               | 599     |         |  |       |        |   |  |   |    |   |  |   |         |   |  |   | 599      |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Deferred stock compensation                                                                                            |  |              |        |            |  |          |    |               |  |               | 13,391  |         |  |       | (13,391 | ) |  |   |    |   |  |   |         |   |  |   |         |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Amortization of deferred stock compensation                                                                            |  |              |        |            |  |          |    |               |  |               |        |         |  |       | 3,646   |   |  |   |    |   |  |   |         |   |  |   | 3,646    |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Unrealized loss on securities                                                                                          |  |              |        |            |  |          |    |               |  |               |        |         |  |       |        |   |  |   | (6  | ) |  |   |         |   |  |   | (6       | )
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Net loss                                                                                                               |  |              |        |            |  |          |    |               |  |               |        |         |  |       |        |   |  |   |    |   |  |   | (8,389   | ) |  |   | (8,389   | )
|                                                                                                                       |  |              |         |            |  |          |     |               |  |               |         |         |  |       |         |   |  |   |     |   |  |   |          |   |  |   |          |  
|Balances, June 30, 1999                                                                                                |  |              | 69,365  |            |  |          | 69  |               |  |               | 14,455  |         |  |       | (9,745  | ) |  |   | (6  | ) |  |   | (8,389   | ) |  |   | (3,616   | )
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Issuance of common stock for services                                                                                  |  |              | 62      |            |  |          |    |               |  |               | 815     |         |  |       |        |   |  |   |    |   |  |   |         |   |  |   | 815      |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Issuance of common stock on exercise of stock
	options                                                                 |  |              | 4,545   |            |  |          | 5   |               |  |               | 2,007   |         |  |       |        |   |  |   |    |   |  |   |         |   |  |   | 2,012    |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Issuance of common stock in initial public
	offering                                                                   |  |              | 10,000  |            |  |          | 10  |               |  |               | 184,918 |         |  |       |        |   |  |   |    |   |  |   |         |   |  |   | 184,928  |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Conversion of redeemable convertible preferred
	stock to common in connection with initial public offering             |  |              | 41,420  |            |  |          | 41  |               |  |               | 29,421  |         |  |       |        |   |  |   |    |   |  |   |         |   |  |   | 29,462   |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Charitable contribution of common stock                                                                                |  |              | 45      |            |  |          |    |               |  |               | 900     |         |  |       |        |   |  |   |    |   |  |   |         |   |  |   | 900      |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Deferred stock compensation                                                                                            |  |              |        |            |  |          |    |               |  |               | 88,600  |         |  |       | (88,600 | ) |  |   |    |   |  |   |         |   |  |   |         |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Amortization of deferred stock compensation                                                                            |  |              |        |            |  |          |    |               |  |               |        |         |  |       | 40,077  |   |  |   |    |   |  |   |         |   |  |   | 40,077   |  
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Unrealized loss on securities                                                                                          |  |              |        |            |  |          |    |               |  |               |        |         |  |       |        |   |  |   | (17 | ) |  |   |         |   |  |   | (17      | )
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Foreign currency translation adjustments                                                                               |  |              |        |            |  |          |    |               |  |               |        |         |  |       |        |   |  |   | (41 | ) |  |   |         |   |  |   | (41      | )
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Net loss                                                                                                               |  |              |        |            |  |          |    |               |  |               |        |         |  |       |        |   |  |   |    |   |  |   | (60,291  | ) |  |   | (60,291  | )
|                                                                                                                       |  |              |         |            |  |          |     |               |  |               |         |         |  |       |         |   |  |   |     |   |  |   |          |   |  |   |          |  
|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  |  
|                                                                                                                       |  |              |         |            |  |          |     |               |  |               |         |         |  |       |         |   |  |   |     |   |  |   |          |   |  |   |          |  

See accompanying notes to consolidated
financial statements.

34



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##### Table of Contents



HANDSPRING, INC.






CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |         |       |     |        |  
|----------------------------------------------------- | --------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ------ | ----------- | -------- | ------- | ------ | ------- | ------- | ------- | ----- | --- | ------ | -
|                                                      |                                                                                         |                                                                            |                                           |                                           |        | Period From
|                                                      |                                                                                         |                                                                            |                                           |                                           |        | July 29,   
|                                                      |                                                                                         |                                                                            |                                           |                                           |        | 1998       
|                                                      |                                                                                         |                                                                            |                                           |                                           |        | (date of   
|                                                      |                                                                                         | Year Ended                                                                 |                                           | Year Ended                                |        | inception) 
|                                                      |                                                                                         | June 30,                                                                   |                                           | July 1,                                   |        | to June 30,
|                                                      |                                                                                         | 2001                                                                       |                                           | 2000                                      |        | 1999       
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |            
|Cash flows from operating activities:                 |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net loss                                                                                |                                                                            | $                                         | (125,963                                  | )      |             | $        | (60,291 | )      |         | $       | (8,389  | )    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Adjustments to reconcile net loss to net cash
	used in operating activities:            |                                                                            |                                           |                                           |        |             |          |         |        |         |         |         |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Depreciation and amortization                                              |                                           |                                           | 7,104  |             |          |         | 2,668  |         |         |         | 70    |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Amortization of deferred stock compensation and
	intangibles               |                                           |                                           | 32,830 |             |          |         | 40,077 |         |         |         | 3,646 |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | In-process research and development                                        |                                           |                                           | 12,225 |             |          |         |       |         |         |         |      |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Write-off of excess and obsolete inventories                               |                                           |                                           | 26,811 |             |          |         |       |         |         |         |      |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Charitable contribution of common stock                                    |                                           |                                           |       |             |          |         | 900    |         |         |         |      |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Amortization of costs associated with financing
	agreement                 |                                           |                                           |       |             |          |         | 568    |         |         |         | 31    |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Amortization of premium or discount on
	available-for-sale securities, net |                                           |                                           | (1,313 | )           |          |         | (118   | )       |         |         | (108  | )  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Gain on sale of available-for-sale securities                              |                                           |                                           | (277   | )           |          |         |       |         |         |         |      |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Stock compensation to non-employees                                        |                                           |                                           |       |             |          |         | 815    |         |         |         | 15    |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Changes in assets and liabilities:                                         |                                           |                                           |        |             |          |         |        |         |         |         |       |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                            | Accounts receivable                       |                                           |        | 6,625       |          |         |        | (20,484 | )       |         |       |    |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                            | Prepaid expenses and other current assets |                                           |        | (18,219     | )        |         |        | (1,751  | )       |         |       | (48 | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                            | Inventories                               |                                           |        | (10,011     | )        |         |        | (40     | )       |         |       |    |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                            | Intangibles and other assets              |                                           |        | (40         | )        |         |        | (616    | )       |         |       | (64 | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                            | Accounts payable                          |                                           |        | 18,701      |          |         |        | 18,944  |         |         |       | 884 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                            | Accrued liabilities                       |                                           |        | 34,584      |          |         |        | 15,941  |         |         |       | 67  |       
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|                                                      |                                                                                         |                                                                            |                                           | Net cash used in operating activities     |        |             | (16,943  | )       |        |         | (3,387  | )       |       |     | (3,896 | )
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|Cash flows from investing activities:                 |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Purchases of available-for-sale securities                                              |                                                                            |                                           | (244,972                                  | )      |             |          | (4,474  | )      |         |         | (10,965 | )    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Sales and maturities of available-for-sale
	securities                                  |                                                                            |                                           | 186,866                                   |        |             |          | 10,424  |        |         |         | 4,833   |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Purchases of investments for collateral on
	operating leases                            |                                                                            |                                           | (51,287                                   | )      |             |          | (2,106  | )      |         |         | (150    | )    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Purchases of property and equipment                                                     |                                                                            |                                           | (14,283                                   | )      |             |          | (9,818  | )      |         |         | (780    | )    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash acquired from acquisition                                                          |                                                                            |                                           | 29                                        |        |             |          |        |        |         |         |        |      
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|                                                      |                                                                                         |                                                                            |                                           | Net cash used in investing activities     |        |             | (123,647 | )       |        |         | (5,974  | )       |       |     | (7,062 | )
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|Cash flows from financing activities:                 |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from borrowings                                                                |                                                                            |                                           |                                          |        |             |          | 6,000   |        |         |         |        |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Principal payments on borrowings                                                        |                                                                            |                                           | (83                                       | )      |             |          | (6,000  | )      |         |         |        |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Issuance of redeemable convertible preferred
	stock, net                                |                                                                            |                                           |                                          |        |             |          | 11,490  |        |         |         | 17,972  |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net proceeds from initial public offering and
	exercise of underwriters over-allotment |                                                                            |                                           | 27,969                                    |        |             |          | 184,928 |        |         |         |        |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from issuance of common stock                                                  |                                                                            |                                           | 3,109                                     |        |             |          | 2,012   |        |         |         | 519     |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Repurchase of common stock                                                              |                                                                            |                                           | (41                                       | )      |             |          |        |        |         |         |        |      
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|                                                      |                                                                                         |                                                                            |                                           | Net cash provided by financing activities |        |             | 30,954   |         |        |         | 198,430 |         |       |     | 18,491 |  
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|                                                      |                                                                                         |                                                                            |                                           | Effect of exchange rate changes on cash   |        |             | 668      |         |        |         | (54     | )       |       |     |       |  
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|Net increase (decrease) in cash and cash
	equivalents |                                                                                         |                                                                            | (108,968                                  | )                                         |        |             | 189,015  |         |        |         | 7,533   |        
|                                                     
|                                                     
|                                                     
|                                                     
|Cash and cash equivalents:                            |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Beginning of period                                                                     |                                                                            |                                           | 196,548                                   |        |             |          | 7,533   |        |         |         |        |      
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|                                                      | End of period                                                                           |                                                                            | $                                         | 87,580                                    |        |             | $        | 196,548 |        |         | $       | 7,533   |      
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|Supplemental disclosure of cash flow information:     |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash paid for interest                                                                  |                                                                            | $                                         | 6                                         |        |             | $        | 37      |        |         | $       | 1       |      
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        
|                                                      | Cash paid for taxes                                                                     |                                                                            | $                                         | 236                                       |        |             | $        | 1       |        |         | $       | 1       |      
|                                                      |                                                                                         |                                                                            |                                           |                                           |        |             |          |         |        |         |         |        

