##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K



---

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended June 29,
    2002                                                     
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                                 

Commission File No. 0-30719

Handspring, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                           |  |                                                      
|-------------------------------------------------------------------------- |  | -----------------------------------------------------
|Delaware(State or other jurisdiction of
    incorporation or organization) |  | 77-0490705(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
$93,100,000 as of August 31, 2002, based upon the closing
price on the Nasdaq National Market reported for such date. The
Registrant has not issued any non-voting stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement
relating to the Registrants 2002 Annual Meeting of
Shareholders, to be held on November 7, 2002, are
incorporated by reference into Part III of this Form where
indicated.



---






---

TABLE OF CONTENTS



|                 |                                                                                               |  |  |  |  |  |  | 
|---------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|HANDSPRING, INC.
|PART I          
|                 | Item 1. Business                                                                             
|                 | Item 2. Properties                                                                           
|                 | Item 3. Legal Proceedings                                                                    
|                 | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II         
|                 | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                 | Item 6. Selected Financial Data                                                              
|                 | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                 | Item 8. Financial Statements and Supplementary Data                                          
|                 | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III        
|                 | Item 10. Directors and Executive Officers of the Registrant                                  
|                 | 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                     
|SCHEDULE II     
|SIGNATURES      
|EXHIBIT INDEX   
|EXHIBIT 10.8    
|EXHIBIT 10.9    
|EXHIBIT 10.17   
|EXHIBIT 10.18   
|EXHIBIT 10.30   
|EXHIBIT 10.31   
|EXHIBIT 21.1    
|EXHIBIT 23.2    



---



##### Table of Contents






HANDSPRING, INC.

2002 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

|                       |  |                                                                                           |    |      |    | 
|---------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                       |  |                                                                                           |    | Page
|                       |  |                                                                                           |    |     
|PART I                
|Item 1.                |  | Business                                                                                  |    |      | 3  | 
|Item 2.                |  | Properties                                                                                |    |      | 9  | 
|Item 3.                |  | Legal Proceedings                                                                         |    |      | 9  | 
|Item 4.                |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 10 | 
|PART II               
|Item 5.                |  | Market for Registrants Common Equity and
    Related Shareholder Matters                 |    |      | 10 | 
|Item 6.                |  | Selected Financial Data                                                                   |    |      | 11 | 
|Item 7.                |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 12 | 
|Item 7A.               |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 31 | 
|Item 8.                |  | Financial Statements and Supplementary Data                                               |    |      | 31 | 
|Item 9.                |  | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure  |    |      | 31 | 
|PART III              
|Item 10.               |  | Directors and Executive Officers of the Registrant                                        |    |      | 31 | 
|Item 11.               |  | Executive Compensation                                                                    |    |      | 31 | 
|Item 12.               |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 32 | 
|Item 13.               |  | Certain Relationships and Related Transactions                                            |    |      | 32 | 
|PART IV               
|Item 14.               |  | Exhibits, Financial Statements, Financial
    Statement Schedule and Reports on Form 8-K  |    |      | 32 | 
|SIGNATURES             |  |                                                                                           | 58 |     
|Officer Certifications |  |                                                                                           | 59 |     

2



---



##### Table of Contents






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. Except as required by law, we undertake
no obligation to update any forward-looking statement, whether
as a result of new information, future events or
otherwise.

Overview

We are a leading provider of handheld computing
and wireless communications devices. We design, manufacture and
sell products in two major categories: handheld computers, also
called organizers, and integrated handheld wireless devices,
also called communicators. These products include various
combinations of hardware, software and services.

We believe that over time the future of handheld
computing will be integrated wireless devices that combine
voice, data, messaging and personal organization capabilities
into one device with a compelling form factor. Accordingly,
during the 2002 fiscal year we focused our development and
business efforts on the emerging communicator market.

In December 2001 we started shipping the
Treo 180 communicator, our first product in the
communicator category. The Treo 180 is an integrated device
combining a mobile phone that operates on the GSM (Global System
for Mobile Communications) telecommunications standard, a
personal organizer based on the Palm OS, and wireless
applications such as SMS (short messaging service), Internet
access and email, all in a shirt pocket size form factor.

The Treo 270 communicator first shipped in June
2002 and is similar to the Treo 180 but adds a bright color
display, a backlit keyboard and improved battery life. In July
2002 we shipped the Treo 300 communicator, an integrated
device with functionality similar to the Treo 270 that is based
on the CDMA (Code Division Multiple Access) telecommunications
standard and is designed to work on the Sprint 1xRTT network.

In May 2002 we released the Treo Mail service
which, for an additional charge, allows users to send and
receive email from their Treo communicator as if they were
working from their desktop computer. In addition, we are now in
the process of releasing a firmware update that allows
Treo 180 and Treo 270 users to upgrade their devices
to take advantage of new GPRS (General Packet Radio Service)
data services on select carrier networks.

In the handheld computer market, we launched the
first product in our Visor product family, the Visor Deluxe, in
October 1999. Our Visor line of electronic organizers support an
open expansion slot, known as our Springboard platform, that
provides a simple and easy method for adding hardware and
software applications.

In 2000 and 2001 we expanded the Visor family to
include the Visor Prism, Visor Platinum, Visor Edge, Visor Pro
and Visor Neo. As we have shifted our focus to communicators and
our Visor products have reached the end of their product life
cycle, we have discontinued building Visors, although inventory
is available from us and our channel partners. To date, we have
shipped approximately 3.2 million Visor units worldwide.

3



---



##### Table of Contents



In June 2002, we shipped the Treo 90, an
organizer product with a similar form factor to our Treo
communicators. The Treo 90 is the lightest Palm OS
color device on the market today, and features an integrated,
physical keyboard.

In addition to our hardware products, we also
license our Blazer browser to end users and other companies.
Blazer is a fast, proxy-based Palm OS browser that enables
wirelessly connected mobile devices to quickly access a wide
range of Web sites, not just those designed for mobile content.

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 users.

Products and Services

Communicators.We
design, manufacture and sell a line of integrated, handheld
wireless devices that combine a mobile phone, an organizer based
on the Palm OS, and wireless applications such as
messaging, Internet access and email, all in a shirt pocket size
form factor. We call these devices communicators. We believe
that communicators represent a new, emerging category of devices
that holds great potential value to users.

Our first communicator, the Treo 180 based on the
GSM standard, started shipping in limited volumes in December
2001 and in larger volumes during the first quarter of calendar
of 2002. There are two dual-band versions of the Treo 180
available: a 900/1900 MHz version sold in North America,
which can roam throughout the world; and a 900/1800 MHz version
sold in Europe and Asia, which can roam in those markets.
Treo 180s are available in English, French, and German
versions. The Treo 180 features include:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Hardware                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | Software                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                 
| An upgradeable, dual band radio on
    the GSM standard
     A small, integrated QWERTY and numeric keyboard
     16 megabytes of user memory
     A 33 MHz Motorola dragonball processor
     A monochrome 160 x 160 pixel display
     An integrated hard cover with a clear viewing
    window
     A rechargeable lithium ion battery
     A ring silencer
     A jog dial
     A speaker and speaker phone
     A phone headset jack along with an included
    headset
     A power charging and synchronization cable |  |  The Palm OS
     The Palm Desktop software for either Macintosh or
    Windows   desktop computers
     The Blazer Internet browser
     A suite of personal organization applications, such
    as an   advanced calendar
     HotSync synchronization software
     A variety of separately provided applications on a
    CD,  including OneTouch Mail from JP Systems

The Treo 180g is identical to the Treo 180 except
that instead of the physical keyboard, the digitizer is extended
and includes a Graffiti text input area.

In June 2002 we started shipping our second
communicator product, the Treo 270. The Treo 270 is
also a GSM product and differs from the Treo 180 in that it
has a color CSTN 160 x 160 pixel display, a backlit
keyboard, and an enhanced battery life. We do not offer a
Graffiti version of the Treo 270.

We are now in the process of releasing a firmware
update that allows Treo 180 and Treo 270 users to
upgrade their devices to take advantage of new GPRS data
services offered by numerous GSM carriers around the world.

4



---



##### Table of Contents



This firmware update is offered to users at no
additional charge. It will be delivered over the Internet and
synchronized onto the users device through the HotSync
process. With this update, Treo 180 and Treo 270 users
will be able to take advantage of an always on and
higher bandwidth Internet connection for accessing Web pages and
utilizing email and other data services.

In July 2002 we shipped the Treo 300, a Treo
communicator based on the CDMA standard widely used in North
America. This product is a co-labeled product with Sprint PCS
under an exclusive arrangement. The Treo 300 is available
through Sprint stores, third party resellers, Sprint business
channels including its direct sales force, and on Sprints
and Handsprings Web sites. The Treo 300 has features
similar to the Treo 270, with additional functionality that
was designed for Sprint that optimizes Sprints new 1xRTT
packet data network.

We believe Treo communicators are distinguished
by several features from their competitors. First, Treo software
has an easy-to-use interface that makes functions such as
conference calling, caller ID, speed-dialing, call history and
standard dialing, fast and intuitive. Second, the software has
integrated the telephone functionality with the organizer
functionality such that there is now a single application that
contains both the phone book and the address book. As a result,
users can quickly and easily look up and dial any name in a
large address book just by typing a few letters of a name.
Third, while there have been integrated products shipped in the
past by other companies, the Treo is unique in its small size
(weighing just over 5.2 oz, 148g), and it fits easily into a
shirt pocket or purse. Fourth, the Treo also comes with
significant data services software: the Blazer Internet browser,
an SMS messaging client and a POP3 email client. Finally, Treo
is the first voice and data communicator that includes an
integrated alpha numeric physical keyboard.

Treo Mail.In May
2002, we released the Treo Mail service that allows Treo
communicators to receive and send wireless email that
synchronizes with their Outlook, Microsoft Exchange Server or
POP3 email account. To purchase Treo Mail, a user downloads a
piece of client software from Handsprings Web site, and
installs that software on the users desktop computer. With
Treo Mail, email is forwarded in an encrypted form to a secure
server, managed by our business partner Visto Corporation, and
then is retrieved by the Treo communicator. Users can receive
emails through either an automated dial-up process, or manually
upon demand. Users pay an annual subscription fee to Handspring
for the use of Treo Mail (currently $99.99 or $49.99, depending
on the version) as well as a usage fee to the appropriate
network operator. Usage pricing plans vary by network operator.
Treo Mail works over GSM circuit switched data networks, as well
as on GPRS and CDMA 1xRTT networks.

Organizers.We sell
a family of Visor handheld, expandable computers that we call
organizers. The Visor product line has included the Visor
Deluxe, Visor Prism, Visor Platinum, Visor Edge, Visor Pro and
Visor Neo. We have introduced Visor handheld computers in
English, French, Italian, German, Spanish and Japanese versions.
The Visor series uses the Palm OS operating system that we
license from PalmSource, which allows the Visors to run standard
Palm OS applications, such as the Address Book, as well as
Handspring developed Palm OS applications, such as an
advanced calculator. Our Visor handheld computers are expandable
through our proprietary Springboard expansion slot, which allows
users to add applications through a Springboard module.

As we have shifted our focus to communicators and
our Visor products are reaching the end of their product life
cycle, we have discontinued building Visors, although inventory
may still be available from us and our channel partners. To
date, we have shipped approximately 3.2 million Visor units
worldwide.

Our newest handheld computer is the Treo 90. The
Treo 90 is distinguished from our Visor products in that it does
not have a Springboard slot, but instead has a Secure Digital
(SD) slot for adding content and memory expansion modules.
The Treo 90 is the lightest Palm OS based device with a color
display in the market today, and features a small QWERTY
keyboard for text entry rather than Graffiti text entry
software. The Treo 90 has a CSTN color display, 16 megabytes of
user memory, an infrared transceiver, a rechargeable lithium ion
battery, and a combination charging and synchronizing cable, and
includes personal organization applications and HotSync desktop
synchronization software. The Treo 90 display has a digitizer
that, along with the included stylus, can be used for easy
navigation and for playing games.

5



---



##### Table of Contents



Blazer Software.Blazer is a Palm OS Web browser that
enables wirelessly connected mobile devices 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
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.

Blazer is available for download for $19.95
through our software distribution partners Handango and
PalmGear. We also have licensed Blazer to Earthlink, Sprint and
Xircom, an Intel company. In addition, Blazer is included as a
part of our Treo communicator products.

Accessories.We
offer a full line of accessories for our products. For example,
we sell a selection of cases and a variety of stylus packs for
our handheld computers, and a car lighter adaptor and optional
cradle for our communicators. 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, carrier and online partners in the United States,
Asia-Pacific, Canada, the Middle East and Europe and through our
own Web site at handspring.com. North American sales constituted
84% of total revenue during fiscal 2002. Our largest retailer is
Best Buy, which accounted for 15% of total worldwide revenue
during fiscal 2002.

We have worked to develop strong relationships
with a variety of wireless carriers around the world. We work
with these carriers in different ways, depending on each
carriers unique situation and requirements. In each case,
technical certification on the network is required. We also work
with carriers to determine joint marketing and sales plans and
we often train their sales and technical support representatives.

Handspring.com is a major site for buying our
products on the Internet. When we sell a Treo communicator on
our own Web site, we sometimes have the opportunity to earn
subsidies from carriers if the Treo communicator customer also
purchases a voice or data plan. Today the wireless industry is
generally decreasing subsidies on voice services. However, given
the need for carriers to sign up customers to their new data
service offerings, we believe that subsidies will continue to be
available for data service contracts.

Our early target markets for the Treo
communicator products are those users who carry multiple devices
such as a cell phone, a handheld computer (such as a Palm OS
organizer) and a pager. To these people, our key selling points
are the ability to eliminate multiple devices and consolidate
monthly invoices, and the benefits of integrating functionality,
such as dialing any name in the address book. Treo customers to
date have generally been high end consumers who are interested
in new technologies and new products. These early
adopters represent a significant part of the selling
process in new categories as they recommend a product to friends
and colleagues. In our early Treo customer surveys, 88% of users
indicated a willingness to recommend the Treo to others.

Although our sales to date principally have been
to individual consumers, we have seen interest in the Treo
product family from education, government and enterprise
customers. To enhance our ability to sell into these markets in
the U.S., we retained MarketLink, a manufacturers
representative organization with approximately 35 direct
salespeople experienced in the sales of wireless products.

We use a variety of marketing programs to build
awareness of our products through retail partner advertising,
end user promotions, public relations campaigns, strategic
promotional efforts and in-store retail

6



---



##### Table of Contents



merchandising. Over this past year, we have not
invested substantially in mass market advertising. We believe
that such a marketing program is a less efficient use of
resources than a more targeted effort.


Customer Service and Support

We generally sell our products with a one-year
limited warranty and offer a supplemental extended warranty
program. We currently outsource our Visor repair services to
Jabil Global Services Corporation. Jabil receives products at
its Louisville, Kentucky facility. We currently outsource our
Treo repair services to Solectron Global Service. Solectron
receives products at its Cypress, California facility.

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

Product Development and Technology

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

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

Although hardware is the most visible aspect of
our products, we also add value to our products through software
development. This software development is at a low level to
enable hardware functionality, at the operating system level to
enhance and extend the Palm OS, at the applications software
level to provide integrated functionality, and, outside of the
devices, at the server level, to manage communications such as
with the Blazer browser.

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

We expect to continue to invest in developing new
products, particularly in the area of wireless communicators.
Our research and development expenditures totaled
$24.7 million in fiscal 2002, $23.6 million in fiscal
2001 and $10.3 million in fiscal 2000. As of
August 31, 2002, we had 100 people engaged in research
and development activities.

Manufacturers and Suppliers

Our Treo communicators and Treo 90 organizer are
manufactured by Solectron at its facilities in Guadalajara,
Mexico. Solectron procures components, and manufactures,
assembles and tests our products. By outsourcing the
manufacturing process, we are able to focus on our core
competencies of product development and design, minimize capital
expenditures, rely on third parties with more manufacturing
expertise than we have, and avoid the need to maintain
facilities for manufacturing operations.

