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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended September 28, 2002

OR

Commission File No. 0-30719

HANDSPRING, INC.

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)

     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 [X]  No [   ]

     As of October 31, 2002 there were 144,865,065 shares of the Registrant’s common stock outstanding.

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HANDSPRING, INC.

FORM 10-Q

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

HANDSPRING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

See accompanying notes to condensed consolidated financial statements.

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HANDSPRING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

See accompanying notes to condensed consolidated financial statements.

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HANDSPRING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

See accompanying notes to condensed consolidated financial statements.

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HANDSPRING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and generally accepted accounting principals. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended June 29, 2002. The results of operations for the quarter ended September 28, 2002 are not necessarily indicative of the operating results for the full fiscal year or any future period.

     The Company’s fiscal year ends on the Saturday closest to June 30, and each fiscal quarter ends on the Saturday closest to the end of each calendar quarter.

2. 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 was adopted by the Company at the beginning of fiscal 2003, and did not have a material impact on the Company’s financial position or results of operations.

     In July 2002, the FASB issued SFAS 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.

3. Net Loss Per Share

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

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

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     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):

     The weighted average repurchase price of unvested stock was $0.42 and $0.06 as of September 28, 2002 and September 29, 2001, respectively. The weighted-average exercise price of stock options outstanding was $1.37 and $10.63 as of September 28, 2002 and September 29, 2001, respectively.

4. Inventories

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

5. Comprehensive Loss

     The components of comprehensive loss are as follows (in thousands):

6. 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):

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7. 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 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, which were renewed in filings made on October 29 ,2002, and the Company 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. The Handspring officers named as defendants have been dismissed from these cases by court order. A Motion to Dismiss has been filed by a number of defendants, including Handspring, 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. The parties have signed an agreement in principle setting out the fundamental terms under which RIM will license certain RIM keyboard patents to the Company and dismiss pending litigation against the Company. However, a definitive agreement settling the matter has not been signed.

     On September 30, 2002, Digcom, Inc. filed suit against the Company, Anritsu Company, Matsushita Electric Corporation of America, Mitsubishi Electric and Electronics USA Inc., Rohde & Schwartz, Inc., and Tekronix Inc. in the United States District Court for the Eastern District of California. The complaint alleges infringement of one U.S. patent. The complaint seeks unspecified compensatory and treble damages. The Company has not yet filed an answer to the complaint. The Company has sought indemnification from Wavecom, Inc., the Company’s supplier of GSM radios.

     On April 24, 2002, MLR, LLC filed suit against U.S. Robotics Corporation, Kyocera Corporation, Toshiba Corporation, Telefonaktiebolaget LM Ericsson and Samsung Electronics Co., Ltd in the United States District Court for the Northern District of Illinois. On November 1, 2002, MLR filed leave with the Court to file a Second Amended Complaint to add additional parties to the suit, including Handspring, Sony Ericsson Mobile Communications AB, Nokia Corporation and Sierra Wireless. The amended complaint alleges infringement by Handspring of at least four U.S. patents. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. The Second Amended Complaint was filed on or about November 6, 2002; however, as of the date of filing, Handspring had not been served.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     We may make statements in this Form 10-Q 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 of 1933 and Section 21E of the Securities Exchange Act of 1934. 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 Form 10-Q. These forward-looking statements speak only as of the date of this Form 10-Q, 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 Form 10-Q. 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 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 handheld products began in October 1999. Beginning in the fourth quarter of fiscal 2001, we saw significant adverse changes in the handheld market due to the economic slowdown, excess channel inventory, aggressive price reductions and increased competition from both PocketPC and Palm OS handheld manufacturers.

     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 personal communicators. We began shipping our first communicator product, the Treo, in December 2001. We have also shifted our future product development towards communication-focused products. The transition to a communicator-focused company 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. However, we feel that this focus will give Handspring the potential to become a leader in a potentially large, new category of computing and communications devices.

Significant Accounting Policies

     The condensed 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 and carrier 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.

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     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.

     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. Revenue for the first quarter of fiscal 2003 was $54.1 million as compared with $61.4 million for the same quarter of the previous fiscal year, a decline of 12%. Revenue decreased during the quarter primarily due to the decline in unit shipments of our Visor organizers as we continued to shift our focus from organizer products to communicator products. The decrease in Visor organizer revenue was offset in part by revenue generated from Treo communicators. Our Treo products represented 70% of net revenue for the first quarter of fiscal 2003 or $37.6 million, with revenues from Sprint accounting for a significant portion of this amount. There were no sales of communicator products during the first quarter of fiscal 2002.

     Revenue outside North America increased to 18% of revenue during the first quarter of fiscal 2003 as compared to 7% of revenue during the first quarter of fiscal 2002, primarily due to the introduction of communicator products and our entry into Latin America and China. In addition, revenue for the first quarter of fiscal 2002 was significantly affected by pricing and promotion actions taken to increase demand and reduce inventory in Europe and Japan.