See accompanying notes to consolidated
financial statements.

35



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##### 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 innovator in the
handheld computing industry. The Company develops, manufactures
and markets a family of expandable handheld computers for a
broad range of markets and customers. Handsprings flagship
technology is the Springboard platform, which provides a simple
and easy method for hardware and software expansion. The
Companys products are sold through select Internet and
retail partners both domestically and internationally and over
its Web site.

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.

Stock
split On March 16,
2000, the Board of Directors authorized a three-for-one stock
split of the outstanding shares of common stock and on May 12,
2000, the Board of Directors authorized a three-for-two stock
split of the outstanding shares of common stock. All common
share and per share information included in these financial
statements has been retroactively adjusted to reflect these
stock splits.

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

2.     Summary of
Significant Accounting Policies

Fiscal
year During the period
from July 29, 1998 (date of inception) to June 30,
1999, our fiscal months coincided with calendar month ends.
Effective July 1, 1999, we changed our fiscal year to a
52-53 week fiscal year ending on the Saturday nearest to
June 30. Unless otherwise stated, all years and dates refer
to our fiscal year and fiscal periods.

Cash and cash equivalents, short-term
investments, and long-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, and those with maturities
greater than twelve months from the balance sheet date are
considered long-term investments.

All short-term and long-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 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

36



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##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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. At July 1, 2000, three customers accounted for
35%, 23% and 16% of net receivables, and three customers
accounted for 15%, 14% and 11% of revenue during fiscal 2000. No
one geographic sub-region outside of the United States accounted
for more than 10% of revenue in any of the periods presented.

Inventories Inventories are stated at the lower of cost
(first-in, first-out) or market.

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.

Intangibles and other assets Intangibles and other assets includes
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. As of June 30, 2001 accumulated amortization of
goodwill and intangible assets totaled $76,000. There was no
accumulated amortization of goodwill and intangible assets at
July 1, 2000.

Long-lived assets The Company evaluates the
recoverability of its long-lived assets in accordance with
Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS)
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. SFAS
No. 121 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.

Foreign currency translation The majority of the Companys
operations are denominated in U.S. dollars. For foreign
operations with the 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).

Derivatives The Company enters 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.
Gains and losses resulting from exchange rate fluctuations on
forward foreign exchange 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.

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.

37



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, on the date of
the grant, between the fair value of the Companys common
stock and the exercise price. Unearned stock compensation is
amortized and expensed in accordance with FASB Interpretation
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 Emerging Issues Task
Force No. 96-18, Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling Goods and Services.

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. Statements of comprehensive loss
have been included within the statements of stockholders
equity.

Revenue
recognition Revenue from
sales is recognized when a purchase order has been received, the
product has been shipped, the sales price is fixed or
determinable and collection of the resulting receivable is
probable. No significant post-delivery obligations exist with
respect to revenue recognized during fiscal 2001 or fiscal 2000.
Provisions are made at the time the related revenue is
recognized for estimated product returns and warranty.

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 Palm, 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 year 2001,
fiscal 2000, and for the period from July 29, 1998 (date of
inception) to June 30, 1999 advertising costs totaled
$31,011,000, $3,928,000 and $114,000, 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.