7



---



##### Table of Contents



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

Product orders are transmitted to either Modus
Media or BrightPoint depending on the product and the location
of the customer. 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.

Our Treo Mail product is offered as a result of a
joint development and marketing partnership with Visto
Corporation. We offer Treo Mail as a Handspring product,
invoiced directly to customers who purchase it from our Web
site. The servers that manage the flow of electronic mail are
developed and maintained by Visto, with whom we share the
revenue generated from Treo Mail subscriptions.

Competition

The market for organizers and wireless
communicators is highly competitive, and we expect competition
to increase in the future. Most of our competitors or potential
competitors have significantly greater financial, technical and
marketing resources than we do. These competitors may be able to
respond more rapidly to new or emerging technologies or changes
in customer requirements than we can. They also may devote
greater resources to the development, promotion and sale of
their products than we do.

We believe that the principal competitive factors
affecting the market for organizers and wireless communicators
are design, performance, 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 organizers, handheld computers, high end cell
phones, smart phones and two-way pagers. Our principal
competitors include:



| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Palm Solutions Group, a subsidiary of Palm,
    Inc., which develops, manufactures and markets handheld devices,
    and which is now physically separated from PalmSource, the
    licensor of Palm OS software;
|
| |  | Research In Motion Limited, a leading provider of
    wireless email, instant messaging and Internet connectivity;                                                                                                   
|
| |  | personal computer companies such as
    Hewlett-Packard and Acer;                                                                                                                                                    
|
| |  | mobile handset manufacturers such as Audiovox,
    Ericsson, Kyocera, LG, Motorola, Nokia, Sanyo and Samsung;                                                                                                        
|
| |  | consumer electronics companies such as Casio,
    Sharp and Sony; and                                                                                                                                                
|
| |  | a variety of privately held start-up companies
    looking to compete in our current and future markets, such as
    Danger and Good Technologies.                                                                   

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 lower our
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.

8



---



##### Table of Contents



Intellectual Property

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

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

Employees

As of August 31, 2002, we had a total of 383
employees, of which 100 were in research and development, 43
were in manufacturing services, 124 were in marketing and sales,
42 were in customer relations and operations and 74 were in
general and administrative. We consider our relationships with
employees to be good. None of our employees is covered by
collective bargaining agreements.




Item 2.     Properties

Our headquarters are located in two leased office
spaces in Mountain View, California. These buildings comprise an
aggregate of approximately 86,500 square feet. 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
that we are currently seeking to sublease. In addition, we
currently lease office space in Singapore, the United Kingdom,
the Netherlands, Switzerland, France and Germany.

In February 2001, we entered into lease
agreements for two buildings totaling approximately
340,000 square feet that are being 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. Monthly rent expense of $1.7 million
and monthly operating expenses of approximately $300,000 are
expected to commence in the quarter ending on December 28,
2002, with annual rent increases determined in part by the
Consumer Price Index.

Given that our existing office space is adequate
to meet our current requirements, our current plan is to
sublease at least one, and possibly both, of the two Sunnyvale
buildings. We have engaged a real estate broker to market the
space but have not yet secured any subtenants. Subleasing is
difficult given the substantial decline in the commercial real
estate market in Silicon Valley. Accordingly, any space that we
do sublease will be at a rental rate significantly below our
lease rate.

At the same time that we are attempting to
sublease the buildings, we also are in discussions with the
developer to negotiate a potential buy-out or restructuring of
our leases. Today we cannot predict the outcome of those
discussions. However, as a result of either subleasing the
buildings, or a buy-out or restructuring of the leases, we
anticipate taking a significant, one-time, charge relating to
these buildings in the December quarter of fiscal 2003.
Moreover, in either case, the resulting expense will be
substantial and will adversely affect our cash resources.




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

9



---



##### Table of Contents



asserting counterclaims for declaratory judgments
that we do not infringe the patents in suit, that the patents in
suit are invalid, and that they are unenforceable. On
June 14, 2002, following the retirement of the judge
hearing the case, the case was referred to a magistrate. On
July 11, 2002, the magistrate granted Handsprings
motion for summary judgment finding that Handspring did not
infringe the patents. On August 29, 2002, NCR filed an
objection to the magistrates ruling and Handspring
currently is preparing a response to that objection.


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 patent
in the future. We filed an answer on August 1, 2001,
denying DataQuills allegations and asserting counterclaims
for declaratory judgments that we do not infringe the patent in
suit, that the patent in suit is invalid, and that it is
unenforceable. On August 7, 2002, Handspring filed motions
for summary judgment and expects a ruling shortly. The case
against the other defendant, Kyocera Wireless Corp., has been
severed and transferred to the United States District Court for
the Southern District of California, where it pends separately.

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. These cases have been consolidated with
many cases brought on similar grounds against other parties in
the United States District Court for the Southern District of
New York. A Motion to Dismiss has been filed by a number of
defendants, including Handspring and our named officers, but the
court has not yet ruled on the motion.

On September 18, 2002, Research in Motion
filed suit against Handspring in the United States District
Court for the District of Delaware. The complaint alleges
infringement of one U.S. patent. The complaint seeks
unspecified compensatory and treble damages and to permanently
enjoin Handspring from infringing the patents in the future.
Handspring has not yet filed an answer to the complaint.




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

None.




PART II




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

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

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

10



---



##### Table of Contents



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

On August 31, 2002, there were 476
stockholders of record and over 50,000 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.




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 29, 2002,
June 30, 2001 and July 1, 2000, and the selected
consolidated balance sheet data at June 29, 2002 and
June 30, 2001, are derived from our audited consolidated
financial statements that have been included elsewhere in this
annual report. The consolidated statement of operations data for
the period from July 29, 1998 (date of inception) to
June 30, 1999 and the consolidated balance sheet data as of
July 1, 2000 and June 30, 1999 are derived from our
audited consolidated financial statements not included herein.

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

11



---



##### Table of Contents



|                                              |  |                |         |          |  |         |         |          |  |   |         |  |  |   |        |  
|--------------------------------------------- |  | -------------- | ------- | -------- |  | ------- | ------- | -------- |  | - | ------- |  |  | - | ------ | -
|                                              |  | June 29,       |         | June 30, |  | July 1, |         | June 30,
|                                              |  | 2002           |         | 2001     |  | 2000    |         | 1999    
|                                              |  |                |         |          |  |         |         |         
|                                              |  |               
|                                              |  | (In thousands)
|Consolidated Balance Sheet Data:              |  |                |         |          |  |         |         |          |  |   |         |  |  |   |        |  
|Cash, cash equivalents and investments        |  | $              | 151,433 |          |  | $       | 201,760 |          |  | $ | 199,212 |  |  | $ | 13,917 |  
|Working capital                               |  |                | 51,762  |          |  |         | 48,670  |          |  |   | 182,662 |  |  |   | 13,108 |  
|Total assets                                  |  |                | 216,175 |          |  |         | 253,235 |          |  |   | 230,472 |  |  |   | 15,631 |  
|Long-term liabilities, net of current portion |  |                |        |          |  |         |        |          |  |   | 57      |  |  |   |       |  
|Redeemable convertible preferred stock        |  |                |        |          |  |         |        |          |  |   |        |  |  |   | 17,972 |  
|Total stockholders equity (deficit)          |  |                | 122,906 |          |  |         | 145,202 |          |  |   | 194,229 |  |  |   | (3,616 | )




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 organizer products
began in October 1999.

Beginning in the fourth quarter of fiscal 2001,
we saw significant adverse changes in the handheld organizer
market due to the economic slowdown, excess channel inventory,
aggressive price reductions and increased competition from both
PocketPC and Palm OS handheld organizer manufacturers. These
conditions continued throughout fiscal 2002, and contributed in
part to a 35% decrease in revenue from fiscal 2001 to fiscal
2002.

Significant accomplishments during fiscal 2002
included the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We began shipping our Treo communicators for
    operation with GSM networks: the monochrome Treo 180 and the
    color Treo 270. We also released Treo Mail, our wireless email
    solution for Treo communicators.                                                                                                                                                                                                                                           
|
| |  | We added two new products to our Visor organizer
    family in September 2001, Visor Neo for the entry level market,
    and Visor Pro for the professional market. In June 2002, we
    shipped the Treo 90, a color organizer with the same form factor
    as our Treo communicators that features an integrated, physical
    keyboard.                                                                                                                     
|
| |  | We released a new version of Blazer, our Web
    browser, that supports five languages: English, French, Italian,
    German and Spanish. Blazer continues to be viewed as a leading
    Web browser for Palm OS devices, and is a key component for Treo.                                                                                                                                                                                                      
|
| |  | We completed an underwritten public offering of
    7.0 million shares of common stock at a price to the public
    of $5.50 per share, plus an additional 36,000 shares pursuant to
    the underwriters over-allotment option. In addition,
    QUALCOMM Incorporated made an investment of $10.0 million to
    purchase 1.8 million shares of our common stock. Net of
    offering expenses, these transactions resulted in proceeds of
    $47.0 million.
|
| |  | We significantly reduced operating expenses.
    Excluding amortization of deferred stock compensation and
    intangibles, operating expenses declined by $58.4 million,
    or 35%, from fiscal 2001 to fiscal 2002.                                                                                                                                                                                                                                          

We believe that integrated wireless devices will
be the future of handheld computing. As a result of this belief,
we are in the process of transitioning Handspring from a company
focused on standalone handheld computers, to a company aimed at
becoming a leader in the emerging category of wireless
communicators. This transition may take some time as products
are introduced and advanced, as the networks mature their data
offerings, and as customers become more familiar with these new
offerings. While we continue to sell organizers, we have shifted
much of our future product development towards wireless
communicators, which we believe represents a potentially large,
new category of computing and communications devices.

12



---



##### Table of Contents



Significant Accounting Policies

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

Revenue Recognition Revenue to date is comprised almost
entirely of sales of our organizers and communicators. 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 recognize revenue when a purchase order
has been received, the product has been shipped, title has
transferred to the customer, the sales price is fixed or
determinable and collection of the resulting receivable is
probable. Sales of our handheld communicators may also include
subsidy revenue from wireless carriers for new customer service
contracts or the extension of existing customer contracts. In
these cases, the customer has a specified period of time in
which they may cancel their service. All revenue related to
these subsidies is deferred until this specified period of time
has elapsed. No significant post-delivery obligations exist with
respect to revenue recognized.

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

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

Cash and cash equivalents, short-term
investments and long-term investments We invest our 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.

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

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

13



---



##### Table of Contents



Income Taxes We account 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.

Results of Operations

Revenue.Fiscal 2002
revenue was $240.7 million, a decline of $130.3 million
from fiscal 2001 revenue of $370.9 million. The decrease
was primarily due to the following factors:



| |   |                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | There was a decline in unit shipments of our
    Visor organizers. We believe that unit sales decreased due to
    economic weakness, a significant slowing in the growth rate of
    the organizer market, excess inventories, increased competition,
    and our shift in focus from organizer products to communicator
    products.
|
| |  | There was a decline in the average selling price
    for our Visor organizers, which was primarily attributable to
    pricing and promotion actions that we initiated to reduce
    channel inventory, as well as a general reduction in the market
    prices for handheld organizers.                                               
|
| |  | The decrease in Visor organizer revenue was
    offset in part by revenue generated from the first shipments of
    our Treo products, which began shipping internationally at the
    end of the second quarter of fiscal 2002, and began shipping in
    North America during the third quarter of fiscal 2002.                      

Fiscal 2001 revenue was $370.9 million, an
increase of $269.0 million from fiscal 2000 revenue of
$101.9 million. This increase in revenue was primarily due
to the following factors:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We began shipping products during the second
    quarter of fiscal 2000. Therefore, on a comparative basis, there
    was only a partial year of product shipments during fiscal 2000
    compared to 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 was
$205.9 million during fiscal 2002, a decline of
$86.4 million from cost of revenue of $292.3 million
during fiscal 2001. Excluding the amortization of deferred stock
compensation, cost of revenue resulted in gross margin declining
from 21% in fiscal 2001 to 14% in fiscal 2002. This decline was
primarily attributable to aggressive pricing and promotion
actions taken in order to increase demand and reduce inventory
of our organizer products. The negative effect of the pricing
and promotion actions on gross margin was partially offset by
higher margins on the sales of our Treo line of products
beginning in the second quarter of fiscal 2002. Also offsetting
the decrease in gross margin was a slightly higher percentage of
our products sold through our Web site during fiscal 2002 as
compared with fiscal 2001. Sales through our Web site typically
generate higher gross margins as compared to retail sales.

Cost of revenue during fiscal 2001 was
$292.3 million, an increase of $222.4 million from
fiscal 2000 cost of revenue of $69.9 million. Excluding
amortization of deferred stock compensation, cost of revenue
resulted

14



---



##### Table of Contents



in gross margin declining from 31% in fiscal 2000
to 21% in fiscal 2001. This decline was primarily attributable
to three factors. First, we incurred a $26.8 million charge
in the fourth fiscal quarter as a result of 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. 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.


We expect gross margin to improve as Treo becomes
a larger percentage of our product mix. However, future gross
margins 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, seasonal effects, and timing and amount of
carrier subsidies.

Research and development.Research and development expenses
during fiscal 2002 were $24.7 million, an increase of
$1.1 million, or 5%, from $23.6 million during fiscal
2001. Research and development expenses during fiscal 2001
increased $13.3 million, or 130%, from $10.3 million
during fiscal 2000. The increases in both years were primarily
due to the hiring of additional personnel required for
development of new products, including our Treo communicator
during fiscal 2002. We believe that continued investment in
research and development is critical to our plan to continue to
develop wireless communicator products.

Selling, general and administrative.Selling, general and administrative
expenses during fiscal 2002 were $85.6 million, a decline
of $59.5 million, or 41%, from $145.1 million during
fiscal 2001. This decrease was primarily due to significant
reductions in advertising and marketing activities, as well as
the restructuring of our customer support organization and
general cost reductions made company-wide. Selling, general and
administrative expenses during fiscal 2001 increased
$102.7 million, or 242%, from $42.4 million during
fiscal 2000. This increase reflected the additional costs and
expenses relating to the overall expansion in our level of
operations required to support our revenue growth during this
period, including increased sales and marketing activities 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.

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

In connection with the acquisition of BlueLark
Systems, we recorded a $12.2 million charge for in-process
research and development 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.

15



---



##### Table of Contents



Amortization of deferred stock compensation
and intangibles.We recognized
$20.2 million, $32.8 million and $40.1 million of
amortization of deferred stock compensation and intangibles
during fiscal 2002, 2001 and 2000, 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 intangible assets consisting of goodwill and
assembled workforce of $612,000. These assets were amortized
from the date of acquisition through fiscal 2002 on a
straight-line basis over three years. However, with the adoption
of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, beginning in fiscal
2003, the value of assembled workforce will be reclassified and
recorded as goodwill, and the amortization will be discontinued.
Instead, the unamortized balance of $331,000 at June 29,
2002 will be subject to an impairment test at least annually.

Future amortization of deferred stock
compensation is estimated to be $8.2 million and
$1.3 million for fiscal years 2003 and 2004, respectively.

Interest and other income, net.Interest and other income, net was
$5.3 million during fiscal 2002, a decline of
$6.9 million from $12.2 million in fiscal 2001. This
decrease was a result of decreased interest income from lower
average cash and investment balances as well as lower interest
rates during fiscal 2002 compared to fiscal 2001. Interest and
other income, net during fiscal 2001 increased by
$11.5 million from $675,000 in fiscal 2000. This increase
is a result of increased interest income from higher average
cash and investment balances primarily resulting from our
financing activities, including $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 this line item are gains and
losses from fluctuations in foreign currency exchange rates,
primarily caused from the movement between the Euro and the U.S.
dollar on our foreign subsidiaries U.S. dollar
liabilities. These fluctuations partially offset the decrease in
interest and other income, net during fiscal 2002 and partially
offset the increase during fiscal 2001. We have in the past
entered into foreign exchange forward contracts to minimize the
impact of foreign currency fluctuations on assets and
liabilities denominated in currencies other than the functional
currency of the reporting entity. We will continue to assess the
need to utilize financial instruments to hedge currency
exposures.