     Cost of revenue. Cost of revenue was $41.0 million for the first quarter of fiscal 2003 compared to $56.1 million for the same quarter of the previous fiscal year. Cost of revenue, excluding the amortization of deferred stock, resulted in gross margin increasing to 24% during the first quarter of fiscal 2003 from 9% during the first quarter of fiscal 2002. This increase was primarily attributable to the introduction of Treo products, which have a higher gross margin than our organizer products. In addition, during the first quarter of fiscal 2002, pricing and promotion actions were taken in order to increase demand and reduce inventory which contributed to our lower gross margin during this period. Gross margin may be adversely affected by new product introductions by our competitors, competitor pricing actions and higher inventory balances. We also expect our gross margin to fluctuate in the future due to channel mix, geographic mix, new product introductions, seasonal effects, promotional funding and timing and amount of carrier subsidies.

     Research and development. Research and development expenses decreased to $5.4 million during the first quarter of fiscal 2003 from $7.0 million during the same quarter of the previous fiscal year. This decrease in absolute dollars was primarily due to $1.3 million in

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carrier-reimbursed development costs. We believe that continued investment in research and development is critical to our plans to develop wireless communication products.

     Selling, general and administrative. Selling, general and administrative expenses decreased to $20.7 million during the first quarter of fiscal 2003 from $26.7 million during the same quarter of the previous fiscal year due to general cost reductions made company-wide, including significant reductions in advertising and marketing activities. This reduction was partially offset by a restructuring charge taken during the first quarter of fiscal 2003 to align our expenses with the current scale of the company. This charge included severance expenses associated with headcount reductions for both our U.S. and European operations, and the write-off of leases and capital equipment for our European operations. We will continue to reduce any expenses that do not serve our key goals in order to manage costs.

     Amortization of deferred stock compensation and intangibles. We recognized $2.9 million of amortization of deferred stock compensation during the first quarter of fiscal 2003, and $6.5 million of amortization of deferred stock compensation and intangibles during the first quarter of fiscal 2002. This amount is primarily related to the stock options that we granted to our officers and employees prior to our initial public offering on June 20, 2000, at prices subsequently deemed to be below the fair value of the underlying stock. The cumulative difference between the fair value of the underlying stock at the date the options were granted and the exercise price of the granted options was $102.0 million. In addition, in February 2001, we recorded $3.9 million of deferred stock compensation in relation to the unvested stock options and restricted stock assumed in the acquisition of BlueLark Systems. All of the deferred stock compensation is being amortized, using the multiple option method, over the vesting period of the related options and restricted stock. Accordingly, our results of operations will include amortization of deferred stock compensation through fiscal 2004.

     As part of the acquisition of BlueLark Systems, we also recorded goodwill and other intangible assets of $612,000. The goodwill and intangibles were being amortized on a straight-line basis over three years. However, with the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, beginning in fiscal 2003, the value of assembled workforce was reclassified and recorded as goodwill, and the amortization was discontinued. Instead, the unamortized balance of $331,000 is subject to an impairment test at least annually.

     Future amortization of deferred stock compensation is estimated to be $5.2 million and $1.3 million for the fiscal years ending 2003 and 2004, respectively. However, the amortization of deferred stock compensation and intangibles may be higher than these expected amounts if we acquire additional companies or technologies.

     Interest and other income, net. Interest and other income, net decreased to $637,000 during the first quarter of fiscal 2003 from $3.0 million during the first quarter of fiscal 2002. The decrease was primarily attributable to the lower average cash balances and lower interest rates during the first quarter of fiscal 2003 compared with the same quarter of fiscal 2002. In addition, the first quarter of fiscal 2002 included gains on available for sale securities. Also included within this line item are gains and losses from fluctuations in foreign currency exchange rates. These fluctuations had a negligible effect on interest and other income, net during the first quarter of fiscal 2003. However, during the first quarter of fiscal 2002 we recorded gains on our foreign subsidiaries’ U.S. dollar liabilities as the dollar weakened against the entities’ functional currencies. These gains contributed to the effect of the higher interest income during the quarter. 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.

     Income Tax Provision. The provision for income taxes was $100,000 during the first quarter of fiscal 2003 and $750,000 during the first quarter of fiscal 2002. This decrease is due to a decrease in the level of our operations outside of the United States. No provision for federal and state 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, as we are presently unable to conclude that it is more likely than not that the deferred tax assets will be realized.

Liquidity and Capital Resources

     As of September 28, 2002, we had cash, cash equivalents and short-term investments of $73.8 million, down $27.0 million from the balances as of June 29, 2002. The decrease was primarily attributable to the cash used for operations, partially offset by a reduction of investments pledged under lease agreements (the “Sunnyvale Leases”) for two buildings that are being constructed in Sunnyvale, CA.

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     During the first quarter of fiscal 2003, we used $27.8 million of cash for operating activities. This usage was primarily attributable to our net loss during the quarter. An increase in our accounts receivable and a decrease in current liabilities also contributed significantly to the usage of cash during the quarter, and were partially offset by non-cash charges for depreciation and amortization, and amortization of deferred stock compensation. During the first quarter of fiscal 2002, we used $57.1 million of cash for operating activities. This usage was primarily attributable to our net loss during the quarter. An increase in our accounts receivable, prepaid expenses, other current assets and inventories, and a decrease in current liabilities also contributed significantly to the usage of cash during the quarter. These uses were partially offset by non-cash charges for depreciation and amortization, and amortization of deferred stock compensation and intangibles.