38



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the computation of
basic and diluted net loss per share for the periods indicated
(in thousands, except per share amounts):

|                                                                                     |                                                       |            |          |            |   |               |         |         |   |   |        |         |  
|------------------------------------------------------------------------------------ | ----------------------------------------------------- | ---------- | -------- | ---------- | - | ------------- | ------- | ------- | - | - | ------ | ------- | -
|                                                                                     |                                                       |            |          |            |   | Period From  
|                                                                                     |                                                       |            |          |            |   | July 29,     
|                                                                                     |                                                       |            |          |            |   | 1998 (date   
|                                                                                     |                                                       | Year Ended |          | Year Ended |   | of inception)
|                                                                                     |                                                       | June 30,   |          | July 1,    |   | to June 30,  
|                                                                                     |                                                       | 2001       |          | 2000       |   | 1999         
|                                                                                     |                                                       |            |          |            |   |              
|Net loss                                                                             |                                                       | $          | (125,963 | )          |   | $             | (60,291 | )       |   | $ | (8,389 | )      
|                                                                                     |                                                       |            |          |            |   |               |         |         |   |   |        |        
|Basic and diluted:                                                                   |                                                       |            |          |            |   |               |         |         |   |   |        |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Weighted average common shares outstanding            |            |          | 128,004    |   |               |         | 73,196  |   |   |        | 59,673  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Weighted average common shares subject to
	repurchase |            |          | (24,108    | ) |               |         | (39,181 | ) |   |        | (47,901 | )
|                                                                                     |                                                       |            |          |            |   |               |         |         |   |   |        |        
|Weighted average common shares used to compute
	basic and diluted net loss per share |                                                       |            | 103,896  |            |   |               | 34,015  |         |   |   | 11,772 |        
|                                                                                     |                                                       |            |          |            |   |               |         |         |   |   |        |        
|Basic and diluted net loss per share                                                 |                                                       | $          | (1.21    | )          |   | $             | (1.77   | )       |   | $ | (0.71  | )      
|                                                                                     |                                                       |            |          |            |   |               |         |         |   |   |        |        

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 (in thousands):

|                                                                                      |  |          |        |         |  |          |        |  |  |  |        | 
|------------------------------------------------------------------------------------- |  | -------- | ------ | ------- |  | -------- | ------ |  |  |  | ------ | 
|                                                                                      |  | June 30, |        | July 1, |  | June 30,
|                                                                                      |  | 2001     |        | 2000    |  | 1999    
|                                                                                      |  |          |        |         |  |         
|Common stock subject to repurchase                                                    |  |          | 16,556 |         |  |          | 32,413 |  |  |  | 56,675 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Shares issuable under stock options                                                   |  |          | 31,544 |         |  |          | 26,622 |  |  |  | 11,776 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Shares issuable pursuant to right to purchase
	redeemable convertible preferred stock |  |          |       |         |  |          |       |  |  |  | 895    | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Shares of redeemable convertible preferred stock
	on an as if converted basis       |  |          |       |         |  |          |       |  |  |  | 36,346 | 

The weighted average repurchase price of unvested
stock was $0.06, $0.07 and $0.01 as of June 30, 2001,
July 1, 2000 and June 30, 1999, respectively. The
weighted-average exercise price of stock options outstanding was
$11.30, $4.68 and $0.08 as of June 30, 2001, July 1,
2000 and June 30, 1999, respectively.

Recently issued accounting
pronouncements In June
2001, the FASB issued SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets.SFAS No. 141 eliminates the
pooling-of-interest method of accounting for business
combinations as well as providing guidance for accounting under
the purchase method. This statement is effective for all
transactions initiated after June 30, 2001. SFAS
No. 142 establishes accounting standards for recording
goodwill. It prohibits the periodic recording of amortization
expense on goodwill, and requires new methods of reviewing all
intangible assets for impairments. SFAS No. 142 is
effective for all fiscal years beginning after December 15,
2001, and accordingly, the Company will adopt this standard at
the beginning of fiscal 2003. The adoption is not expected to
have a material impact on the Companys financial position
and 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.

39



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     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.

An independent valuation was performed to assist
the Company 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
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, $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, $312,000 was recorded as goodwill, and the remainder
was allocated to in-process research and development. 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 is being amortized on a straight-line basis
over three years. 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.

40



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Investments

Available-for-sale securities consist of the
following:

|                         |  |                   |     |                   |  |              |     |   |  |   |         | 
|------------------------ |  | ----------------- | --- | ----------------- |  | ------------ | --- | - |  | - | ------- | 
|                         |  | Gains in          |     | Losses in         |  |             
|                         |  | Accumulated Other |     | Accumulated Other |  |             
|                         |  | Comprehensive     |     | Comprehensive     |  |             
|                         |  | Income (Loss)     |     | Income (Loss)     |  | Market Value
|                         |  |                   |     |                   |  |             
|                         |  |                  
|                         |  | (In thousands)   
|                        
|                        
|                        
|                        
|June 30, 2001            |  |                   |     |                   |  |              |     |   |  |   |         | 
|                        
|                        
|                        
|                        
|Corporate obligations    |  | $                 | 274 |                   |  | $            | (35 | ) |  | $ | 46,348  | 
|                        
|                        
|                        
|                        
|Government obligations   |  |                   | 104 |                   |  |              | (20 | ) |  |   | 38,381  | 
|                        
|                        
|                        
|                        
|Commercial paper         |  |                   | 12  |                   |  |              | (3  | ) |  |   | 15,673  | 
|                        
|                        
|                        
|                        
|Certificates of deposits |  |                   |    |                   |  |              |    |   |  |   | 550     | 
|                        
|                        
|                        
|                        
|Other                    |  |                   |    |                   |  |              |    |   |  |   | 13,228  | 
|                         |  |                   |     |                   |  |              |     |   |  |   |         | 
|                         |  | $                 | 390 |                   |  | $            | (58 | ) |  | $ | 114,180 | 
|                         |  |                   |     |                   |  |              |     |   |  |   |         | 
|July 1, 2000             |  |                   |     |                   |  |              |     |   |  |   |         | 
|                        
|                        
|                        
|                        
|Commercial paper         |  | $                 |    |                   |  | $            |    |   |  | $ | 2,114   | 
|                        
|                        
|                        
|                        
|Certificates of deposits |  |                   |    |                   |  |              |    |   |  |   | 550     | 
|                         |  |                   |     |                   |  |              |     |   |  |   |         | 
|                         |  | $                 |    |                   |  | $            |    |   |  | $ | 2,664   | 
|                         |  |                   |     |                   |  |              |     |   |  |   |         | 

Contractual maturities of available-for-sale debt
securities are as follows:

|                      |  |                |         |         |  |   |       | 
|--------------------- |  | -------------- | ------- | ------- |  | - | ----- | 
|                      |  | June 30,       |         | July 1,
|                      |  | 2001           |         | 2000   
|                      |  |                |         |        
|                      |  |               
|                      |  | (In thousands)
|                     
|                     
|                     
|                     
|Due in 1 year or less |  | $              | 64,665  |         |  | $ | 2,664 | 
|                     
|                     
|                     
|                     
|Due in 1-2 years      |  |                | 49,515  |         |  |   |      | 
|                      |  |                |         |         |  |   |       | 
|                      |  | $              | 114,180 |         |  | $ | 2,664 | 
|                      |  |                |         |         |  |   |       | 

During fiscal 2001, available-for-sale securities
were sold for total proceeds of $82,147,000. The gross realized
gains on these sales totaled $283,000 and the gross realized
losses on these sales were $6,000. The Company realized no gains
or losses on the sale of securities during fiscal 2000, and
during the period from July 29, 1998 (date of inception) to
June 30, 1999.