During fiscal 2000, interest and other income,
net also included 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
$1.1 million, $3.0 million and $200,000 during fiscal
2002, 2001 and 2000, respectively. The provision for income
taxes consists primarily of foreign taxes related to our
business outside of the United Sates of America. The
fluctuations in the provision for income taxes during fiscal
2000 through fiscal 2002 relate to the increase during fiscal
2001 and the decrease during fiscal 2002 in the level of our
operations outside of the United States.

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

16



---



##### Table of Contents



Liquidity and Capital Resources

As of June 29, 2002, we had cash, cash
equivalents and short-term investments of $100.8 million,
down $20.7 million from $121.5 million as of
June 30, 2001. This decrease is primarily attributable to
cash used in operations, partially offset by the net proceeds
received from the underwritten public offering and private
offering we completed during December 2001 as well as the
movement of investments from long-term to short-term.

Net cash used in operating activities was
$89.0 million, $16.9 million and $3.4 million
during fiscal 2002, 2001 and 2000, respectively. Net cash used
in operating activities was primarily attributable to our net
losses offset partially by the non-cash charge for amortization
of deferred stock compensation and intangibles and, to a lesser
extent, depreciation and amortization. The losses during fiscal
2001 were also offset by the non-cash 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 2002, additional contributors to
the use of cash were an increase in accounts receivable and a
decrease in current liabilities. The increase in accounts
receivable was due to the timing of shipments in the last
quarter of fiscal 2002 compared with the previous year, and the
decrease in current liabilities was due to a general decrease in
the level of operations throughout the year as well as the
payment for excess and obsolete inventories reserved for in the
previous year. Also, during fiscal 2002 we changed our business
practice with our logistics partners, whereby we now own all
inventory held at their facilities. This change in practice
caused a decrease in prepaid expenses and an increase in
inventory on the balance sheet. During fiscal 2001, an 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
held on our behalf and purchases of long lead-time,
Handspring-specific, product components. A decrease in accounts
receivable during fiscal 2001, due to the timing of shipments in
the last quarter of fiscal 2001 compared with fiscal 2000, and
an increase in current liabilities, due to a general increase in
the level of operations during the year, partially offset the
cash used during fiscal 2001. During fiscal 2000, an increase in
accounts receivable contributed to the use of cash in operating
activities, reflecting the commencement of product sales, offset
by a significant increase in current liabilities due to a
general increase in the level of operations during that year.

Net cash provided by investing activities was
$36.4 million during fiscal 2002, primarily attributable to
proceeds received from maturities or sales of available-for-sale
securities, partially offset by purchases of available-for-sale
securities, and to a lesser extent, purchases of property and
equipment. Net cash used in investing activities was
$123.6 million and $6.0 million during fiscal 2001 and
2000, 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
$51.1 million, $31.0 million and $198.4 million
during fiscal 2002, 2001 and 2000, respectively. The net cash
provided by financing activities during fiscal 2002 resulted
primarily from the public sale of our common stock and a
$10.0 million investment from QUALCOMM Incorporated, for
total net proceeds of $47.0 million. 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 and $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. In addition,
we received proceeds of $4.1 million, $3.1 million and
$2.0 million during fiscal 2002, 2001 and 2000,
respectively, from the issuance of common stock under stock
option plans and stock purchase plans.

We have pledged a portion of our investment
securities as collateral for specified obligations under lease
agreements for two buildings totaling approximately
340,000 square feet that are being constructed in
Sunnyvale, California. Both leases have initial terms of twelve
years. Monthly rent expense of $1.7 million and monthly
operating expenses of approximately $300,000 are expected to
commence during the second quarter

17



---



##### Table of Contents



of fiscal 2003, with annual rent increases
determined in part by the Consumer Price Index. The minimum
monthly rent payment in the twelfth year is $2.4 million.
As of June 29, 2002 there was $47.4 million pledged in
relation to these leases. Of the amount pledged
$23.5 million is designated by the agreements to be
utilized for tenant improvements. The remaining portion of the
pledged investment represents a security deposit on the
property. As of June 29, 2002 there was also a total of
$3.3 million pledged as collateral for lease payments for
various other leases expiring between June 2002 and June 2008,
as well as foreign taxes.


Given that our existing office space is adequate
to meet our current requirements, our current plan is to
sublease at least one, and possibly both, of the two Sunnyvale
buildings. We have engaged a real estate broker to market the
space but have not yet secured any subtenants. Subleasing is
difficult given the substantial decline in the commercial real
estate market in Silicon Valley. Accordingly, any space that we
do sublease will be at a rental rate significantly below our
lease rate.

At the same time that we are attempting to
sublease the buildings, we also are in discussions with the
developer to negotiate a potential buy-out or restructuring of
our leases. Today we cannot predict the outcome of those
discussions. However, as a result of either subleasing the
buildings, or a buy-out or restructuring of the leases, we
anticipate taking a significant, one-time, charge relating to
these buildings in the December quarter of fiscal 2003.
Moreover, in either case, the resulting expense will be
substantial and will adversely affect our cash resources.

Our future capital requirements will depend on
many factors, including the level and timing of our revenue and
expenses and the extent of our lease obligations. We believe
that our cash, cash equivalents and short-term investments will
be sufficient to meet our working capital needs for at least the
next twelve months. To the extent cash generated from operations
is insufficient to satisfy our liquidity requirements, including
our lease obligations, 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. If adequate
funds are not available, we may be required to delay, scale back
or eliminate significant operating activities which may include
certain research and development or marketing programs.
Accordingly, the inability to obtain needed financing could
adversely affect our business, financial condition and results
of operations. 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 August 2001, the FASB issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.SFAS 144 supercedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and APB 30,
Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions.Under SFAS 144 a single accounting model
for long-lived assets to be disposed of is established. The
accounting model is based on the framework established in
SFAS 121 and resolves certain implementation issues.
SFAS 144 is effective beginning in fiscal 2003. The
adoption is not expected to have a material impact on our
financial position and results of operations.

In November 2001, the Emerging Issues Task Force
(EITF), issued EITF Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products),which
codified and reconciled EITF Issue No. 00-14, Accounting
for Certain Sales Incentives, Issues 2 and 3 of Issue
No. 00-22, Accounting for Points and Certain Other
Time-Based or Volume-Based Sales Incentive Offers and Offers for
Free Products or Services to be Delivered in the Future, and
Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the
Vendors Products.EITF addresses the accounting for
consideration given by a vendor to a customer (including both a
reseller of the vendors products and an entity that
purchases the vendors products from the reseller). Any
consideration given by a vendor to a customer (or a reseller, or
a customer of a reseller) is generally presumed to be a
reduction of selling price, and therefore, a reduction of
revenue. That presumption can be overcome if the vendor receives
an identifiable benefit in return for the consideration paid
that is sufficiently separable from the sale to the recipient,
and the vendor can reasonably estimate the fair value of that
benefit, in which

18



---



##### Table of Contents



case the consideration is characterized as an
expense. We adopted EITF during fiscal 2002. The adoption did
not have a material impact on our financial position or results
of operations.


In July 2002, the FASB issued SFAS 146,
Accounting for Costs Associated With Exit or Disposal
Activities.SFAS 146 requires that a liability for
costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is
incurred. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The
adoption is not expected to have a material impact on our
financial position and results of operations.

Factors Affecting Future Results



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

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

If we fail to anticipate our customers
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.

Successful new product introductions are
particularly important given our shift in development focus from
organizers to wireless communicators. This shift in focus
requires that our limited resources be directed more towards the
development of communicators and less on traditional organizers
where we have more extensive engineering, production and
marketing experience. VisorPhone, which was our first attempt to
offer a product combining wireless communications features with
an organizer, did not achieve significant commercial success.
Our new Treo family of wireless communicators is the next step
in our ongoing development effort focused on new wireless
technologies. Our business would be substantially harmed if we
fail to successfully develop and commercialize new communicators
and other innovative wireless products and services.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | We depend on wireless carriers for the
    success of our Treo communicator products.

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



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the wireless carriers interest in testing
    Treo on their networks;                                                                                
|
| |  | the quality and coverage area of voice and data
    services offered by the wireless carriers for use with Treo;                                      
|
| |  | the degree to which wireless carriers will
    facilitate the successful introduction of Treo and actively
    promote Treo;                          
|
| |  | the extent to which wireless carriers will
    require specific hardware and software features on Treo
    communicators to be used on their networks;

19



---



##### Table of Contents





| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the extent to which carriers will sell and
    promote competitive products over Treo and coverage area of
    voice and data services offered by the wireless carriers for use
    with Treo; and
|
| |  | the pricing and terms of voice and data rate
    plans that the wireless carriers will offer for use with Treo.                                                                                   



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | The success of our Treo communicator
    products requires both network and software
    upgrades

We also depend on wireless carriers to build out
advanced wireless networks in a timely manner. Advanced wireless
networks such as General Packet Radio Services (GPRS, also known
as 2.5G) and 1xRTT (also know as 3G) are expected to enhance the
user experience for email and other services through higher
speed and always on functionality. We are working to
develop products that utilize these advanced wireless networks
and recently shipped the Treo 300 designed to operate on
Sprints CDMA 1xRTT network. We are now in the process of
releasing a firmware update that allows Treo 180 and
Treo 270 users to upgrade their devices to take advantage
of new GPRS data services on select carrier networks. Delays in
the roll-out of GPRS networks, or our failure to complete as
scheduled the release of the Treo software upgrade that is
needed for Treo to effectively operate with GPRS networks, could
adversely affect our business.



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

The shift in focus of our business from
traditional handheld computers to our Treo wireless communicator
products presents many significant manufacturing, marketing and
other operational risks and uncertainties, many of which are
beyond our control. Factors that could affect the success of
Treo include:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our dependence on third parties to supply
    components, such as Wavecom and AirPrime which provide radios
    for our GSM and CDMA based Treo communicators, respectively;                         
|
| |  | our ability to manufacture our Treo products in
    sufficient volumes on a timely basis;                                                                                                            
|
| |  | the type of distribution channels where Treo will
    be available;                                                                                                                                  
|
| |  | our ability to forecast demand accurately,
    especially for products such as Treo communicators which are in
    a new product category for which relevant data is incomplete or
    not available;
|
| |  | the end user price of Treo; and                                                                                                                                                                      
|
| |  | the extent of consumer acceptance of this new
    product category, which combines multiple functions in a pocket
    sized device.                                                                  



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Our relationship with Sprint is
    particularly important to the success of our
    business.

In March 2002, we announced an agreement to work
with Sprint to develop a new CDMA version of the Treo
communicator that operates on Sprints 3G network. This
jointly labeled product, the Treo 300, became commercially
available in August 2002. The Treo 300 is principally sold
and promoted by Sprint and sales of this product are expected to
constitute a significant portion of our revenues for the
remainder of the calendar year. Since the Treo 300 is
customized for the Sprint network, Handspring currently will
manufacture the product only in volumes that are supported by
Sprint purchase orders or if Sprint assumes financial liability
for long lead time components. If Sprint does not sell and
promote the product to the extent we anticipate, future purchase
orders from Sprint may be deferred and our business will be
harmed.



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

When we sell a Treo communicator on our own Web
site, we sometimes have the opportunity to earn subsidies from
carriers if the Treo communicator customer also purchases a
voice or data plan from the carrier. Today the wireless industry
is generally decreasing subsidies on voice services. Moreover,
carriers that currently provide Handspring with subsidies may
reduce or discontinue such subsidies with little or no notice to
Handspring. While we believe carriers will continue to offer
subsidies to Handspring, particularly given their

20



---



##### Table of Contents



need to sign up new data service customers, if
these subsidies were reduced or eliminated the gross margins for
Treo communicators would decline and we would be more limited in
our ability to sell Treo communicators at prices that are
attractive to cost sensitive consumers.




| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | We face economic exposure with respect to
    our lease obligations as a result of excess leased real
    estate.

In February 2001, we entered into lease
agreements for two buildings totaling approximately 340,000
square feet that are being constructed in Sunnyvale, California.
Both leases have initial terms of twelve years. Monthly rent
expense of $1.7 million and monthly operating expenses of
approximately $300,000 are expected to commence during the
second quarter of fiscal 2003, with annual rent increases
determined in part by the Consumer Price Index.

Given that our existing office space is adequate
to meet our current requirements, our current plan is to
sublease at least one, and possibly both, of the two Sunnyvale
buildings. We have engaged a real estate broker to market the
space but have not yet secured any subtenants. Subleasing is
difficult given the substantial decline in the commercial real
estate market in Silicon Valley. Accordingly, any space that we
do sublease will be at a rental rate significantly below our
lease rate.

At the same time that we are attempting to
sublease the buildings, we also are in discussions with the
developer to negotiate a potential buy-out or restructuring of
our leases. Today we cannot predict the outcome of those
discussions. However, as a result of either subleasing the
buildings, or a buy-out or restructuring of the leases, we
anticipate taking a significant, one-time, charge relating to
these buildings in the December quarter of fiscal 2003.
Moreover, in either case, the resulting expense will be
substantial and will adversely affect our cash resources.



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

The downturn in general economic conditions and
the substantial decline in the stock market have 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. This is particularly true with respect to our
Treo communicators as they typically carry a list price between
$349 and $699 and therefore are expensive purchases for many
consumers.



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

We began selling our Visor handheld computer and
generating revenue in the quarter ended January 1, 2000. We
began volume shipments of our Treo communicator products during
the quarter ended March 30, 2002. While we continue to
manufacture and sell organizer products, we are transitioning
from a company primarily focused on organizers, to a company
primarily focused on the emerging market for handheld
communicators. Given our limited operating history and the shift
in our focus from organizers to communicators, 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 common stock would likely decline.



| |                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend heavily on our license from
    PalmSource. Our failure to maintain this license, a change in
    PalmSources business focus or an adverse outcome in any of
    the lawsuits involving the Palm OS could seriously harm our
    business.

Our license of the Palm OS operating system is
critical for the operation of our products. If the license is
not maintained or if PalmSource, the newly established,
wholly-owned subsidiary of Palm that owns and controls the Palm
OS platform, changes its business focus, it could seriously harm
our business. This could happen in several ways. First, we could
breach the license agreement, in which case PalmSource would be
entitled to terminate the license. Second, if PalmSource were to
be acquired, the new licensor may not be as strategically
aligned with us as PalmSource even though it would be obligated
to honor our license agreement.

21



---



##### Table of Contents



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

Suits against Palm and PalmSource involving the
Palm OS operating system 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 or PalmSource as a result of
market uncertainty or product changes that could arise from such
a determination.

While we are not contractually precluded from
licensing or developing an alternative operating system, doing
so could be less desirable and could be costly in terms of cash
and other resources.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | 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 29, 2002
was $286.2 million. We had net losses of $91.6 million
during fiscal 2002, $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, which will contribute to our net losses.
As of June 29, 2002, we had a total of $9.5 million of
deferred compensation 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 might need additional capital in the
    future and additional financing might not be
    available.

In December 2001, we completed an underwritten
public offering as well as a non-underwritten transaction with
QUALCOMM Incorporated. Net of offering expenses, these
transactions resulted in proceeds of $47.0 million. 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 twelve months.
However, our resources may prove to be insufficient for 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;
|
| |  | meet our lease obligations with respect to our
    Sunnyvale facilities;                                                    
|
| |  | 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.

22



---



##### Table of Contents





| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
    products.

We sell our products through numerous retailers
and distributors as well as online through our handspring.com
Web site and e-commerce partners. Currently, our largest retail
partner is Best Buy. We also sell in international markets and
offer our products through distributors in Asia Pacific, Canada,
Europe and the Middle East. Disruptions to these channels would
adversely affect our ability to generate revenues from the sale
of our products.