5.     Inventories

The components of inventories are as follows (in
thousands):

|               |  |          |       |         |  |   |    | 
|-------------- |  | -------- | ----- | ------- |  | - | -- | 
|               |  | June 30, |       | July 1,
|               |  | 2001     |       | 2000   
|               |  |          |       |        
|Raw materials  |  | $        | 1,174 |         |  | $ |   | 
|              
|              
|              
|              
|Finished goods |  |          | 1,683 |         |  |   | 40 | 
|               |  |          |       |         |  |   |    | 
|               |  | $        | 2,857 |         |  | $ | 40 | 
|               |  |          |       |         |  |   |    | 

41



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##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Property and
Equipment

Property and equipment consists of the following:

|                               |                              |                |        |         |  |   |        |        | 
|------------------------------ | ---------------------------- | -------------- | ------ | ------- |  | - | ------ | ------ | 
|                               |                              | June 30,       |        | July 1,
|                               |                              | 2001           |        | 2000   
|                               |                              |                |        |        
|                               |                              |               
|                               |                              | (In thousands)
|                              
|                              
|                              
|                              
|Tooling                        |                              | $              | 6,863  |         |  | $ | 3,411  |       
|                              
|                              
|                              
|                              
|Computer and office equipment  |                              |                | 7,521  |         |  |   | 3,245  |       
|                              
|                              
|                              
|                              
|Furniture and fixtures         |                              |                | 2,871  |         |  |   | 1,615  |       
|                              
|                              
|                              
|                              
|Software                       |                              |                | 5,064  |         |  |   | 1,557  |       
|                              
|                              
|                              
|                              
|Leasehold improvements         |                              |                | 2,182  |         |  |   | 1,139  |       
|                              
|                              
|                              
|                              
|Vehicles                       |                              |                | 23     |         |  |   | 23     |       
|                               |                              |                |        |         |  |   |        |       
|                               | Total property and equipment |                |        | 24,524  |  |   |        | 10,990 | 
|                              
|                              
|                              
|                              
|Less: Accumulated depreciation |                              |                | (9,483 | )       |  |   | (2,710 | )     
|                               |                              |                |        |         |  |   |        |       
|                               | Property and equipment, net  |                | $      | 15,041  |  |   | $      | 8,280  | 
|                               |                              |                |        |         |  |   |        |       

Property and equipment did not include any assets
acquired under capital leases at June 30, 2001. At
July 1, 2000 there was $96,000 of computer and office
equipment acquired under capital leases, with related
accumulated amortization of $21,000.

7.     Accrued
Liabilities

Accrued liabilities consist of the following:

|                                          |  |                |        |         |  |   |        | 
|----------------------------------------- |  | -------------- | ------ | ------- |  | - | ------ | 
|                                          |  | June 30,       |        | July 1,
|                                          |  | 2001           |        | 2000   
|                                          |  |                |        |        
|                                          |  |               
|                                          |  | (In thousands)
|                                         
|                                         
|                                         
|                                         
|Provision for committed inventory         |  | $              | 19,257 |         |  | $ |       | 
|                                         
|                                         
|                                         
|                                         
|Accrued product warranty                  |  |                | 13,202 |         |  |   | 8,392  | 
|                                         
|                                         
|                                         
|                                         
|Accrued royalty expense                   |  |                | 3,713  |         |  |   | 2,961  | 
|                                         
|                                         
|                                         
|                                         
|Accrued compensation and related benefits |  |                | 5,558  |         |  |   | 803    | 
|                                         
|                                         
|                                         
|                                         
|Other                                     |  |                | 28,422 |         |  |   | 3,878  | 
|                                          |  |                |        |         |  |   |        | 
|                                          |  | $              | 70,152 |         |  | $ | 16,034 | 
|                                          |  |                |        |         |  |   |        | 

8.     Subordinated
Debt and Equipment Lease Facility

In June 1999, the Company obtained a subordinated
debt facility of $6,000,000, which was drawn upon and repaid
during fiscal 2000. The debt facility expired in June 2000. In
connection with this agreement, the Company also obtained an
equipment and software lease facility of $1,000,000, which was
available until September 2000. Equipment leases up to $600,000
under this facility had a 42 month term. Leases for
software, tooling, tenant improvements and other costs up to
$400,000 under this facility had a 36 month term. All
borrowings under this agreement bore interest at 7.5% per annum.
There were no outstanding borrowings at June 30, 2001, and
there was $83,000 outstanding at July 1, 2000.

9.     Commitments
and Contingencies

The Company leases its facilities under operating
leases which expire through November 2014. 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 payment bond certificate of $150,000 associated
with a lease

42



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##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

expiring in June 2002, a $400,000 standby letter
of credit established on August 3, 1999, and a $2,105,000
standby letter of credit established on May 9, 2000. The
standby letter of credits are required until the expiration of
the related leases in August 2004 and June 2008, respectively.
The bond certificate is included in short-term investments as of
June 30, 2001 and in long-term investments at July 1,
2000. Both of the letter of credits are included in long-term
investments at June 30, 2001 and July 1, 2000.

In February 2001, the Company entered into two
operating lease agreements for its new corporate headquarters,
consisting of approximately 340,000 square feet, to be
constructed in Sunnyvale, California. Both leases have initial
terms of twelve years with options to renew for an additional
six years, subject to certain conditions. At June 30, 2001,
there was $51.5 million pledged as collateral for specified
obligations of the lessor in conjunction with these lease
transactions. This amount has been classified as a long-term
investment in the accompanying consolidated balance sheet at
June 30, 2001. The pledged assets will be reduced upon
completion of the Companys build-out obligation for its
new corporate headquarters. In addition, the pledged assets may
be further reduced if certain financial criteria are met.

As of June 30, 2001 the future minimum lease
commitments under all operating leases were as follows (in
thousands):

|                             |  |   |         | 
|---------------------------- |  | - | ------- | 
|Fiscal Years Ending,         |  |  
|                             |  |  
|2002                         |  | $ | 5,164   | 
|                            
|                            
|                            
|                            
|2003                         |  |   | 17,457  | 
|                            
|                            
|                            
|                            
|2004                         |  |   | 24,558  | 
|                            
|                            
|                            
|                            
|2005                         |  |   | 23,934  | 
|                            
|                            
|                            
|                            
|2006                         |  |   | 24,265  | 
|                            
|                            
|                            
|                            
|Thereafter                   |  |   | 136,341 | 
|                             |  |   |         | 
|Total minimum lease payments |  | $ | 231,719 | 
|                             |  |   |         | 

Rent expense under operating leases, net of
sublease income, was $4,086,000, $1,510,000 and $283,000 for
fiscal 2001, fiscal 2000, and for the period from July 29,
1998 (date of inception) to June 30, 1999, respectively.

In June 1999 and July 2000, the Company entered
into purchase agreements with manufacturers in Malaysia and
Mexico, respectively. In addition, in July 1999, the Company
entered into a development and manufacturing agreement for the
production of the VisorPhone module. All agreements provide for
the manufacturers 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 manufactured
products are to be purchased by a third-party subcontractor. The
Company has guaranteed prompt payment of all invoices and
charges in the event of default related to said charges by the
third-party subcontractor. The initial term of the agreements
with the manufacturers in Malaysia and Mexico are both for one
year, with automatic renewal for separate but successive
one-year terms subsequent to the expiration of the initial term.
The agreements with the manufacturers in Malaysia and Mexico are
cancelable upon 90 days and 180 days notice by either
party, respectively. The agreement with the developer and
manufacturer of the VisorPhone has a five-year term. Had the
Company cancelled any such orders with the previously stated
manufacturers, its maximum liability at June 30, 2001 under
the cancellation provisions of all purchase agreements would
have approximated $63,700,000.

43



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##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In April 2000, the Company entered into an
agreement with its logistics provider and the provider of
telephone-based customer care. In January 2001, a separate
agreement was entered into by the Company with a provider of
fulfillment services for the VisorPhone module. Both contracts
provide for the logistics partners to purchase product directly
from the manufacturers in order to maintain product to fulfill
the forecasted level of orders for a minimum period of time
ranging from two weeks to 30 days. The inventory is
purchased based on 120-day rolling forecasts provided by the
Company on a monthly basis. The Company is invoiced for and is
required to pay for all components or finished goods that have
been in inventory at the logistics provider for a specified
period of time ranging from 120 to 180 days. The Company is
also contingently liable for any inventory purchased in
accordance with the agreements that is in excess of customer
fulfillment requirements. As of June 30, 2001 there was
$47,400,000 of inventory held at the logistics providers for
which the Company was contingently liable, and $10,700,000 that
the Company had paid to the logistics providers for inventory
held by them on the Companys behalf. The $10,700,000 is
included in prepaid expenses and other current assets in the
accompanying financial statements. Both contracts have initial
terms of two years, and are then extended automatically for
successive one-year periods, unless terminated by either party
with 90 days notice.

During fiscal 2001, the Company wrote-off
$26,811,000 of excess and obsolete inventory due to the economic
slowdown, aggressive price reductions, and increased
competition. This amount is included in cost of revenue in the
accompanying consolidated statements of operations. Of this
amount, $22,800,000 relates to the contingent inventory related
liabilities discussed above.

The Company has also entered into an agreement
with an outsource provider for telephone-based technical
support. The contract provides for the outsource provider to
supply certain levels of support according to a rolling 90-day
forecast provided by the Company. The Company may revise the
forecast within fifteen days of each subsequent month. The
Company is liable for 80% of a given months forecast.

10.     Stockholders
Equity



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

The Company is authorized to issue 10,000,000
shares of preferred stock, none of which was outstanding at
June 30, 2001, July 1, 2000 or June 30, 1999.



| |             
| | ------------
| | 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 13,650,000,
26,247,690 and 50,400,000 shares of the founders common
stock subject to repurchase by the Company at June 30,
2001, July 1, 2000 and June 30, 1999, respectively.

44



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##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Company has 1,000,000,000 shares of common
stock authorized, of which 129,949,768, 125,436,978 and
69,365,078 were issued and outstanding as of June 30, 2001,
July 1, 2000 and June 30, 1999, respectively. Common
stock reserved for future issuances is as follows:

|                                                                      |  |                |        |         |  |          |        |  |  |  |        | 
|--------------------------------------------------------------------- |  | -------------- | ------ | ------- |  | -------- | ------ |  |  |  | ------ | 
|                                                                      |  | June 30,       |        | July 1, |  | June 30,
|                                                                      |  | 2001           |        | 2000    |  | 1999    
|                                                                      |  |                |        |         |  |         
|                                                                      |  |               
|                                                                      |  | (In thousands)
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Issuance under stock options                                          |  |                | 47,111 |         |  |          | 43,238 |  |  |  | 15,533 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Issuance under employee stock purchase plan                           |  |                | 1,943  |         |  |          | 750    |  |  |  |       | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Conversion of redeemable convertible preferred
	stock                 |  |                |       |         |  |          |       |  |  |  | 36,346 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Exercise of right to purchase redeemable
	convertible preferred stock |  |                |       |         |  |          |       |  |  |  | 895    | 
|                                                                      |  |                |        |         |  |          |        |  |  |  |        | 
|Total shares reserved                                                 |  |                | 49,054 |         |  |          | 43,988 |  |  |  | 52,774 | 
|                                                                      |  |                |        |         |  |          |        |  |  |  |        | 



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

Effective June 21, 2000, the Company adopted
the 2000 Employee Stock Purchase Plan (the 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 will end 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. 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. There were
78,000 shares sold through the ESPP in fiscal 2001 for proceeds
of $1,347,000. No shares were purchased under the ESPP as of
July 1, 2000 or June 30, 1999.



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

The Companys 1998 Equity Incentive Plan
(the 1998 Plan) and the 1999 Executive Equity
Incentive Plan (the 1999 Plan) provided for the
issuance of options to acquire 28,707,693 and 10,350,000 shares
of common stock, respectively. Incentive stock options
(ISO) may be granted under both the 1998 Plan and
1999 Plan only to Company employees (including officers and
directors who are also employees). Nonqualified stock options
(NSO) may be granted to Company employees, officers,
directors and consultants. 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.

45



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##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 2,066,329, 4,445,853 and 6,275,078
shares issued under the 1998 Plan at June 30, 2001,
July 1, 2000 and June 30, 1999 that were subject to
repurchase, respectively. There were 685,939 and 1,719,373
shares issued under the 1999 Executive Equity Incentive Plan
that were subject to repurchase at June 30, 2001 and
July 1, 2000, respectively. Upon adoption of the
2000 Equity Incentive Plan (the 2000 Plan), the
Company transferred all shares available for grant under the
1998 Plan and the 1999 Plan to the 2000 Plan.



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

The 2000 Plan was adopted by the Board of
Directors on April 26, 2000 and became effective on
June 20, 2000. Options granted under the 2000 Plan may be
either ISOs or NSOs. ISOs may be granted only to Company
employees (including officers and directors who are also
employees). NSOs may be granted to Company employees, officers,
directors, consultants, independent contractors and advisors of
the Company. All other terms of options issued are generally the
same as those described under the 1998 Plan and 1999 Plan. 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 Directors discretion, on January 1,
2001 and on each anniversary thereafter, the aggregate number of
shares reserved for issuances under the 2000 Plan was and 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
that no more than 20,000,000 shares shall be issued as ISOs.



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

As part of the acquisition of BlueLark described
in Note 3, the Company assumed BlueLarkss
2000 Equity Incentive Plan (the BlueLark Plan).
There were incentive stock options and restricted stock awards
granted under the 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. As of June 30, 2001,
there were 153,899 shares of the Companys common stock
issued pursuant to the BlueLark Plan that were subject to
repurchase by the Company.