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



| |   |                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | product returns from retailers and distributors
    when Handspring determines their inventories exceed appropriate
    levels;                                                                                                                                                             
|
| |  | retailers and distributors may not maintain
    inventory levels sufficient to meet customer demand or may elect
    not to carry our new wireless communicator products such as Treo;                                                                                                      
|
| |  | retailers and distributors may emphasize our
    competitors products or decline to carry our products;                                                                                                                                                                                    
|
| |  | as the global information technology market
    weakens, the likelihood of the erosion of the financial
    condition of these distributors and retailers increases, which
    could cause a disruption in distribution as well as a loss of
    any of our outstanding accounts receivable;
|
| |  | 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; and                                                                                                         
|
| |  | if we reduce the prices of our products, as we
    have in the past, in order to maintain good business relations,
    we may compensate retailers and distributors for the difference
    between the higher price they paid to buy their inventory and
    the new lower prices.          



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 Web servers currently are
co-located with the Exodus Service provided by Cable &
Wireless plc. Any disruption in these services or the failure of
these services to handle current or higher volumes of use could
have a material adverse affect on our business. Despite
precautions we have taken and improvements 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 manufacturer 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, such as those that
have occurred in the handheld computer industry, would harm our
ability to deliver our products on a timely basis.

Some components, such as power supply integrated
circuits, radios, microprocessors and certain discrete
components, come from sole or single source suppliers. For
example, Wavecom is the sole supplier of certain

23



---



##### Table of Contents



wireless technology components for our Treo 180
and 270 communicators. Alternative sources are not currently
available for these sole and single source components. If
suppliers are unable to meet our demand for sole source
components and if we are unable to obtain an alternative source
or if the price for an alternative source is prohibitive, we
might not be able to maintain timely and cost-effective
production of our products. This problem is compounded when the
sole or single source supplier is facing financial difficulties
and the possibility of discontinuing its operations.




| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to compete effectively
    with existing or new competitors, our resulting loss of
    competitive position could result in price reductions, fewer
    customer orders, reduced margins and loss of market
    share.

The markets for handheld organizers and wireless
communication products are highly competitive and we expect
competition to increase. 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 include:



| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Palm Solutions Group, a subsidiary of Palm,
    Inc., which develops, manufactures and markets handheld devices
    and which is now physically separated from PalmSource, the
    licensor of Palm OS software.
|
| |  | Research In Motion Limited, a leading provider of
    wireless email, instant messaging and Internet connectivity;                                                                                                  
|
| |  | personal computer companies such as
    Hewlett-Packard and Acer;                                                                                                                                                   
|
| |  | mobile handset manufacturers such as Audiovox,
    Ericsson, Kyocera, LG, Motorola, Nokia, Sanyo and Samsung;                                                                                                       
|
| |  | consumer electronics companies such as Casio,
    Sharp and Sony; and                                                                                                                                               
|
| |  | a variety of privately held start-up companies
    looking to compete in our current and future markets, such as
    Danger and Good Technologies.                                                                  

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 lower
our market share. We cannot be sure that we will have sufficient
resources or that we will be able to make the technological
advances necessary to be competitive.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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;

24



---



##### Table of Contents





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

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

If demand does not develop as expected, we could
have excess production resulting in excess finished products and
components and may be required to incur excess and obsolete
inventory charges. We have limited capability to reduce
manufacturing capacity once a purchase order has been placed and
in some circumstances we would incur cancellation charges or
other liabilities to our manufacturing 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.

If demand exceeds our expectations, we will need
to rapidly increase production at our third-party manufacturer.
Our suppliers will also need to provide additional volumes of
components, which may not be possible within our timeframes.
Even if our third-party manufacturer is 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
manufacturer or our suppliers to increase production rapidly
enough could cause us to fail to meet customer demand. In
addition, rapid increases in production levels to meet
unanticipated demand could result in higher costs for
manufacturing and supply of components and other expenses. These
higher costs would lower our profit margins.



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

We depend on a single third party manufacturer,
Solectron, to produce sufficient volume of our products in a
timely fashion and at satisfactory quality levels. The cost,
quality and availability of Solectrons manufacturing
operations are essential to the successful production and sale
of our products. Under our manufacturing agreement with
Solectron we order products on a purchase order basis in
accordance with a forecast. The absence of dedicated capacity
under our manufacturing agreement with Solectron means that,
with little or no notice, Solectron could refuse to continue to
manufacture all or some of the units of our devices that we
require or change the terms under which they manufacture our
devices, such as our credit terms. If they were to stop
manufacturing our devices, it could take from three to six
months to secure alternative manufacturing capacity and our
results of operations could be harmed. In addition, if Solectron
were to change the terms under which they manufacture for us,
our manufacturing costs could increase and our results of
operations could suffer.

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



| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | unexpected increases in manufacturing and repair
    costs;              
|
| |  | interruptions in shipments if they are unable to
    complete production;
|
| |  | inability to control quality of finished products;                       

25



---



##### Table of Contents





| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | inability to control delivery schedules;                                                                                   
|
| |  | the risks associated with international
    operations in Guadalajara, Mexico where Solectron maintains
    facilities; and
|
| |  | unpredictability of manufacturing yields.                                                                                  



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



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | 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. We have
experienced seasonality in the sales of our products with
increased demand typically occurring in our second fiscal
quarter. This increase in demand is due in part to increased
consumer spending on electronic devices during the holiday
season, in particular during the last few weeks of December. In
addition, demand for our products may decline after the holiday
season, particularly during the summer months because of typical
decreased consumer spending patterns during this period.



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

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



| |                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 markets. 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. For example, any such undetected errors or defects
in our Treo communicator line of products could adversely impact
market acceptance of this product line, which would hurt our
business. We may experience delays in releasing new products or
producing them in significant volumes as problems are corrected.

From time to time, we have become aware of
problems with components and other defects. Errors or defects in
our products that are significant, or are perceived to be
significant, could result in the rejection of the products,
damage to our reputation, lost revenues, diverted development
resources and increased customer service and support costs and
warranty claims. In addition, we warrant that our hardware will
be free of defects for one year after the date of purchase. In
Europe, we are required by law in some countries to provide a
two-year warranty for certain defects. Delays, costs and damage
to our reputation due to product defects could harm our business.

26



---



##### Table of Contents



In July 2002, we discovered a defect in a
component of the backlight assembly in some Treo 90 and
Treo 270 products, which can render the backlight
inoperable. While we believe most of our Treo 90 and
Treo 270 products will not experience this problem, we
decided to screen all units in our inventory for the defective
component, and are building new products with verified
components. As a cautionary measure, we suspended shipments of
Treo 90 and Treo 270 for a period of approximately two
weeks.



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

Our facilities, information systems and general
business operations, and those of our partners and customers,
are vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure, terrorist attacks, wars and other
events beyond our control. The business interruption insurance
we carry may not be sufficient to compensate us fully for losses
or damages that may occur as a result of such events. Any such
losses or damages incurred by us could have a material adverse
effect on our business.



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

Our future success depends to a significant
extent on the continued service of our key technical, sales and
senior management personnel and their ability to execute our
growth strategy. In particular, we rely on Jeffrey C. Hawkins,
our Chief Product Officer, Donna L. Dubinsky, our Chief
Executive Officer, and Edward T. Colligan, our Chief Operating
Officer. The loss of the services of any of these or any of our
other senior level management, or other key employees could harm
our business.

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



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

Our future success depends on our ability to
attract, retain and motivate highly skilled employees.
Competition for highly skilled employees in our industry is
intense. Although we provide compensation packages that include
stock options, cash incentives and other employee benefits, we
may be unable to retain our key employees or to attract,
assimilate and retain other highly qualified employees in the
future. If we fail to retain, hire and integrate qualified
employees and contractors, we will not be able to maintain and
expand our business.

In addition, when our common stock price is less
than the exercise price of stock options granted to employees,
turnover may increase, which could harm our results of
operations or financial condition. In order to help retain
employees, we recently offered our employees the right to
participate in an option exchange program pursuant to which they
were given the right to choose to exchange unexercised stock
options for new stock options with a new exercise price to be
granted at least six months and one day following the
cancellation of their existing stock options on. The terms of
the replacement options will be substantially the same as the
cancelled options, except that in most circumstances there will
be an additional cliff period of up to six months imposed on the
vesting schedule of the option that will limit the ability of
the option holder to exercise the option. Of the 28,538,126
shares subject to stock options that were eligible for the
exchange program, a total of 11,677,415 such options shares were
submitted and accepted for exchange on May 17, 2002. We
currently anticipate that replacement options will be granted on
or soon after November 18, 2002.



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

27



---



##### Table of Contents



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. In particular, as our focus has shifted to
wireless communicators, we have received, and expect to continue
to receive, communications from holders of patents related to
GSM, GPRS, CDMA and other mobile communication standards.

Any litigation to determine the validity of
intellectual property claims, 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.

Handspring currently is a defendant in the three
patent infringement lawsuits described below, all of which we
believe are without merit and intend to vigorously defend. Our
policy is to vigorously defend meritless lawsuits while
respecting the intellectual property rights of others.

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

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 patent
in the future. We filed an answer on August 1, 2001,
denying DataQuills allegations and asserting counterclaims
for declaratory judgments that we do not infringe the

28



---



##### Table of Contents



patent in suit, that the patent in suit is
invalid, and that it is unenforceable. Handspring has filed
motions for summary judgment and expects a ruling shortly. The
case against the other defendant, Kyocera Wireless Corp., has
been severed and transferred to the United States District Court
for the Southern District of California, where it pends
separately.


On September 18, 2002, Research in Motion
filed suit against Handspring in the United States District
Court for the District of Delaware. The complaint alleges
infringement of one U.S. patent. The complaint seeks
unspecified compensatory and treble damages and to permanently
enjoin Handspring from infringing the patents in the future.
Handspring has not yet filed an answer to the complaint.



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

We sell our products in Asia Pacific, Canada,
Europe 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 product 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 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.

We expect to evaluate 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.



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

Among the factors that could affect our stock
price are:



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | quarterly variations in our operating results,
    including the level of sales during the holiday season;
|
| |  | the timing and success of the introduction of our
    Treo line of products;                              
|
| |  | changes in revenues or earnings estimates or
    publication of research reports by analysts;             
|
| |  | speculation in the press or investment community;                                                         

29



---



##### Table of Contents





| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
subjects of securities class action litigation. We have been
named as a party in several purported securities class action
lawsuits that claim 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 the underwriters pursuant to
the underwriting agreement that we entered into with them in
connection with our initial public offering.



| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Communications we made to an investor could
    subject us to claims for return to the investor of the purchase
    price it paid us for the shares purchased.

In November 2001, we provided a written
communication to QUALCOMM Incorporated, which subsequently
agreed to purchase 1,838,945 shares of common stock from us at a
price of $5.4379 per share. It is possible that the
communication might be deemed to be a prospectus that did not
meet the requirements of the Securities Act and was therefore
made in violation of the Securities Act. If this communication
were determined to violate the Securities Act, then for a period
of one year after the date QUALCOMM discovered this violation,
QUALCOMM might bring a claim against us. In any action of this
kind, QUALCOMM might seek recovery of the funds it paid for its
shares or, if it had already sold its shares, damages resulting
from its purchase and sales of those shares. We would contest
any such claim vigorously.



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

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



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

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



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | 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. Many of the shares
eligible for sale in the public market 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.

30



---



##### Table of Contents






Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

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

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






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

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






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

Not applicable.




PART III




Item 10.     Directors
and Executive Officers of the 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 2002
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 2002 annual
stockholders meeting, is incorporated into this annual
report by reference.

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
2002.




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 2002 annual stockholders meeting, is incorporated
into this annual report by reference.

31



---



##### Table of Contents






Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information concerning security ownership
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
2002 annual stockholders meeting, is incorporated into
this annual report by reference.

The information concerning equity compensation
plan information required by this item, which will be set forth
in the section entitled Equity Compensation Plan
Information of our definitive proxy statement for our 2002
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
2002 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                                                                                                                |  |      | 35 | 
|Consolidated Balance Sheets at June 29, 2002
    and June 30, 2001                                                                               |  |      | 36 | 
|Consolidated Statements of Operations for the
    Years Ended June 29, 2002, June 30, 2001 and
    July 1, 2000                                  |  |      | 37 | 
|Consolidated Statements of Stockholders
    Equity and Comprehensive Loss for the Years Ended June 29,
    2002, June 30, 2001 and July 1, 2000 |  |      | 38 | 
|Consolidated Statements of Cash Flows for the
    Years Ended June 29, 2002, June 30, 2001 and
    July 1, 2000                                  |  |      | 39 | 
|Notes to Consolidated Financial Statements                                                                                                       |  |      | 40 | 

(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 29, 2002:       |  | Period       |        | Expenses          |  | Deductions |        | Period    
|                                |  |              |        |                   |  |            |        |           
|Allowance for doubtful accounts |  | $            | 2,239  |                   |  | $          | 1,667  |            |  | $ | (195    | ) |  | $ | 3,711  | 
|Product return reserve          |  |              | 4,552  |                   |  |            | 15,060 |            |  |   | (16,752 | ) |  |   | 2,860  | 
|Accrued product warranty        |  |              | 13,202 |                   |  |            | 19,801 |            |  |   | (18,567 | ) |  |   | 14,436 | 

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

32



---



##### 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(2)                                                                                                                                        
|        | 10 | .8  |  |              |  | Standard Manufacturing Agreement between
    Registrant and Solectron (de Mexico), dated June 11,
    2002                                                                                                                                    
|        | 10 | .9  |  |              |  | Offer Letter of Employment between Registrant and
    William Slakey, dated July 26, 2002*                                                                                                                                                      
|        | 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 |  |              |  | Master Purchase Agreement between Registrant and
    Wavecom Inc., dated June 12, 2001                                                                                                                                                        
|        | 10 | .18 |  |              |  | Amendment 1 to Master Purchase Agreement between
    Registrant and Wavecom Inc., dated January 22, 2002                                                                                                                                      
|        | 10 | .19 |  |              |  | Reserved                                                                                                                                                                                                                                        
|        | 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)                                                                                                             

33



---



##### Table of Contents



|        |    |     |  |               |  |                                                                                                                                                                                                                                                                                     
|------- | -- | --- |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |              
|Number  |    |     |  | Exhibit Title
|        |    |     |  |              
|        | 10 | .24 |  |              |  | Standby Letter of Credit (Building 3, Security
    Deposit) between Registrant and Wells Fargo Bank, National
    Association(3)                                                                                                                                                    
|        | 10 | .25 |  |              |  | Standby Letter of Credit (Building 3, Tenant
    Improvements) between Registrant and Wells Fargo Bank, National
    Association(3)                                                                                                                                                 
|        | 10 | .26 |  |              |  | Form of Addendum to Standby Letter of Credit
    between Registrant and Wells Fargo Bank, National Association(3)                                                                                                                                                                   
|        | 10 | .27 |  |              |  | Securities Account Control Agreement among
    Registrant, Wells Fargo Bank, National Association, acting
    through its Investment Group and Wells Fargo Bank, National
    Association, acting through its Peninsula Technology RCBO
    Office, dated as of February 16, 2001(3)
|        | 10 | .28 |  |              |  | Security Agreement between Registrant and Wells
    Fargo Bank, National Association, dated as of February 16,
    2001(3)                                                                                                                                                          
|        | 10 | .29 |  |              |  | Addendum to Security Agreement between Registrant
    and Wells Fargo Bank, National Association, dated as of
    February 16, 2001(3)                                                                                                                                              
|        | 10 | .30 |  |              |  | Amendment to Lease Agreement (Building 2) between
    Registrant and M-F Downtown Sunnyvale, LLC, dated as of
    July 12, 2002                                                                                                                                                     
|        | 10 | .31 |  |              |  | Amendment to Lease Agreement (Building 3) between
    Registrant and M-F Downtown Sunnyvale, LLC, dated as of
    July 12, 2002                                                                                                                                                     
|        | 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 28, 2001.                                                    
|   
|(3) | Incorporated by reference to the exhibit with the
    same number to our Report on Form 10-Q, filed on
    May 4, 2001.                                                           