46



---



##### 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
|                         |                             |           |            |                     |   |               
|                         | Authorized                  |           |            | 21,807,693          |   |                |            |           |   |  |       |       | 
|                        
|                        
|                        
|                        
|                         | Options granted             |           |            | (18,050,884         | ) |                |            | 18,050,884 |   |  | $     | 0.08  | 
|                        
|                        
|                        
|                        
|                         | Options exercised           |           |            |                    |   |                |            | (6,275,078 | ) |  |       | 0.07  | 
|                         |                             |           |            |                     |   |                |            |            |   |  |       |      
|Balance at June 30, 1999 |                             |           | 3,756,809  |                     |   |                | 11,775,806 |            |   |  | 0.08  |      
|                        
|                        
|                        
|                        
|                         | Authorized                  |           |            | 32,250,000          |   |                |            |           |   |  |       |       | 
|                        
|                        
|                        
|                        
|                         | Options granted             |           |            | (19,527,497         | ) |                |            | 19,527,497 |   |  |       | 6.45  | 
|                        
|                        
|                        
|                        
|                         | Options exercised           |           |            |                    |   |                |            | (4,544,623 | ) |  |       | 0.44  | 
|                        
|                        
|                        
|                        
|                         | Options canceled            |           |            | 136,500             |   |                |            | (136,500   | ) |  |       | 1.04  | 
|                         |                             |           |            |                     |   |                |            |            |   |  |       |      
|Balance at 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 at June 30, 2001 |                             |           | 15,567,010 |                     |   |                | 31,543,541 |            |   |  | 11.30 |      
|                         |                             |           |            |                     |   |                |            |            |   |  |       |      

The following table summarizes information
concerning options outstanding and exercisable at
June 30, 2001:

|              |  |                     |            |              |  |                |      |                     |  |                |       |  |  |  |            |  |  |   |       | 
|------------- |  | ------------------- | ---------- | ------------ |  | -------------- | ---- | ------------------- |  | -------------- | ----- |  |  |  | ---------- |  |  | - | ----- | 
|              |  |                     |            |              |  |               
|              |  | Options Outstanding |            |              |  |               
|              |  |                     |            |             
|              |  |                     |            | Weighted     |  |                |      | Options Exercisable
|              |  |                     |            | Average      |  |                |      |                    
|Range of      |  |                     |            | Remaining    |  | Weighted       |      |                     |  | Weighted      
|Exercise      |  | Number              |            | Contractual  |  | Average        |      | Number              |  | Average       
|Prices        |  | Outstanding         |            | Life (Years) |  | Exercise Price |      | Exercisable         |  | Exercise Price
|              |  |                     |            |              |  |                |      |                     |  |               
|$ 0.05        |  |                     | 7,022,806  |              |  |                | 7.29 |                     |  | $              | 0.05  |  |  |  | 7,022,806  |  |  | $ | 0.05  | 
|             
|             
|             
|             
|$ 0.11-$ 0.44 |  |                     | 3,953,255  |              |  |                | 8.04 |                     |  |                | 0.30  |  |  |  | 3,953,255  |  |  |   | 0.30  | 
|             
|             
|             
|             
|$ 0.67-$ 0.89 |  |                     | 3,194,025  |              |  |                | 8.46 |                     |  |                | 0.80  |  |  |  | 2,351,442  |  |  |   | 0.76  | 
|             
|             
|             
|             
|$ 1.33-$ 1.56 |  |                     | 2,003,056  |              |  |                | 8.59 |                     |  |                | 1.44  |  |  |  | 449,678    |  |  |   | 1.44  | 
|             
|             
|             
|             
|$ 2.11-$12.81 |  |                     | 1,680,866  |              |  |                | 9.30 |                     |  |                | 6.28  |  |  |  | 184,282    |  |  |   | 2.11  | 
|             
|             
|             
|             
|$13.03-$13.44 |  |                     | 3,016,883  |              |  |                | 9.55 |                     |  |                | 13.11 |  |  |  | 282,181    |  |  |   | 13.31 | 
|             
|             
|             
|             
|$14.19-$14.71 |  |                     | 3,153,151  |              |  |                | 8.85 |                     |  |                | 14.66 |  |  |  | 885,962    |  |  |   | 14.67 | 
|             
|             
|             
|             
|$15.23-$20.00 |  |                     | 3,056,899  |              |  |                | 9.01 |                     |  |                | 19.22 |  |  |  | 747,191    |  |  |   | 19.41 | 
|             
|             
|             
|             
|$21.00-$48.56 |  |                     | 3,465,600  |              |  |                | 9.45 |                     |  |                | 36.51 |  |  |  |           |  |  |   |      | 
|             
|             
|             
|             
|$50.88-$88.13 |  |                     | 997,000    |              |  |                | 9.36 |                     |  |                | 68.07 |  |  |  |           |  |  |   |      | 
|              |  |                     |            |              |  |                |      |                     |  |                |       |  |  |  |            |  |  |   |       | 
|$ 0.05-$88.13 |  |                     | 31,543,541 |              |  |                | 8.53 |                     |  |                | 11.30 |  |  |  | 15,876,797 |  |  |   | 2.24  | 
|              |  |                     |            |              |  |                |      |                     |  |                |       |  |  |  |            |  |  |   |       | 

47



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                            
| | ---------------------------
| | 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 has 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 during fiscal 2000 and the period from
July 29, 1998 (date of inception) to June 30, 1999 was
$88,600,000 and $13,391,000, respectively. In addition, during
fiscal 2001, the Company recorded $3,930,000 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 $32,754,000,
$40,077,000 and $3,646,000 of deferred stock compensation during
fiscal 2001, fiscal 2000 and the period from July 29, 1998
(date of inception) to June 30, 1999, respectively.

As discussed in Note 2, 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 increased to the pro
forma amounts indicated below:

|                                      |             |                                       |   |            |   |                     |   |         |   |  |   |        |  
|------------------------------------- | ----------- | ------------------------------------- | - | ---------- | - | ------------------- | - | ------- | - |  | - | ------ | -
|                                      |             |                                       |   |            |   | Period From        
|                                      |             |                                       |   |            |   | July 29,           
|                                      |             |                                       |   |            |   | 1998               
|                                      |             | Year Ended                            |   | Year Ended |   | (date of inception)
|                                      |             | June 30,                              |   | July 1,    |   | to June 30,        
|                                      |             | 2001                                  |   | 2000       |   | 1999               
|                                      |             |                                       |   |            |   |                    
|                                      |             |                                      
|                                      |             | (In thousands, except per share data)
|                                     
|                                     
|                                     
|                                     
|Net loss:                             |             |                                       |   |            |   |                     |   |         |   |  |   |       
|                                     
|                                     
|                                     
|                                     
|                                      | As reported |                                       | $ | (125,963   | ) |                     | $ | (60,291 | ) |  | $ | (8,389 | )
|                                     
|                                     
|                                     
|                                     
|                                      | Pro forma   |                                       |   | (212,799   | ) |                     |   | (75,648 | ) |  |   | (8,483 | )
|                                     
|                                     
|                                     
|                                     
|Basic and diluted net loss per share: |             |                                       |   |            |   |                     |   |         |   |  |   |       
|                                     
|                                     
|                                     
|                                     
|                                      | As reported |                                       | $ | (1.21      | ) |                     | $ | (1.77   | ) |  | $ | (0.71  | )
|                                     
|                                     
|                                     
|                                     
|                                      | Pro forma   |                                       |   | (2.05      | ) |                     |   | (2.22   | ) |  |   | (0.72  | )

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 |      |            |  |               
|                         |  |                                       |      |            |  |               
|                         |  |                                       |      | Period     |  |                |      |           
|                         |  |                                       |      | From       |  |               
|                         |  |                                       |      | July 29,   |  | ESPP Shares   
|                         |  |                                       |      | 1998       |  | Granted During
|                         |  |                                       |      | (date of   |  |               
|                         |  | Year Ended                            |      | Year Ended |  | inception)     |      | Year Ended |  | Year Ended
|                         |  | June 30,                              |      | July 1,    |  | to June 30,    |      | June 30,   |  | July 1,   
|                         |  | 2001                                  |      | 2000       |  | 1999           |      | 2001       |  | 2000      
|                         |  |                                       |      |            |  |                |      |            |  |           
|Expected life (in years) |  |                                       | 4    |            |  |                | 4    |            |  |            | 4    |   |  |  | 1    |   |  |  | 1    |  
|                        
|                        
|                        
|                        
|Risk-free interest rate  |  |                                       | 5.06 | %          |  |                | 6.31 | %          |  |            | 4.96 | % |  |  | 4.81 | % |  |  | 6.17 | %
|                        
|                        
|                        
|                        
|Expected volatility      |  |                                       | 70   | %          |  |                | 70   | %          |  |            | 70   | % |  |  | 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

48



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 2001, fiscal 2000 and during the period
from July 29, 1998 (date of inception) to June 30,
1999 was $17.30, $7.99 and $0.76, respectively. The weighted
average estimated fair value of shares granted under the ESPP
during fiscal 2001 and fiscal 2000 was $6.54.