34



---



##### 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 32 present fairly, in all
material respects, the financial position of Handspring, Inc.
and its subsidiaries at June 29, 2002 and June 30,
2001 and the results of their operations and their cash flows
for each of the three years ended June 29, 2002 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 32 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 16, 2002, except as to Note 10, as
to


which the date is September 18, 2002


35



---



##### Table of Contents



HANDSPRING, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share
amounts)


|                                         |                                                                                                                                                                                                  |                                            |        |          |         |  |        |          |         | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | -------- | ------- |  | ------ | -------- | ------- | 
|                                         |                                                                                                                                                                                                  | June 29,                                   |        | June 30,
|                                         |                                                                                                                                                                                                  | 2002                                       |        | 2001    
|                                         |                                                                                                                                                                                                  |                                            |        |         
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                                  |                                            |        |          |         |  |        |         
|                                         | Cash and cash equivalents                                                                                                                                                                        |                                            | $      | 85,554   |         |  | $      | 87,580   |        
|                                         | Short-term investments                                                                                                                                                                           |                                            |        | 15,235   |         |  |        | 33,943   |        
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $3,711 and $2,239 as of June 29, 2002
    and June 30, 2001, respectively                                                     |                                            |        | 20,491   |         |  |        | 12,850   |        
|                                         | Prepaid expenses and other current assets                                                                                                                                                        |                                            |        | 3,667    |         |  |        | 19,473   |        
|                                         | Inventories                                                                                                                                                                                      |                                            |        | 20,084   |         |  |        | 2,857    |        
|                                         |                                                                                                                                                                                                  |                                            |        |          |         |  |        |         
|                                         |                                                                                                                                                                                                  | Total current assets                       |        |          | 145,031 |  |        |          | 156,703 | 
|Long-term investments                    |                                                                                                                                                                                                  |                                            | 50,644 |          |         |  | 80,237 |         
|Property and equipment, net              |                                                                                                                                                                                                  |                                            | 19,092 |          |         |  | 15,041 |         
|Other assets                             |                                                                                                                                                                                                  |                                            | 1,408  |          |         |  | 1,254  |         
|                                         |                                                                                                                                                                                                  |                                            |        |          |         |  |        |         
|                                         |                                                                                                                                                                                                  | Total assets                               |        | $        | 216,175 |  |        | $        | 253,235 | 
|                                         |                                                                                                                                                                                                  |                                            |        |          |         |  |        |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                                  |                                            |        |          |         |  |        |         
|                                         | Accounts payable                                                                                                                                                                                 |                                            | $      | 44,490   |         |  | $      | 37,881   |        
|                                         | Accrued liabilities                                                                                                                                                                              |                                            |        | 48,779   |         |  |        | 70,152   |        
|                                         |                                                                                                                                                                                                  |                                            |        |          |         |  |        |         
|                                         |                                                                                                                                                                                                  | Total current liabilities                  |        |          | 93,269  |  |        |          | 108,033 | 
|Commitments and contingencies (Note 5)   |                                                                                                                                                                                                  |                                            |        |          |         |  |        |         
|Stockholders equity:                    |                                                                                                                                                                                                  |                                            |        |          |         |  |        |         
|                                         | Preferred stock, $0.001 par value per share,
    10,000,000 shares authorized; nil shares issued and outstanding
    at June 29, 2002 and June 30, 2001                                          |                                            |        |         |         |  |        |         |        
|                                         | Common stock, $0.001 par value per share,
    1,000,000,000 shares authorized; 143,126,516 and 129,949,768
    shares issued and outstanding at June 29, 2002 and
    June 30, 2001 respectively |                                            |        | 143      |         |  |        | 130      |        
|                                         | Additional paid-in capital                                                                                                                                                                       |                                            |        | 419,256  |         |  |        | 368,166  |        
|                                         | Deferred stock compensation                                                                                                                                                                      |                                            |        | (9,468   | )       |  |        | (29,445  | )      
|                                         | Accumulated other comprehensive income (loss)                                                                                                                                                    |                                            |        | (793     | )       |  |        | 994      |        
|                                         | Accumulated deficit                                                                                                                                                                              |                                            |        | (286,232 | )       |  |        | (194,643 | )      
|                                         |                                                                                                                                                                                                  |                                            |        |          |         |  |        |         
|                                         |                                                                                                                                                                                                  | Total stockholders equity                 |        |          | 122,906 |  |        |          | 145,202 | 
|                                         |                                                                                                                                                                                                  |                                            |        |          |         |  |        |         
|                                         |                                                                                                                                                                                                  | Total liabilities and stockholders equity |        | $        | 216,175 |  |        | $        | 253,235 | 
|                                         |                                                                                                                                                                                                  |                                            |        |          |         |  |        |         

See accompanying notes to consolidated
financial statements.

36



---



##### Table of Contents



HANDSPRING, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                                     |                                                                    |                                    |         |            |         |            |          |         |         |   |         |        |         | 
|-------------------------------------------------------------------- | ------------------------------------------------------------------ | ---------------------------------- | ------- | ---------- | ------- | ---------- | -------- | ------- | ------- | - | ------- | ------ | ------- | 
|                                                                     |                                                                    | Year Ended                         |         | Year Ended |         | Year Ended
|                                                                     |                                                                    | June 29,                           |         | June 30,   |         | July 1,   
|                                                                     |                                                                    | 2002                               |         | 2001       |         | 2000      
|                                                                     |                                                                    |                                    |         |            |         |           
|Revenue                                                              |                                                                    | $                                  | 240,651 |            |         | $          | 370,943  |         |         | $ | 101,937 |       
|                                                                     |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       
|Costs and operating expenses:                                        |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       
|                                                                     | Cost of revenue                                                    |                                    |         | 205,917    |         |            |          | 292,311 |         |   |         | 69,921 |        
|                                                                     | Research and development                                           |                                    |         | 24,739     |         |            |          | 23,603  |         |   |         | 10,281 |        
|                                                                     | Selling, general and administrative                                |                                    |         | 85,612     |         |            |          | 145,132 |         |   |         | 42,424 |        
|                                                                     | In-process research and development                                |                                    |         |           |         |            |          | 12,225  |         |   |         |       |        
|                                                                     | Amortization of deferred stock compensation and
    intangibles(*) |                                    |         | 20,181     |         |            |          | 32,830  |         |   |         | 40,077 |        
|                                                                     |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       
|                                                                     |                                                                    | Total costs and operating expenses |         |            | 336,449 |            |          |         | 506,101 |   |         |        | 162,703 | 
|                                                                     |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       
|Loss from operations                                                 |                                                                    |                                    | (95,798 | )          |         |            | (135,158 | )       |         |   | (60,766 | )     
|Interest and other income, net                                       |                                                                    |                                    | 5,259   |            |         |            | 12,195   |         |         |   | 675     |       
|                                                                     |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       
|Loss before taxes                                                    |                                                                    |                                    | (90,539 | )          |         |            | (122,963 | )       |         |   | (60,091 | )     
|Income tax provision                                                 |                                                                    |                                    | 1,050   |            |         |            | 3,000    |         |         |   | 200     |       
|                                                                     |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       
|Net loss                                                             |                                                                    | $                                  | (91,589 | )          |         | $          | (125,963 | )       |         | $ | (60,291 | )     
|                                                                     |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       
|Basic and diluted net loss per share                                 |                                                                    | $                                  | (0.71   | )          |         | $          | (1.21    | )       |         | $ | (1.77   | )     
|                                                                     |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       
|Shares used in calculating basic and diluted net
    loss per share  |                                                                    |                                    | 128,221 |            |         |            | 103,896  |         |         |   | 34,015  |       
|                                                                     |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       
|                                                                    
|(*) Amortization of deferred stock
    compensation and intangibles: |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       
|Cost of revenue                                                      |                                                                    | $                                  | 2,586   |            |         | $          | 4,521    |         |         | $ | 5,904   |       
|Research and development                                             |                                                                    |                                    | 4,672   |            |         |            | 6,926    |         |         |   | 8,059   |       
|Selling, general and administrative                                  |                                                                    |                                    | 12,923  |            |         |            | 21,383   |         |         |   | 26,114  |       
|                                                                     |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       
|                                                                     |                                                                    | $                                  | 20,181  |            |         | $          | 32,830   |         |         | $ | 40,077  |       
|                                                                     |                                                                    |                                    |         |            |         |            |          |         |         |   |         |       

See accompanying notes to consolidated
financial statements.

37



---



##### 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
|                                                                                                                                                       |  |              |         |            |  |          |     |               |  |               |         |         |  |      
|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 under stock option plans                                                                                                      |  |              | 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  |  
|Net proceeds from issuance of common stock in
    private offering, underwritten public offering and upon exercise
    of underwriters over-allotment |  |              | 8,875   |            |  |          | 9   |               |  |               | 47,027  |         |  |       |        |   |  |   |       |   |  |   |         |   |  |   | 47,036   |  
|Issuance of common stock under stock option and
    stock purchase plans                                                                               |  |              | 4,328   |            |  |          | 4   |               |  |               | 4,063   |         |  |       |        |   |  |   |       |   |  |   |         |   |  |   | 4,067    |  
|Repurchase of common stock                                                                                                                             |  |              | (26     | )          |  |          |    |               |  |               |        |         |  |       |        |   |  |   |       |   |  |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                                                                                                            |  |              |        |            |  |          |    |               |  |               |        |         |  |       | 19,977  |   |  |   |       |   |  |   |         |   |  |   | 19,977   |  
|Unrealized loss on securities                                                                                                                          |  |              |        |            |  |          |    |               |  |               |        |         |  |       |        |   |  |   | (203   | ) |  |   |         |   |  |   | (203     | )
|Foreign currency translation adjustments                                                                                                               |  |              |        |            |  |          |    |               |  |               |        |         |  |       |        |   |  |   | (1,584 | ) |  |   |         |   |  |   | (1,584   | )
|Net loss                                                                                                                                               |  |              |        |            |  |          |    |               |  |               |        |         |  |       |        |   |  |   |       |   |  |   | (91,589  | ) |  |   | (91,589  | )
|                                                                                                                                                       |  |              |         |            |  |          |     |               |  |               |         |         |  |       |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|Balances, June 29, 2002                                                                                                                                |  |              | 143,127 |            |  | $        | 143 |               |  | $             | 419,256 |         |  | $     | (9,468  | ) |  | $ | (793   | ) |  | $ | (286,232 | ) |  | $ | 122,906  |  
|                                                                                                                                                       |  |              |         |            |  |          |     |               |  |               |         |         |  |       |         |   |  |   |        |   |  |   |          |   |  |   |          |  

See accompanying notes to consolidated
financial statements.

38



---



##### Table of Contents



HANDSPRING, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |         |        |         |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ------ | ---------- | -------- | -------- | ------ | ------- | -------- | ------- | ------ | ------- | ------- | -
|                                                         |                                                                                                                                                        | Year Ended                                                                    |                                           | Year Ended                                              |        | Year Ended
|                                                         |                                                                                                                                                        | June 29,                                                                      |                                           | June 30,                                                |        | July 1,   
|                                                         |                                                                                                                                                        | 2002                                                                          |                                           | 2001                                                    |        | 2000      
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |           
|Cash flows from operating activities:                    |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|                                                         | Net loss                                                                                                                                               |                                                                               | $                                         | (91,589                                                 | )      |            | $        | (125,963 | )      |         | $        | (60,291 | )     
|                                                         | Adjustment to reconcile net loss to net cash used
    in operating activities:                                                                         |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |         |       
|                                                         |                                                                                                                                                        | Depreciation and amortization                                                 |                                           |                                                         | 8,542  |            |          |          | 7,104  |         |          |         | 2,668  |        
|                                                         |                                                                                                                                                        | Amortization of deferred stock compensation and
    intangibles               |                                           |                                                         | 20,181 |            |          |          | 32,830 |         |          |         | 40,077 |        
|                                                         |                                                                                                                                                        | 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    |        
|                                                         |                                                                                                                                                        | Amortization of premium or discount on
    available-for-sale securities, net |                                           |                                                         | 83     |            |          |          | (1,313 | )       |          |         | (118   | )      
|                                                         |                                                                                                                                                        | Gain on sale of available-for-sale securities                                 |                                           |                                                         | (784   | )          |          |          | (277   | )       |          |         |       |        
|                                                         |                                                                                                                                                        | Stock compensation to non-employees                                           |                                           |                                                         |       |            |          |          |       |         |          |         | 815    |        
|                                                         |                                                                                                                                                        | Changes in assets and liabilities:                                            |                                           |                                                         |        |            |          |          |        |         |          |         |        |        
|                                                         |                                                                                                                                                        |                                                                               | Accounts receivable                       |                                                         |        | (7,438     | )        |          |        | 6,625   |          |         |        | (20,484 | )      
|                                                         |                                                                                                                                                        |                                                                               | Prepaid expenses and other current assets |                                                         |        | 15,518     |          |          |        | (18,219 | )        |         |        | (1,751  | )      
|                                                         |                                                                                                                                                        |                                                                               | Inventories                               |                                                         |        | (17,030    | )        |          |        | (10,011 | )        |         |        | (40     | )      
|                                                         |                                                                                                                                                        |                                                                               | Other assets                              |                                                         |        | 175        |          |          |        | (40     | )        |         |        | (616    | )      
|                                                         |                                                                                                                                                        |                                                                               | Accounts payable                          |                                                         |        | 5,409      |          |          |        | 18,701  |          |         |        | 18,944  |        
|                                                         |                                                                                                                                                        |                                                                               | Accrued liabilities                       |                                                         |        | (22,094    | )        |          |        | 34,584  |          |         |        | 15,941  |        
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|                                                         |                                                                                                                                                        |                                                                               |                                           | Net cash used in operating activities                   |        |            | (89,027  | )        |        |         | (16,943  | )       |        |         | (3,387  | )
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|Cash flows from investing activities:                    |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|                                                         | Purchases of available-for-sale securities                                                                                                             |                                                                               |                                           | (69,989                                                 | )      |            |          | (244,972 | )      |         |          | (4,474  | )     
|                                                         | Sales and maturities of available-for-sale
    securities                                                                                              |                                                                               |                                           | 118,863                                                 |        |            |          | 186,866  |        |         |          | 10,424  |       
|                                                         | Purchases of investments for collateral on
    operating leases                                                                                        |                                                                               |                                           |                                                        |        |            |          | (51,287  | )      |         |          | (2,106  | )     
|                                                         | Purchases of property and equipment                                                                                                                    |                                                                               |                                           | (12,501                                                 | )      |            |          | (14,283  | )      |         |          | (9,818  | )     
|                                                         | Cash acquired from acquisition                                                                                                                         |                                                                               |                                           |                                                        |        |            |          | 29       |        |         |          |        |       
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|                                                         |                                                                                                                                                        |                                                                               |                                           | Net cash provided by (used in) investing
    activities |        |            | 36,373   |          |        |         | (123,647 | )       |        |         | (5,974  | )
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|Cash flows from financing activities:                    |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|                                                         | Net proceeds from issuance of common stock in
    private offering, underwritten public offering and upon exercise
    of underwriters over-allotment |                                                                               |                                           | 47,036                                                  |        |            |          |         |        |         |          |        |       
|                                                         | Proceeds from issuance of common stock                                                                                                                 |                                                                               |                                           | 4,067                                                   |        |            |          | 3,109    |        |         |          | 2,012   |       
|                                                         | Net proceeds from initial public offering and
    exercise of underwriters over-allotment                                                             |                                                                               |                                           |                                                        |        |            |          | 27,969   |        |         |          | 184,928 |       
|                                                         | Proceeds from borrowings                                                                                                                               |                                                                               |                                           |                                                        |        |            |          |         |        |         |          | 6,000   |       
|                                                         | Principal payments on borrowings                                                                                                                       |                                                                               |                                           |                                                        |        |            |          | (83      | )      |         |          | (6,000  | )     
|                                                         | Issuance of redeemable convertible preferred
    stock, net                                                                                            |                                                                               |                                           |                                                        |        |            |          |         |        |         |          | 11,490  |       
|                                                         | Repurchase of common stock                                                                                                                             |                                                                               |                                           |                                                        |        |            |          | (41      | )      |         |          |        |       
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|                                                         |                                                                                                                                                        |                                                                               |                                           | Net cash provided by financing activities               |        |            | 51,103   |          |        |         | 30,954   |         |        |         | 198,430 |  
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|                                                         |                                                                                                                                                        |                                                                               |                                           | Effect of exchange rate changes on cash                 |        |            | (475     | )        |        |         | 668      |         |        |         | (54     | )
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                                                                                                        |                                                                               | (2,026                                    | )                                                       |        |            | (108,968 | )        |        |         | 189,015  |        
|Cash and cash equivalents:                               |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|                                                         | Beginning of year                                                                                                                                      |                                                                               |                                           | 87,580                                                  |        |            |          | 196,548  |        |         |          | 7,533   |       
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|                                                         | End of year                                                                                                                                            |                                                                               | $                                         | 85,554                                                  |        |            | $        | 87,580   |        |         | $        | 196,548 |       
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|Supplemental disclosure of cash flow information:        |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|                                                         | Cash paid for interest                                                                                                                                 |                                                                               | $                                         | 1                                                       |        |            | $        | 6        |        |         | $        | 37      |       
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        
|                                                         | Cash paid for taxes                                                                                                                                    |                                                                               | $                                         | 922                                                     |        |            | $        | 236      |        |         | $        | 1       |       
|                                                         |                                                                                                                                                        |                                                                               |                                           |                                                         |        |            |          |          |        |         |          |        

See accompanying notes to consolidated
financial statements.

39



---



##### Table of Contents



HANDSPRING, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Description of
Business and Basis of Presentation

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

The Company is a leading provider of handheld
computing and communications devices. The Company develops,
manufactures and markets these products for a broad range of
markets and customers. Products are sold through select Internet
and retail partners, both domestically and internationally and
over the Companys 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.

Liquidity
From inception through June 29, 2002, the Company has
incurred substantial losses and negative cash flows from
operations and, as of June 29, 2002, the Company had an
accumulated deficit of $286.2 million. For the year ended
June 29, 2002, the Company recorded a net loss of
$91.6 million and cash outflows for operating activities of
$89.0 million.

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

The Company believes that cash, cash equivalents
and short-term investments will be sufficient to meet working
capital needs for at least the next twelve months. To the extent
that the Company does not generate sufficient revenues from new
and existing products or reduce discretionary expenditures and,
as a result, cash generated from operations is insufficient to
satisfy liquidity requirements, additional cash may be needed to
finance operating and investing needs. However, depending on
market conditions, any additional financing needed may not be
available on acceptable terms, or at all. The inability to
obtain needed financing could adversely affect the
Companys ability to achieve its intended business
objectives.

2.     Summary of
Significant Accounting Policies

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

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

40



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 Pacific and the Middle East.

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

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

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

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

Property and equipment Property and equipment, including
leasehold improvements, are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the
assets, generally one to five years. Leasehold improvements and
assets held under capital leases are amortized over the term of
the lease or estimated useful lives, whichever is shorter. The
Company capitalizes tooling costs to the extent they relate to
ongoing and routine costs of tools and molds

41



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

used to manufacture products that the Company
markets. Capitalized tooling is amortized over its estimated
useful life of one year. Assets acquired under capital leases
are recorded at the present value of the related lease
obligation.

Other assets Other assets include goodwill and
other intangible assets carried at cost less accumulated
amortization. Amortization is computed using the straight-line
method over the expected useful life of three years. Accumulated
amortization of goodwill and intangibles totaled $280,000 and
$76,000 as of June 29, 2002 and June 30, 2001,
respectively. In June 2001, the Financial Accounting Standards
Board (FASB) released Statement of Financial
Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets,which will become
effective for the Company beginning in fiscal 2003, under which
goodwill will no longer be amortized but will be subject to
impairment tests at least annually.

Long-lived assets The Company evaluates the
recoverability of its long-lived assets in accordance with 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 using local currency as the functional currency,
assets and liabilities are translated at year-end exchange
rates, and statements of operations are translated at the
average exchange rates during the year. Gains or losses
resulting from foreign currency translation are included as a
component of accumulated other comprehensive income (loss).

Derivatives
The Company has entered into foreign exchange forward contracts
to minimize the impact of foreign currency fluctuations on
assets and liabilities denominated in currencies other than the
functional currency of the reporting entity. 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.

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

42



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, title has transferred to the customer,
the sales price is fixed or determinable and collection of the
resulting receivable is probable. Sales of our handheld
communicators may also include subsidy revenue from wireless
carriers for new customer service contracts or the extension of
existing customer contracts. In these cases, the customer has a
specified period of time in which they may cancel their service.
All revenue related to these subsidies is deferred until this
specified period of time has elapsed. No significant
post-delivery obligations exist with respect to revenue
recognized during fiscal 2002, 2001 or 2000.

Returns reserve The Company offers limited return
rights on its products and accordingly, at the time the related
sale is recorded, revenue is reduced for estimated returns. The
estimates for returns are adjusted periodically and are based
upon various factors including historical rates of returns and
inventory levels in the channel. The Company also estimates and
reserves for rebates and price protection based upon specific
programs. Actual results may differ from these estimates.

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

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

Advertising
costs The cost of
advertising is expensed as incurred. For fiscal years 2002, 2001
and 2000 advertising costs totaled $3.0 million, $31.0
million and $3.9 million, respectively.

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

43



---



##### 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):

|                                                                                        |                                                          |            |         |            |   |            |          |         |   |   |         |         |  
|--------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------- | ------- | ---------- | - | ---------- | -------- | ------- | - | - | ------- | ------- | -
|                                                                                        |                                                          | Year Ended |         | Year Ended |   | Year Ended
|                                                                                        |                                                          | June 29,   |         | June 30,   |   | July 1,   
|                                                                                        |                                                          | 2002       |         | 2001       |   | 2000      
|                                                                                        |                                                          |            |         |            |   |           
|Net loss                                                                                |                                                          | $          | (91,589 | )          |   | $          | (125,963 | )       |   | $ | (60,291 | )      
|                                                                                        |                                                          |            |         |            |   |            |          |         |   |   |         |        
|Basic and diluted:                                                                      |                                                          |            |         |            |   |            |          |         |   |   |         |        
|                                                                                        | Weighted average common shares outstanding               |            |         | 137,391    |   |            |          | 128,004 |   |   |         | 73,196  |  
|                                                                                        | Weighted average common shares subject to
    repurchase |            |         | (9,170     | ) |            |          | (24,108 | ) |   |         | (39,181 | )
|                                                                                        |                                                          |            |         |            |   |            |          |         |   |   |         |        
|Weighted average common shares used to compute
    basic and diluted net loss per share |                                                          |            | 128,221 |            |   |            | 103,896  |         |   |   | 34,015  |        
|                                                                                        |                                                          |            |         |            |   |            |          |         |   |   |         |        
|Basic and diluted net loss per share                                                    |                                                          | $          | (0.71   | )          |   | $          | (1.21    | )       |   | $ | (1.77   | )      
|                                                                                        |                                                          |            |         |            |   |            |          |         |   |   |         |        

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 29, |        | June 30, |  | July 1,
|                                    |  | 2002     |        | 2001     |  | 2000   
|                                    |  |          |        |          |  |        
|Common stock subject to repurchase  |  |          | 2,067  |          |  |         | 16,556 |  |  |  | 32,413 | 
|Shares issuable under stock options |  |          | 16,463 |          |  |         | 31,544 |  |  |  | 26,622 | 

The weighted average repurchase price of unvested
stock was $0.17, $0.06, and $0.07 as of June 29, 2002,
June 30, 2001 and July 1, 2000, respectively. The
weighted-average exercise price of stock options outstanding was
$1.47, $11.30 and $4.68 as of June 29, 2002, June 30,
2001 and July 1, 2000, respectively.

Recently issued accounting
pronouncements In August
2001, the FASB issued SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS
121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and APB 30,
Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Under SFAS 144 a single accounting model for
long-lived assets to be disposed of is established. The
accounting model is based on the framework established in SFAS
121 and resolves certain implementation issues. SFAS 144 is
effective beginning in fiscal 2003. The adoption is not expected
to have a material impact on the Companys financial
position and results of operations.

In November 2001, the Emerging Issues Task Force
(EITF), issued EITF Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products),which
codified and reconciled EITF Issue No. 00-14, Accounting
for Certain Sales Incentives, Issues 2 and 3 of Issue
No. 00-22, Accounting for Points and Certain Other
Time-Based or Volume-Based Sales Incentive Offers and Offers for
Free Products or Services to be Delivered in the Future, and
Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the
Vendors Products. EITF addresses the accounting for
consideration given by a vendor to a customer (including both a
reseller of the vendors products and an entity that
purchases the vendors products from the reseller). Any
consideration given by a vendor to a customer (or a reseller, or
a customer of a reseller) is generally presumed to be a
reduction of selling price, and therefore, a reduction of
revenue. That presumption can be overcome if the vendor receives
an identifiable benefit in return for the consideration paid
that is sufficiently separable from the sale to the recipient,
and the vendor can reasonably estimate the fair value of that
benefit, in which case the consideration is characterized as an
expense. EITF was adopted by the Company during fiscal 2002, and
did not have a material impact on the Companys financial
position or results of operations.

44



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In July 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities.SFAS 146 requires that a liability for costs
associated with an exit or disposal activity be recognized and
measured initially at fair value only when the liability is
incurred. SFAS 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. 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.

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 has been amortized on a straight-line basis
over three years; however, the amortization will cease in fiscal
2003 with the adoption of SFAS 142. 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.

45



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Balance Sheet
Components



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

Available-for-sale securities consists of the
following:

|                         |  |                |         |                   |  |                   |     |            |  |   |     |   |  |   |         | 
|------------------------ |  | -------------- | ------- | ----------------- |  | ----------------- | --- | ---------- |  | - | --- | - |  | - | ------- | 
|                         |  |                |         | Gains in          |  | Losses in         |     |           
|                         |  |                |         | Accumulated Other |  | Accumulated Other |     |           
|                         |  |                |         | Comprehensive     |  | Comprehensive     |     |           
|                         |  | Amortized Cost |         | Income (Loss)     |  | Income (Loss)     |     | Fair Value
|                         |  |                |         |                   |  |                   |     |           
|                         |  |               
|                         |  | (In thousands)
|June 29, 2002            |  |                |         |                   |  |                   |     |            |  |   |     |   |  |   |         | 
|Corporate obligations    |  | $              | 14,955  |                   |  | $                 | 168 |            |  | $ | (39 | ) |  | $ | 15,084  | 
|Certificates of deposits |  |                | 550     |                   |  |                   |    |            |  |   |    |   |  |   | 550     | 
|Money market             |  |                | 50,245  |                   |  |                   |    |            |  |   |    |   |  |   | 50,245  | 
|                         |  |                |         |                   |  |                   |     |            |  |   |     |   |  |   |         | 
|                         |  | $              | 65,750  |                   |  | $                 | 168 |            |  | $ | (39 | ) |  | $ | 65,879  | 
|                         |  |                |         |                   |  |                   |     |            |  |   |     |   |  |   |         | 
|June 30, 2001            |  |                |         |                   |  |                   |     |            |  |   |     |   |  |   |         | 
|Corporate obligations    |  | $              | 46,109  |                   |  | $                 | 274 |            |  | $ | (35 | ) |  | $ | 46,348  | 
|Government obligations   |  |                | 38,297  |                   |  |                   | 104 |            |  |   | (20 | ) |  |   | 38,381  | 
|Commercial paper         |  |                | 15,664  |                   |  |                   | 12  |            |  |   | (3  | ) |  |   | 15,673  | 
|Certificates of deposits |  |                | 550     |                   |  |                   |    |            |  |   |    |   |  |   | 550     | 
|Money market             |  |                | 13,228  |                   |  |                   |    |            |  |   |    |   |  |   | 13,228  | 
|                         |  |                |         |                   |  |                   |     |            |  |   |     |   |  |   |         | 
|                         |  | $              | 113,848 |                   |  | $                 | 390 |            |  | $ | (58 | ) |  | $ | 114,180 | 
|                         |  |                |         |                   |  |                   |     |            |  |   |     |   |  |   |         | 

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

|                      |  |                |        |          |  |   |         | 
|--------------------- |  | -------------- | ------ | -------- |  | - | ------- | 
|                      |  | June 29,       |        | June 30,
|                      |  | 2002           |        | 2001    
|                      |  |                |        |         
|                      |  |               
|                      |  | (In thousands)
|Due in 1 year or less |  | $              | 65,879 |          |  | $ | 64,665  | 
|Due in 1-2 years      |  |                |       |          |  |   | 49,515  | 
|                      |  |                |        |          |  |   |         | 
|                      |  | $              | 65,879 |          |  | $ | 114,180 | 
|                      |  |                |        |          |  |   |         | 

Available-for-sale securities were sold for total
proceeds of $73.9 million during fiscal 2002 with gross
realized gains of $785,000 and gross realized losses of $1,000
on these sales. During fiscal 2001 available-for-sale securities
were sold for proceeds of $82.1 million with gross realized
gains of $283,000 and gross realized losses of $6,000.

Of the amounts included in short-term investments
on the consolidated balance sheet, $150,000 is pledged as
collateral for lease payments for both of the periods presented.
Of the amounts included in long-term investments on the balance
sheet, $50.6 million and $54.0 million is pledged as
collateral as of June 29, 2002 and June 30, 2001,
respectively, relating almost entirely to commitments under
lease agreements. See further discussion in Note 5.

46



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The components of inventories are as follows:

|               |  |                |        |          |  |   |       | 
|-------------- |  | -------------- | ------ | -------- |  | - | ----- | 
|               |  | June 29,       |        | June 30,
|               |  | 2002           |        | 2001    
|               |  |                |        |         
|               |  |               
|               |  | (In thousands)
|Raw materials  |  | $              | 380    |          |  | $ | 1,174 | 
|Finished goods |  |                | 19,704 |          |  |   | 1,683 | 
|               |  |                |        |          |  |   |       | 
|               |  | $              | 20,084 |          |  | $ | 2,857 | 
|               |  |                |        |          |  |   |       | 



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

Property and equipment consists of the following:

|                               |                              |                |         |          |  |   |        |        | 
|------------------------------ | ---------------------------- | -------------- | ------- | -------- |  | - | ------ | ------ | 
|                               |                              | June 29,       |         | June 30,
|                               |                              | 2002           |         | 2001    
|                               |                              |                |         |         
|                               |                              |               
|                               |                              | (In thousands)
|Tooling                        |                              | $              | 8,577   |          |  | $ | 6,863  |       
|Computer and office equipment  |                              |                | 9,111   |          |  |   | 7,544  |       
|Furniture and fixtures         |                              |                | 3,036   |          |  |   | 2,871  |       
|Software                       |                              |                | 7,107   |          |  |   | 5,064  |       
|Leasehold improvements         |                              |                | 2,334   |          |  |   | 2,182  |       
|Construction in progress       |                              |                | 6,614   |          |  |   |       |       
|                               |                              |                |         |          |  |   |        |       
|                               | Total property and equipment |                |         | 36,779   |  |   |        | 24,524 | 
|Less: Accumulated depreciation |                              |                | (17,687 | )        |  |   | (9,483 | )     
|                               |                              |                |         |          |  |   |        |       
|                               | Property and equipment, net  |                | $       | 19,092   |  |   | $      | 15,041 | 
|                               |                              |                |         |          |  |   |        |       

Property and equipment did not include any assets
acquired under capital leases at June 29, 2002 or
June 30, 2001.



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

Accrued liabilities consist of the following:

|                                          |  |                |        |          |  |   |        | 
|----------------------------------------- |  | -------------- | ------ | -------- |  | - | ------ | 
|                                          |  | June 29,       |        | June 30,
|                                          |  | 2002           |        | 2001    
|                                          |  |                |        |         
|                                          |  |               
|                                          |  | (In thousands)
|Accrued product warranty                  |  | $              | 14,436 |          |  | $ | 13,202 | 
|Provision for committed inventory         |  |                | 7,141  |          |  |   | 19,257 | 
|Accrued compensation and related benefits |  |                | 4,990  |          |  |   | 5,558  | 
|Other                                     |  |                | 22,212 |          |  |   | 32,135 | 
|                                          |  |                |        |          |  |   |        | 
|                                          |  | $              | 48,779 |          |  | $ | 70,152 | 
|                                          |  |                |        |          |  |   |        | 

5.     Commitments
and Contingencies

The Company leases its facilities under various
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 expiring in June 2002, a $400,000
standby letter of credit established on August 3, 1999, and
a

47



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$2.1 million 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 29, 2002 and
June 30, 2001. Both of the letter of credits are included
in long-term investments at June 29, 2002 and June 30,
2001.