11.     Income
Taxes

Due to operating losses and the inability to
recognize the benefits therefrom, there is no tax provision for
the period from July 29, 1998 (date of inception) to
June 30, 1999. The provision for income taxes for the other
periods presented consists of the following:

|                   |         |                         |   |            |       |  |   |     |     | 
|------------------ | ------- | ----------------------- | - | ---------- | ----- |  | - | --- | --- | 
|                   |         | Year Ended              |   | Year Ended
|                   |         | June 30,                |   | July 1,   
|                   |         | 2001                    |   | 2000      
|                   |         |                         |   |           
|                   |         |                        
|                   |         | (In thousands)         
|                  
|                  
|                  
|                  
|Current provision: |         |                         |   |            |       |  |   |    
|                  
|                  
|                  
|                  
|                   | Federal |                         | $ |           |       |  | $ |    |    
|                  
|                  
|                  
|                  
|                   | State   |                         |   | 250        |       |  |   |    |    
|                  
|                  
|                  
|                  
|                   | Foreign |                         |   | 2,750      |       |  |   | 200 |    
|                   |         |                         |   |            |       |  |   |    
|                   |         | Total current provision |   | $          | 3,000 |  |   | $   | 200 | 
|                   |         |                         |   |            |       |  |   |    

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:

|                                                         |       |                |         |            |  |             |         |   |  |   |        |   | 
|-------------------------------------------------------- | ----- | -------------- | ------- | ---------- |  | ----------- | ------- | - |  | - | ------ | - | 
|                                                         |       |                |         |            |  | Period     
|                                                         |       |                |         |            |  | From       
|                                                         |       |                |         |            |  | July 29,   
|                                                         |       |                |         |            |  | 1998       
|                                                         |       |                |         |            |  | (date of   
|                                                         |       | Year Ended     |         | Year Ended |  | inception) 
|                                                         |       | June 30,       |         | July 1,    |  | to June 30,
|                                                         |       | 2001           |         | 2000       |  | 1999       
|                                                         |       |                |         |            |  |            
|                                                         |       |               
|                                                         |       | (In thousands)
|                                                        
|                                                        
|                                                        
|                                                        
|Tax benefit at federal statutory rate                    |       | $              | (43,037 | )          |  | $           | (21,053 | ) |  | $ | (2,936 | )
|                                                        
|                                                        
|                                                        
|                                                        
|Foreign taxes                                            |       |                | 2,750   |            |  |             | 200     |   |  |   |       |  
|                                                        
|                                                        
|                                                        
|                                                        
|State taxes                                              |       |                | 250     |            |  |             |        |   |  |   |       |  
|                                                        
|                                                        
|                                                        
|                                                        
|In-process research and development                      |       |                | 4,279   |            |  |             |        |   |  |   |       |  
|                                                        
|                                                        
|                                                        
|                                                        
|Unbenefited net operating losses, reserves and
	accruals |       |                | 35,758  |            |  |             | 20,853  |   |  |   | 2,936  |  
|                                                         |       |                |         |            |  |             |         |   |  |   |        |  
|                                                         | Total |                | $       |           |  |             | $       |  |  |   | $      |  | 
|                                                         |       |                |         |            |  |             |         |   |  |   |        |  

49



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##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                               |                        |                |         |         |  |   |         |   | 
|---------------------------------------------- | ---------------------- | -------------- | ------- | ------- |  | - | ------- | - | 
|                                               |                        | June 30,       |         | July 1,
|                                               |                        | 2001           |         | 2000   
|                                               |                        |                |         |        
|                                               |                        |               
|                                               |                        | (In thousands)
|                                              
|                                              
|                                              
|                                              
|Net operating loss carryforwards               |                        | $              | 24,264  |         |  | $ | 3,970   |  
|                                              
|                                              
|                                              
|                                              
|Reserves and accruals not currently deductible |                        |                | 30,651  |         |  |   | 4,416   |  
|                                              
|                                              
|                                              
|                                              
|Deferred compensation                          |                        |                | 7,908   |         |  |   | 17,488  |  
|                                              
|                                              
|                                              
|                                              
|Research credit carryforwards                  |                        |                | 2,424   |         |  |   | 952     |  
|                                              
|                                              
|                                              
|                                              
|Other                                          |                        |                | 1,091   |         |  |   | 148     |  
|                                               |                        |                |         |         |  |   |         |  
|                                               |                        |                | 66,338  |         |  |   | 26,974  |  
|                                              
|                                              
|                                              
|                                              
|Valuation allowance                            |                        |                | (66,338 | )       |  |   | (26,974 | )
|                                               |                        |                |         |         |  |   |         |  
|                                               | Net deferred tax asset |                | $       |        |  |   | $       |  | 
|                                               |                        |                |         |         |  |   |         |  

FASB Statement No. 109 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
$39,364,000, $24,945,000 and $2,029,000, during fiscal 2001,
fiscal 2000 and during the period from July 29, 1998 (date
of inception) to June 30, 1999, respectively.

As of June 30, 2001, the Company had net
operating loss carryforwards for federal and state purposes of
approximately $61,350,000 and $58,400,000, respectively. The
Company also had federal and state research and development tax
credit carryforwards of approximately $1,600,000 and $1,200,000,
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.

12.     401(k)
Plan

Effective January 1, 1999, the Company
adopted a 401(k) tax-deferred savings plan (the
Plan) for essentially all of its employees. Eligible
employees may make voluntary contributions to the 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 Plan.