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. Monthly rent
obligations of $1.7 million and monthly operating expenses
of approximately $300,000 are expected to commence during the
second quarter of fiscal 2003, with annual increases determined
in part by the Consumer Price Index. The minimum monthly rent
payment in the twelfth year is $2.4 million. There was
$47.4 million and $51.5 million pledged as collateral
for specified obligations of the lessor in conjunction with
these lease transactions at June 29, 2002 and June 30,
2001, respectively. Both of these amounts are classified as
long-term investments in the accompanying consolidated balance
sheets. Of the amount pledged, $23.5 million is designated
by the agreements to be utilized for tenant improvements. The
remaining portion of the pledged investments represent a
security deposit on the property. According to the lease
agreements, the pledged assets will be reduced as the Company
completes its build-out obligation for the new corporate
headquarters provided that the company is not in default of the
lease agreements and meets certain other conditions. In
addition, the pledged assets may be further reduced if certain
financial criteria are met. However, given that the
Companys existing space is adequate to meet its current
requirements, the Companys current plan is to sublease at
least one, if not both, of the Sunnyvale buildings. The Company
is actively seeking to secure subtenants and expects that the
sublease will be at a rental rate significantly below its lease
rate. While the Company is attempting to sublease the Sunnyvale
buildings, it is also negotiating with the developer for a
potential buy-out or restructuring of the leases. Due to the
uncertainty of the outcome of these negotiations, the Company is
unable to estimate the amount of any potential charge in
relation to the potential buy-out or subleasing or restructuring
of the leases, but does anticipate a significant charge on these
facilities during fiscal 2003.

As of June 29, 2002 the future minimum lease
commitments under all operating leases were as follows (in
thousands):

|                             |  |   |         | 
|---------------------------- |  | - | ------- | 
|Fiscal Years Ending,         |  |  
|                             |  |  
|2003                         |  | $ | 17,539  | 
|2004                         |  |   | 24,599  | 
|2005                         |  |   | 23,973  | 
|2006                         |  |   | 24,304  | 
|2007                         |  |   | 24,867  | 
|Thereafter                   |  |   | 196,297 | 
|                             |  |   |         | 
|Total minimum lease payments |  | $ | 311,579 | 
|                             |  |   |         | 

Rent expense under operating leases, net of
sublease income, was $4.0 million, $4.1 million and
$1.5 million for fiscal 2002, 2001 and 2000, respectively.

In June 1999 and July 2000, the Company entered
into purchase agreements with manufacturers in Malaysia and
Mexico, respectively. Both 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

48



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

after the date of cancellation without liability.
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. Had the Company cancelled any such orders with the
previously stated manufacturers, its maximum liability at
June 29, 2002 under the cancellation provisions of the
purchase agreements would have approximated $39.0 million.

6.     Stockholders
Equity



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

The Company is authorized to issue 10,000,000
shares of preferred stock, none of which was outstanding at
June 29, 2002, June 30, 2001, or July 1, 2000.



| |             
| | ------------
| | 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 1,050,000,
13,650,000 and 26,247,690 shares of the founders common
stock subject to repurchase by the Company at June 29,
2002, June 30, 2001 and July 1, 2000, respectively.



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

The Company has 1,000,000,000 shares of common
stock authorized, of which 143,126,516, 129,949,768 and
125,436,978 were issued and outstanding as of June 29,
2002, June 30, 2001 and July 1, 2000, respectively.
Common stock reserved for future issuances is as follows:

|                                            |                       |                |        |          |  |         |        |        |  |  |        |        | 
|------------------------------------------- | --------------------- | -------------- | ------ | -------- |  | ------- | ------ | ------ |  |  | ------ | ------ | 
|                                            |                       | June 29,       |        | June 30, |  | July 1,
|                                            |                       | 2002           |        | 2001     |  | 2000   
|                                            |                       |                |        |          |  |        
|                                            |                       |               
|                                            |                       | (In thousands)
|Issuance under stock options                |                       |                | 43,681 |          |  |         | 47,111 |        |  |  | 43,238 |       
|Issuance under employee stock purchase plan |                       |                | 2,461  |          |  |         | 1,943  |        |  |  | 750    |       
|                                            |                       |                |        |          |  |         |        |        |  |  |        |       
|                                            | Total shares reserved |                |        | 46,142   |  |         |        | 49,054 |  |  |        | 43,988 | 
|                                            |                       |                |        |          |  |         |        |        |  |  |        |       



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

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

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

49



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

vesting terms have been explained in the
Companys tender offer filed with the Securities and
Exchange Commission on April 18, 2002 and amended on
May 7, 2002.

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



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

Effective June 21, 2000, the Company adopted
the 2000 Employee Stock Purchase Plan (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 was
scheduled to 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. An offering period may end earlier than
its scheduled term. The offering periods that began on
June 21, 2000, August 1, 2000, and February 1,
2001 all ended early due to the fact that the purchase price on
the first day of those offering periods was higher than the
purchase price on the first day of the offering period which
began on August 1, 2001; per the ESPP, the Company ended
the prior offering periods and automatically enrolled
participants in the offering period that began on August 1,
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 898,000 shares sold
through the ESPP in fiscal 2002 for proceeds of
$2.6 million and 78,000 shares sold through the ESPP in
fiscal 2001 for proceeds of $1.3 million. No shares were
purchased under the ESPP during fiscal 2000.



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

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

50



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 724,866, 2,066,329 and 4,445,853
shares issued under the 1998 Plan at June 29, 2002,
June 30, 2001 and July 1, 2000 that were subject to
repurchase, respectively. There were 232,664, 685,939 and
1,719,373 shares issued under the 1999 Executive Equity
Incentive Plan that were subject to repurchase at June 29,
2002, 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 that may be issued 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 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. The Board of Directors elected
not to increase the shares reserved for issuances under the 2000
Plan during fiscal 2002.



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

As part of the acquisition of BlueLark described
in Note 3, the Company assumed incentive stock options and
restricted stock awards granted under BlueLarkss 2000
Equity Incentive Plan (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. There were 59,697 and 153,899 shares of the
Companys common stock issued pursuant to the BlueLark Plan
that were subject to repurchase by the Company as of
June 29, 2002 and June 30, 2001, respectively.

51



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                         |                             |           |            |                     |   |                |            |             |   |   |       |       | 
|------------------------ | --------------------------- | --------- | ---------- | ------------------- | - | -------------- | ---------- | ----------- | - | - | ----- | ----- | 
|                         |                             |           |            |                    
|                         |                             |           |            | Options Outstanding
|                         |                             |           |            |                    
|                         |                             | Options   |            |                     |   | Weighted      
|                         |                             | Available |            |                     |   | Average       
|                         |                             | for Grant |            | Shares              |   | Exercise Price
|                         |                             |           |            |                     |   |               
|Balance 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 |      
|                         | Options granted             |           |            | (2,699,442          | ) |                |            | 2,699,442   |   |   |       | 2.44  | 
|                         | Options exercised           |           |            |                    |   |                |            | (3,429,157  | ) |   |       | 0.44  | 
|                         | Options canceled            |           |            | 14,350,974          |   |                |            | (14,350,974 | ) |   |       | 23.50 | 
|                         |                             |           |            |                     |   |                |            |             |   |   |       |      
|Balance at June 29, 2002 |                             |           | 27,218,542 |                     |   |                | 16,462,852 |             |   |   | 1.47  |      
|                         |                             |           |            |                     |   |                |            |             |   |   |       |      

The following table summarizes information
concerning options outstanding and exercisable at June 29,
2002:

|                         |  |                     |            |              |  |                |      |                     |  |                |       |  |  |  |            |  |  |   |       | 
|------------------------ |  | ------------------- | ---------- | ------------ |  | -------------- | ---- | ------------------- |  | -------------- | ----- |  |  |  | ---------- |  |  | - | ----- | 
|                         |  |                     |            |              |  |               
|                         |  | Options Outstanding |            |              |  |               
|                         |  |                     |            |             
|                         |  |                     |            | Weighted     |  |                |      | Options Exercisable
|                         |  |                     |            | Average      |  |                |      |                    
|                         |  |                     |            | Remaining    |  | Weighted       |      |                     |  | Weighted      
|                         |  | Number              |            | Contractual  |  | Average        |      | Number              |  | Average       
|Range of Exercise Prices |  | Outstanding         |            | Life (Years) |  | Exercise Price |      | Exercisable         |  | Exercise Price
|                         |  |                     |            |              |  |                |      |                     |  |               
|$ 0.05                   |  |                     | 5,275,042  |              |  |                | 6.29 |                     |  | $              | 0.05  |  |  |  | 5,275,042  |  |  | $ | 0.05  | 
|$ 0.11$ 0.22            |  |                     | 1,503,279  |              |  |                | 6.91 |                     |  |                | 0.16  |  |  |  | 1,503,279  |  |  |   | 0.16  | 
|$ 0.44                   |  |                     | 1,621,626  |              |  |                | 7.19 |                     |  |                | 0.44  |  |  |  | 1,621,626  |  |  |   | 0.44  | 
|$ 0.67$ 0.89            |  |                     | 2,796,430  |              |  |                | 7.46 |                     |  |                | 0.79  |  |  |  | 2,340,958  |  |  |   | 0.77  | 
|$ 1.33$ 1.56            |  |                     | 1,563,795  |              |  |                | 7.65 |                     |  |                | 1.43  |  |  |  | 593,417    |  |  |   | 1.41  | 
|$ 2.11$ 2.73            |  |                     | 2,680,860  |              |  |                | 8.91 |                     |  |                | 2.21  |  |  |  | 695,340    |  |  |   | 2.18  | 
|$ 3.00$13.33            |  |                     | 898,173    |              |  |                | 8.72 |                     |  |                | 10.42 |  |  |  | 273,536    |  |  |   | 12.21 | 
|$15.23$77.56            |  |                     | 123,647    |              |  |                | 8.62 |                     |  |                | 26.60 |  |  |  | 58,447     |  |  |   | 30.07 | 
|                         |  |                     |            |              |  |                |      |                     |  |                |       |  |  |  |            |  |  |   |       | 
|$ 0.05$77.56            |  |                     | 16,462,852 |              |  |                | 7.34 |                     |  |                | 1.47  |  |  |  | 12,361,645 |  |  |   | 0.85  | 
|                         |  |                     |            |              |  |                |      |                     |  |                |       |  |  |  |            |  |  |   |       | 



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

52



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of Directors at the date of grant to be the fair
value. The Company recorded deferred compensation for the
difference between the purchase price of the stock issued to
employees under stock options and the subsequently deemed fair
value of the Companys stock at the date of grant. The
total amount of deferred stock compensation recorded in relation
to these stock options issued was $102.0 million, of which
$88.6 million was recorded during fiscal 2000. In addition,
during fiscal 2001, the Company recorded $3.9 million of
deferred compensation in relation to the unvested stock options
and restricted stock assumed in the acquisition of BlueLark
Systems, Inc. Deferred compensation is amortized to expense over
the vesting period of the related options and restricted stock,
generally four years. The Company amortized $20.0 million,
$32.8 million and $40.1 million of deferred stock
compensation during fiscal 2002, 2001, and 2000, 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:

|                                      |             |                                       |   |            |   |            |   |          |   |  |   |         |  
|------------------------------------- | ----------- | ------------------------------------- | - | ---------- | - | ---------- | - | -------- | - |  | - | ------- | -
|                                      |             | Year Ended                            |   | Year Ended |   | Year Ended
|                                      |             | June 29,                              |   | June 30,   |   | July 1,   
|                                      |             | 2002                                  |   | 2001       |   | 2000      
|                                      |             |                                       |   |            |   |           
|                                      |             |                                      
|                                      |             | (In thousands, except per share data)
|Net loss:                             |             |                                       |   |            |   |            |   |          |   |  |   |        
|                                      | As reported |                                       | $ | (91,589    | ) |            | $ | (125,963 | ) |  | $ | (60,291 | )
|                                      | Pro forma   |                                       |   | (111,180   | ) |            |   | (212,799 | ) |  |   | (75,648 | )
|Basic and diluted net loss per share: |             |                                       |   |            |   |            |   |          |   |  |   |        
|                                      | As reported |                                       | $ | (0.71      | ) |            | $ | (1.21    | ) |  | $ | (1.77   | )
|                                      | Pro forma   |                                       |   | (0.87      | ) |            |   | (2.05    | ) |  |   | (2.22   | )

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

|                         |  |                                       |      |                            |  |            |      |            |  |            |      |            |  |  |      |   |  |  |      |   |  |  |      |  
|------------------------ |  | ------------------------------------- | ---- | -------------------------- |  | ---------- | ---- | ---------- |  | ---------- | ---- | ---------- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                         |  |                                       |      |                           
|                         |  | Employee Stock Options Granted During |      | ESPP Shares Granted During
|                         |  |                                       |      |                           
|                         |  | Year Ended                            |      | Year Ended                 |  | Year Ended |      | Year Ended |  | Year Ended |      | Year Ended
|                         |  | June 29,                              |      | June 30,                   |  | July 1,    |      | June 29,   |  | June 30,   |      | July 1,   
|                         |  | 2002                                  |      | 2001                       |  | 2000       |      | 2002       |  | 2001       |      | 2000      
|                         |  |                                       |      |                            |  |            |      |            |  |            |      |           
|Expected life (in years) |  |                                       | 4    |                            |  |            | 4    |            |  |            | 4    |            |  |  | 1    |   |  |  | 1    |   |  |  | 1    |  
|Risk-free interest rate  |  |                                       | 4.22 | %                          |  |            | 5.06 | %          |  |            | 6.31 | %          |  |  | 2.85 | % |  |  | 4.81 | % |  |  | 6.17 | %
|Expected volatility      |  |                                       | 70   | %                          |  |            | 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 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 2002, 2001 and 2000 was $1.31, $17.30 and
$7.99, respectively. The weighted average estimated fair value
of shares granted under the ESPP was $1.08 during fiscal 2002
and was $6.54 during 2001 and fiscal 2000.