13.     Business
Segment Reporting

The Company operates in one operating segment,
handheld computing, with its headquarters and most of its
operations 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

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HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

period. Revenue from unaffiliated customers and
long-lived assets by geographic region are as follows (in
thousands):

|         |                   |            |   |            |         |  |   |        |         | 
|-------- | ----------------- | ---------- | - | ---------- | ------- |  | - | ------ | ------- | 
|         |                   | Year Ended |   | Year Ended
|         |                   | June 30,   |   | July 1,   
|         |                   | 2001       |   | 2000      
|         |                   |            |   |           
|Revenue: |                   |            |   |            |         |  |   |       
|        
|        
|        
|        
|         | North America     |            | $ | 298,688    |         |  | $ | 97,976 |        
|        
|        
|        
|        
|         | Rest of the world |            |   | 72,255     |         |  |   | 3,961  |        
|         |                   |            |   |            |         |  |   |       
|         |                   | Total      |   | $          | 370,943 |  |   | $      | 101,937 | 
|         |                   |            |   |            |         |  |   |       

|                   |                   |          |   |         |        |  |   |       |        | 
|------------------ | ----------------- | -------- | - | ------- | ------ |  | - | ----- | ------ | 
|                   |                   | June 30, |   | July 1,
|                   |                   | 2001     |   | 2000   
|                   |                   |          |   |        
|Long-Lived Assets: |                   |          |   |         |        |  |   |      
|                  
|                  
|                  
|                  
|                   | North America     |          | $ | 94,544  |        |  | $ | 9,914 |       
|                  
|                  
|                  
|                  
|                   | Rest of the world |          |   | 1,988   |        |  |   | 1,710 |       
|                   |                   |          |   |         |        |  |   |      
|                   |                   | Total    |   | $       | 96,532 |  |   | $     | 11,624 | 
|                   |                   |          |   |         |        |  |   |      

During fiscal 2001, three customers accounted for
14%, 13% and 10% of revenue. The same three customers accounted
for 14%, 15% and 11% of revenue during fiscal 2000.

14.     Litigation

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. The Company 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 19, 2001, DataQuill Limited filed
suit against Handspring and Kyocera Wireless Corp. in the United
States District Court for the Northern District of Illinois. The
complaint alleges infringement of one U.S. Patent. The
complaint seeks unspecified compensatory and treble damages and
to permanently enjoin the defendants from infringing the patents
in the future. The Company 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 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. The complaints
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
also name as defendants the underwriters for Handsprings
initial public offering. The Company 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.
Neither Handspring nor its officers have responded to the
complaints.

15.     Selected
Quarterly Financial Data (Unaudited)

The following table presents unaudited quarterly
financial information for each of the quarters of the fiscal
years ended June 30, 2001 and July 1, 2000. The
Company believes this information reflects a fair presentation
of such interim information in accordance with generally
accepted accounting principles and the

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HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 30,                              |         | March 31, |  | Dec. 30, |         | Sept. 30, |  | July 1, |         | April 1, |  | Jan. 1, |         | Oct. 2,
|                                                                           |  | 2001                                  |         | 2001      |  | 2000     |         | 2000      |  | 2000    |         | 2000     |  | 2000    |         | 1999   
|                                                                           |  |                                       |         |           |  |          |         |           |  |         |         |          |  |         |         |        
|                                                                           |  |                                      
|                                                                           |  | (In thousands, except per share data)
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Revenue                                                                    |  | $                                     | 60,990  |           |  | $        | 123,820 |           |  | $       | 115,616 |          |  | $       | 70,517  |         |  | $ | 51,826  |   |  | $ | 34,321  |   |  | $ | 15,790  |   |  | $ |       |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Gross profit (loss) excluding amortization
	of deferred stock compensation |  |                                       | (19,114 | )         |  |          | 39,404  |           |  |         | 36,333  |          |  |         | 22,009  |         |  |   | 16,076  |   |  |   | 10,972  |   |  |   | 4,968   |   |  |   |       |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Net loss                                                                   |  |                                       | (67,167 | )         |  |          | (27,229 | )         |  |         | (15,194 | )        |  |         | (16,373 | )       |  |   | (19,527 | ) |  |   | (21,503 | ) |  |   | (10,060 | ) |  |   | (9,201 | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Basic and diluted net loss per share                                       |  |                                       | (0.60   | )         |  |          | (0.26   | )         |  |         | (0.15   | )        |  |         | (0.17   | )       |  |   | (0.43   | ) |  |   | (0.61   | ) |  |   | (0.32   | ) |  |   | (0.38  | )

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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                     
| | President and Chief Executive
	Officer

Date: September 28, 2001

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       |  | President, Chief Executive Officer, and a Director |  | September 28, 2001
|                                            
|                                            
|                                            
|                                            
|                                            
|Principal Financial and Accounting
	Officer: |  |                                                    |  |                   
|                                            
|/s/ BERNARD J. WHITNEYBernard J. Whitney     |  | Vice President and
	Chief Financial Officer        |  | September 28, 2001
|                                            
|                                            
|                                            
|                                            
|                                            
|Additional Directors:                        |  |                                                    |  |                   
|                                            
|/s/ BRUCE W. DUNLEVIEBruce W. Dunlevie       |  | Director                                           |  | September 28, 2001
|                                            
|/s/ KIM B. CLARKKim B. Clark                 |  | Director                                           |  | September 28, 2001
|                                            
|/s/ L. JOHN DOERRL. John Doerr               |  | Director                                           |  | September 28, 2001
|                                            
|/s/ JEFFREY C. HAWKINSJeffrey C. Hawkins     |  | Director                                           |  | September 28, 2001
|                                            
|/s/ WILLIAM E. KENNARDWilliam E. Kennard     |  | Director                                           |  | September 28, 2001
|                                            
|/s/ MITCHELL E. KERTZMANMitchell E. Kertzman |  | Director                                           |  | September 28, 2001

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EXHIBIT INDEX

|        |       |  |  |               |  |                                                                                                                                                                                                                                     
|------- | ----- |  |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |              
|Number  |       |  |  | Exhibit Title
|        |       |  |  |              
|        | 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)                                                                                                                                                         
|        | 4.1   |  |  |              |  | Specimen Common Stock Certificate(1)                                                                                                                                                                                                
|        | 4.2   |  |  |              |  | Amended and Restated Investors Rights
	Agreement, dated July 7, 1999(1)                                                                                                                                                            
|        | 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                                                                                                                                    
|        | 10.8  |  |  |              |  | Reserved                                                                                                                                                                                                                            
|        | 10.9  |  |  |              |  | International Manufacturing Contract between
	Registrant and Flextronics (Malaysia) SDN.BHD, dated
	June 29, 1999(1)                                                                                                              
|        | 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 |  |  |              |  | Reserved                                                                                                                                                                                                                            
|        | 10.17 |  |  |              |  | Retail Distribution Agreement between Registrant
	and CompUSA, Inc., dated March 13, 2000(2)                                                                                                                                       
|        | 10.18 |  |  |              |  | Retail Distribution Agreement between Registrant
	and Staples, Inc., dated March 14, 2000, as amended(2)                                                                                                                           
|        | 10.19 |  |  |              |  | Reseller Agreement between Registrant and Best
	Buy Co., Inc., dated March 21, 2000(2)                                                                                                                                             
|        | 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)                                                                                                       

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|        |       |  |  |               |  |                                                                                                                                                                                                                                                                         
|------- | ----- |  |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |              
|Number  |       |  |  | Exhibit Title
|        |       |  |  |              
|        | 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)                                                                                                                                        
|        | 21.1  |  |  |              |  | List of Subsidiaries of Registrant                                                                                                                                                                                                                                      
|        | 23.2  |  |  |              |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                   



---



|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|* | 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 29, 2000.                                                  
|   
|(3) | Incorporated by reference to the exhibit with the
	same number to our Report on Form 10-Q, filed on
	May 4, 2001.                                                         

55