53



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |             
|-- | ------------
|7. | Income Taxes

The provision for income taxes consists of the
following:

|                   |         |                         |   |            |       |            |   |       |       |  |   |     |     | 
|------------------ | ------- | ----------------------- | - | ---------- | ----- | ---------- | - | ----- | ----- |  | - | --- | --- | 
|                   |         | Year Ended              |   | Year Ended |       | Year Ended
|                   |         | June 29,                |   | June 30,   |       | July 1,   
|                   |         | 2002                    |   | 2001       |       | 2000      
|                   |         |                         |   |            |       |           
|                   |         |                        
|                   |         | (In thousands)         
|Current provision: |         |                         |   |            |       |            |   |       |       |  |   |    
|                   | State   |                         | $ | 250        |       |            | $ | 250   |       |  | $ |    |    
|                   | Foreign |                         |   | 800        |       |            |   | 2,750 |       |  |   | 200 |    
|                   |         |                         |   |            |       |            |   |       |       |  |   |    
|                   |         | Total current provision |   | $          | 1,050 |            |   | $     | 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:

|                                                             |       |                |         |            |  |            |         |       |  |   |         |     | 
|------------------------------------------------------------ | ----- | -------------- | ------- | ---------- |  | ---------- | ------- | ----- |  | - | ------- | --- | 
|                                                             |       | Year Ended     |         | Year Ended |  | Year Ended
|                                                             |       | June 29,       |         | June 30,   |  | July 1,   
|                                                             |       | 2002           |         | 2001       |  | 2000      
|                                                             |       |                |         |            |  |           
|                                                             |       |               
|                                                             |       | (In thousands)
|Tax benefit at federal statutory rate                        |       | $              | (31,689 | )          |  | $          | (43,037 | )     |  | $ | (21,053 | )  
|Foreign taxes                                                |       |                | 800     |            |  |            | 2,750   |       |  |   | 200     |    
|State taxes                                                  |       |                | 250     |            |  |            | 250     |       |  |   |        |    
|In-process research and development                          |       |                |        |            |  |            | 4,279   |       |  |   |        |    
|Unbenefitted net operating losses, reserves and
    accruals |       |                | 31,689  |            |  |            | 38,758  |       |  |   | 21,053  |    
|                                                             |       |                |         |            |  |            |         |       |  |   |         |    
|                                                             | Total |                | $       | 1,050      |  |            | $       | 3,000 |  |   | $       | 200 | 
|                                                             |       |                |         |            |  |            |         |       |  |   |         |    

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

|                                               |                        |                |         |          |  |   |         |   | 
|---------------------------------------------- | ---------------------- | -------------- | ------- | -------- |  | - | ------- | - | 
|                                               |                        | June 29,       |         | June 30,
|                                               |                        | 2002           |         | 2001    
|                                               |                        |                |         |         
|                                               |                        |               
|                                               |                        | (In thousands)
|Net operating loss carryforwards               |                        | $              | 54,359  |          |  | $ | 24,264  |  
|Reserves and accruals not currently deductible |                        |                | 19,019  |          |  |   | 30,651  |  
|Deferred compensation                          |                        |                |        |          |  |   | 7,908   |  
|Research credit carryforwards                  |                        |                | 7,754   |          |  |   | 2,424   |  
|Other                                          |                        |                | 4,309   |          |  |   | 1,091   |  
|                                               |                        |                |         |          |  |   |         |  
|                                               |                        |                | 85,441  |          |  |   | 66,338  |  
|Valuation allowance                            |                        |                | (85,441 | )        |  |   | (66,338 | )
|                                               |                        |                |         |          |  |   |         |  
|                                               | 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
$19.1 million, $39.4 million and $24.9 million
during fiscal 2002, fiscal 2001 and fiscal 2000, respectively.

As of June 29, 2002, the Company had net
operating loss carryforwards for federal and state purposes of
$131.2 million and $147.0 million, respectively. The
Company also had federal and state research and

54



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

development tax credit carryforwards of
$4.7 million and $4.6 million, respectively. The
federal and state net operating loss carryforwards will expire
at various dates beginning in 2007 if not utilized.

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



|   |            
|-- | -----------
|8. | 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.



|   |                           
|-- | --------------------------
|9. | 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 period. Revenue from unaffiliated customers and
long-lived assets by geographic region are as follows (in
thousands):

|         |                   |            |   |            |         |            |   |         |         |  |   |        |         | 
|-------- | ----------------- | ---------- | - | ---------- | ------- | ---------- | - | ------- | ------- |  | - | ------ | ------- | 
|         |                   | Year Ended |   | Year Ended |         | Year Ended
|         |                   | June 29,   |   | June 30,   |         | July 1,   
|         |                   | 2002       |   | 2001       |         | 2000      
|         |                   |            |   |            |         |           
|Revenue: |                   |            |   |            |         |            |   |         |         |  |   |       
|         | North America     |            | $ | 202,435    |         |            | $ | 298,688 |         |  | $ | 97,976 |        
|         | Rest of the world |            |   | 38,216     |         |            |   | 72,255  |         |  |   | 3,961  |        
|         |                   |            |   |            |         |            |   |         |         |  |   |       
|         |                   | Total      |   | $          | 240,651 |            |   | $       | 370,943 |  |   | $      | 101,937 | 
|         |                   |            |   |            |         |            |   |         |         |  |   |       

|                   |                   |          |   |          |        |  |   |        |        | 
|------------------ | ----------------- | -------- | - | -------- | ------ |  | - | ------ | ------ | 
|                   |                   | June 29, |   | June 30,
|                   |                   | 2002     |   | 2001    
|                   |                   |          |   |         
|Long-Lived Assets: |                   |          |   |          |        |  |   |       
|                   | North America     |          | $ | 18,653   |        |  | $ | 14,307 |       
|                   | Rest of the world |          |   | 1,847    |        |  |   | 1,988  |       
|                   |                   |          |   |          |        |  |   |       
|                   |                   | Total    |   | $        | 20,500 |  |   | $      | 16,295 | 
|                   |                   |          |   |          |        |  |   |       

During fiscal 2002 one customer accounted for 15%
of revenue. The same customer plus two others accounted for 14%,
13%, and 10% of revenue during fiscal 2001 and 14%, 15% and 11%
of revenue during fiscal 2000.



|    |           
|--- | ----------
|10. | Litigation

The Company is subject to legal proceedings,
claims, and litigation arising in the ordinary course of
business. While the outcome of these matters is currently not
determinable, management does not expect that the ultimate costs
to resolve these matters will have a material adverse effect on
the Companys financial position, results of operations, or
cash flows.

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

55



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 the
Company does not infringe the patents in suit, that the patents
in suit are invalid, and that they are unenforceable. On
June 14, 2002, following the retirement of the judge
hearing the case, the case was referred to a magistrate. On
July 11, 2002, the magistrate granted the Companys
motion for summary judgment finding that the Company did not
infringe the patents. On August 29, 2002, NCR filed an
objection to the magistrates ruling and the Company is
currently preparing a response to that objection.

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 patent
in the future. The Company filed an answer on August 1,
2001, denying DataQuills allegations and asserting
counterclaims for declaratory judgments that the Company does
not infringe the patent in suit, that the patent in suit is
invalid, and that it is unenforceable. On August 7, 2002,
the Company filed motions for summary judgment and expects a
ruling shortly. The case against the other defendant, Kyocera
Wireless Corp., has been severed and transferred to the United
States District Court for the Southern District of California,
where it pends separately.

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
allege claims against the Company and two of its officers under
Sections 11 and 15 of the Securities Act of 1933, as
amended, and under Section 10(b) and Section 20(a) of
the Securities Exchange Act of 1934, as amended. The complaints
also name as defendants the underwriters for the
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. These cases have been consolidated with many
cases brought on similar grounds against other parties in the
United States District Court for the Southern District of
New York. A Motion to Dismiss has been filed by a number of
defendants, including Handspring and its named officers, but the
court has not yet ruled on the motion.

On September 18, 2002, Research in Motion
filed suit against Handspring in the United States District
Court for the District of Delaware. The complaint alleges
infringement of one U.S. patent. The complaint seeks
unspecified compensatory and treble damages and to permanently
enjoin Handspring from infringing the patents in the future.
Handspring has not yet filed an answer to the complaint.



|    |                                                  
|--- | -------------------------------------------------
|11. | Selected Quarterly Financial Data
    (Unaudited)

The following table presents unaudited quarterly
financial information for each of the quarters of the fiscal
years ended June 29, 2002 and June 30, 2001. The
Company believes this information reflects a fair presentation
of such interim information in accordance with generally
accepted accounting principles and the rules and regulations of
the Securities and Exchange Commission. The results of any
quarter are not

56



---



##### Table of Contents



HANDSPRING, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

necessarily indicative of the operating results
for any future period. Selected unaudited quarterly results were
as follows:

|                                                                                              |  |                                       |         |           |  |          |         |           |  |          |         |           |  |          |         |           |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | --------- |  | -------- | ------- | --------- |  | -------- | ------- | --------- |  | -------- | ------- | --------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                              |  |                                      
|                                                                                              |  | Three Months Ended                   
|                                                                                              |  |                                      
|                                                                                              |  | June 29,                              |         | March 30, |  | Dec. 29, |         | Sept. 29, |  | June 30, |         | March 31, |  | Dec. 30, |         | Sept. 30,
|                                                                                              |  | 2002                                  |         | 2002      |  | 2001     |         | 2001      |  | 2001     |         | 2001      |  | 2000     |         | 2000     
|                                                                                              |  |                                       |         |           |  |          |         |           |  |          |         |           |  |          |         |          
|                                                                                              |  |                                      
|                                                                                              |  | (In thousands, except per share data)
|Revenue                                                                                       |  | $                                     | 49,010  |           |  | $        | 59,715  |           |  | $        | 70,512  |           |  | $        | 61,414  |           |  | $ | 60,990  |   |  | $ | 123,820 |   |  | $ | 115,616 |   |  | $ | 70,517  |  
|Gross profit (loss) excluding amortization of
    deferred stock compensation and intangibles |  |                                       | 12,027  |           |  |          | 5,474   |           |  |          | 11,921  |           |  |          | 5,312   |           |  |   | (19,114 | ) |  |   | 39,404  |   |  |   | 36,333  |   |  |   | 22,009  |  
|Net loss                                                                                      |  |                                       | (15,393 | )         |  |          | (23,660 | )         |  |          | (19,828 | )         |  |          | (32,708 | )         |  |   | (67,167 | ) |  |   | (27,229 | ) |  |   | (15,194 | ) |  |   | (16,373 | )
|Basic and diluted net loss per share                                                          |  |                                       | (0.11   | )         |  |          | (0.18   | )         |  |          | (0.16   | )         |  |          | (0.28   | )         |  |   | (0.60   | ) |  |   | (0.26   | ) |  |   | (0.15   | ) |  |   | (0.17   | )

57



---



##### Table of Contents






SIGNATURES

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



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



| |     |                                                                                            
| | --- | -------------------------------------------------------------------------------------------
| | By: | /s/ DONNA L. DUBINSKY 
     _______________________________________ 
     Donna L. Dubinsky

| |                                          
| | -----------------------------------------
| | President and Chief Executive
    Officer

Date: September 27, 2002

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 27, 2002
|                                               
|Principal Financial and Accounting
    Officer: |  |                                                    |  |                   
|                                               
|/s/ DONNA L. DUBINSKYDonna L. Dubinsky          |  | President, Chief Executive Officer, and a Director |  | September 27, 2002
|                                               
|Additional Directors:                           |  |                                                    |  |                   
|                                               
|/s/ BRUCE W. DUNLEVIEBruce W. Dunlevie          |  | Director                                           |  | September 27, 2002
|                                               
|/s/ KIM B. CLARKKim B. Clark                    |  | Director                                           |  | September 27, 2002
|                                               
|/s/ L. JOHN DOERRL. John Doerr                  |  | Director                                           |  | September 27, 2002
|                                               
|/s/ JEFFREY C. HAWKINSJeffrey C. Hawkins        |  | Director                                           |  | September 27, 2002
|                                               
|/s/ WILLIAM E. KENNARDWilliam E. Kennard        |  | Director                                           |  | September 27, 2002
|                                               
|/s/ MITCHELL E. KERTZMANMitchell E. Kertzman    |  | Director                                           |  | September 27, 2002

58



---



##### Table of Contents



CERTIFICATION OF CHIEF EXECUTIVE
OFFICER

PURSUANT TO


18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002


I, Donna L. Dubinsky, certify that:



| |                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    the Annual Report on Form 10-K of Handspring, Inc.                                                                                                                                                                                                                                                                        
|
| | 2.     Based on my
    knowledge, the Annual Report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by the Annual
    Report.
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in the Annual Report, fairly present in all
    material respects, the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in the Annual Report.                      



| |                                          
| | -----------------------------------------
| | /s/ DONNA L. DUBINSKY                    
| |                                          
| | Donna L. Dubinsky                        
| | President and Chief Executive
    Officer

Date: September 27, 2002

59



---



##### Table of Contents



CERTIFICATION OF CHIEF FINANCIAL
OFFICER

PURSUANT TO


18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002


I, Donna L. Dubinsky, certify that:



| |                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    the Annual Report on Form 10-K of Handspring, Inc.                                                                                                                                                                                                                                                                        
|
| | 2.     Based on my
    knowledge, the Annual Report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by the Annual
    Report.
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in the Annual Report, fairly present in all
    material respects, the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in the Annual Report.                      



| |                               
| | ------------------------------
| | /s/ DONNA L. DUBINSKY         
| |                               
| | Donna L. Dubinsky             
| | Acting Chief Financial Officer

Date: September 27, 2002

60



---



##### Table of Contents



CERTIFICATION OF CHIEF EXECUTIVE
OFFICER

PURSUANT TO


18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002


I, Donna L. Dubinsky, certify that the Annual
Report on Form 10-K for the fiscal year ended June 29,
2002 fully complies with the requirements in Sections 13(a)
or 15(d) of the Securities Exchange Act of 1934, and that the
information contained in such Annual Report fairly presents, in
all material respects, the financial condition and results of
operations of Handspring, Inc. for the periods being presented.



| |                                          
| | -----------------------------------------
| | /s/ DONNA L. DUBINSKY                    
| |                                          
| | Donna L. Dubinsky                        
| | President and Chief Executive
    Officer

Date: September 27, 2002

61



---



##### Table of Contents



CERTIFICATION OF CHIEF FINANCIAL
OFFICER

PURSUANT TO


18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002


I, Donna L. Dubinsky, certify that the Annual
Report on Form 10-K for the fiscal year ended June 29,
2002 fully complies with the requirements in Sections 13(a)
or 15(d) of the Securities Exchange Act of 1934, and that the
information contained in such Annual Report fairly presents, in
all material respects, the financial condition and results of
operations of Handspring, Inc. for the periods being presented.



| |                               
| | ------------------------------
| | /s/ DONNA L. DUBINSKY         
| |                               
| | Donna L. Dubinsky             
| | Acting Chief Financial Officer

Date: September 27, 2002

62



---



##### Table of Contents






EXHIBIT INDEX

|        |    |     |  |   |  |                                                                                                                                                                                                                                                 
|------- | -- | --- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |  
|Number  |    |     |  |  
|        |    |     |  |  
|        | 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(2)                                                                                                                                        
|        | 10 | .8  |  |  |  | Standard Manufacturing Agreement between
    Registrant and Solectron (de Mexico), dated June 11,
    2002                                                                                                                                    
|        | 10 | .9  |  |  |  | Offer Letter of Employment between Registrant and
    William Slakey, dated July 26, 2002*                                                                                                                                                      
|        | 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 |  |  |  | Master Purchase Agreement between Registrant and
    Wavecom Inc., dated June 12, 2001                                                                                                                                                        
|        | 10 | .18 |  |  |  | Amendment 1 to Master Purchase Agreement
    between Registrant and Wavecom Inc., dated January 22,
    2002                                                                                                                                  
|        | 10 | .19 |  |  |  | Reserved                                                                                                                                                                                                                                        
|        | 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)                                                                                                             

63



---



##### Table of Contents



|        |    |     |  |   |  |                                                                                                                                                                                                                                                                                     
|------- | -- | --- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |  
|Number  |    |     |  |  
|        |    |     |  |  
|        | 10 | .26 |  |  |  | Form of Addendum to Standby Letter of Credit
    between Registrant and Wells Fargo Bank, National Association(3)                                                                                                                                                                   
|        | 10 | .27 |  |  |  | Securities Account Control Agreement among
    Registrant, Wells Fargo Bank, National Association, acting
    through its Investment Group and Wells Fargo Bank, National
    Association, acting through its Peninsula Technology RCBO
    Office, dated as of February 16, 2001(3)
|        | 10 | .28 |  |  |  | Security Agreement between Registrant and Wells
    Fargo Bank, National Association, dated as of February 16,
    2001(3)                                                                                                                                                          
|        | 10 | .29 |  |  |  | Addendum to Security Agreement between Registrant
    and Wells Fargo Bank, National Association, dated as of
    February 16, 2001(3)                                                                                                                                              
|        | 10 | .30 |  |  |  | Amendment to Lease Agreement (Building 2) between
    Registrant and M-F Downtown Sunnyvale, LLC, dated as of
    July 12, 2002                                                                                                                                                     
|        | 10 | .31 |  |  |  | Amendment to Lease Agreement (Building 3) between
    Registrant and M-F Downtown Sunnyvale, LLC, dated as of
    July 12, 2002                                                                                                                                                     
|        | 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 28, 2001.                                                    
|   
|(3) | Incorporated by reference to the exhibit with the
    same number to our Report on Form 10-Q, filed on
    May 4, 2001.                                                           

64