     During the first quarter of fiscal 2003 we used $351,000 for investing activities, consisting primarily of purchases of property and equipment, offset by a reduction of pledged investments for our Sunnyvale Leases. Net cash provided by investing activities during the first quarter of fiscal 2002 was $29.7 million, consisting primarily of cash received from the sales and maturities of available-for-sale securities, partially offset by purchases of available-for-sale securities and property and equipment.

     Net cash provided by financing activities was $1.3 million during the first quarter of fiscal 2003 and 2002, consisting almost entirely of cash received upon the issuance of common stock for stock option exercises and for purchases under our employee stock purchase program for both respective periods.

     As of September 28, 2002, we have pledged $40.9 million of our investment securities as collateral for specified obligations under Sunnyvale Leases agreements for two buildings totaling approximately 340,000 square feet that are being constructed in Sunnyvale, California. Of the $40.9 million pledged in relation to the Sunnyvale Leases, $17.0 million is designated by the Sunnyvale Leases to be utilized for tenant improvements. The remaining portion of the pledged investment represents a security deposit on the property. As of September 28, 2002, there was also $3.3 million pledged as collateral for lease payments for various other leases expiring between August 2004 and June 2008, as well as foreign taxes.

     The Sunnyvale 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. The minimum monthly rent payment in the twelfth year is $2.4 million. Given that our existing office space is adequate to meet our current requirements, we are in discussions with the developer of the Sunnyvale facilities to negotiate a potential buy-out or restructuring of the Sunnyvale Leases. At the same time, we have engaged a real estate broker to sublease the space. Subleasing is difficult given the substantial decline in the commercial real estate market in Silicon Valley, and we have not secured any subtenants. Any subleases we do enter into will be at a rental rate significantly below the rate we owe under the Sunnyvale Leases. Moreover, successful subleasing activities will likely require us to incur additional costs for tenant improvements and broker commissions.

     Today, we cannot predict the outcome of our discussions with the developer or our ability to sublease the properties. However, if we are successful in buying-out or restructuring the Sunnyvale Leases or subleasing the space, we will take a significant, one-time charge relating to the Sunnyvale Leases in the second quarter of fiscal 2003. Moreover, whether or not we are successful in buying-out or restructuring the lease or subleasing the space, the expense related to the Sunnyvale Leases 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. However, to the extent that we are unable to significantly reduce the cash expenses related to our Sunnyvale Lease obligations or meet our revenue and expense projections, our cash balances will be significantly lower and could adversely affect our business, financial condition and results of operations. Furthermore, if existing and potential customers and vendors believe that our cash balances are not adequate, they may take actions that could further harm our liquidity position.

     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 the status of the Sunnyvale Lease negotiations and on market conditions, any additional financing we need may not be available on acceptable terms or at all. The inability to obtain needed financing could adversely affect our business, financial condition and results of operations.

Factors Affecting Future Results

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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 successfully develop new or enhanced products and services that achieve rapid and broad market acceptance. Successful new product introductions are particularly important given our shift in focus from organizers to wireless communicators. This shift in focus requires that our limited resources be directed primarily towards the development, production and marketing of communicators instead of on traditional organizers where we have more extensive engineering, production and marketing experience.

     The market for our communicator and organizer 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 identify new product and service opportunities or modify or improve our products in response to changes in technology, industry standards or carrier requirements, our products could rapidly become less competitive or obsolete. Our future success will depend, in part, on our ability to:

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

     We cannot guarantee that we will be able to introduce new products on a timely or cost-effective basis or that customer demand will meet our expectations. If we are unsuccessful in developing and introducing new products and services or improving existing products that are appealing to carriers and end user customers, our business and operating results would be negatively impacted.

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.

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 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;

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	•		the degree to which wireless carriers will facilitate the successful introduction of Treo and actively promote, distribute and resell Treo;
	•		the extent to which wireless carriers will require specific hardware and software features on Treo communicators to be used on their networks;
	•		the extent to which carriers will sell and promote competitive products over Treo;
	•		the carriers’ pricing requirements and subsidy programs;
	•		the scope of the 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 organizers 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.

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 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.

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

     In February 2001, we entered into the Sunnyvale Leases 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. The minimum monthly rent payment in the twelfth year is $2.4 million.

     Given that our existing office space is adequate to meet our current requirements, we have engaged a real estate broker to sublease the space. Subleasing is difficult given the substantial decline in the commercial real estate market in Silicon Valley and we have not yet secured any subtenants. Any subleases that we do enter into will be at a rental rate significantly below our lease rate. Moreover, successful subleasing activities will likely require the Company to incur additional costs for tenant improvements and broker commissions.

     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, if we are successful in buying-out or restructuring the Sunnyvale Leases or subleasing the space, we will take a significant, one-time charge relating to the Sunnyvale Leases in the second quarter of fiscal 2003. Moreover, whether or not we are successful in buying-out or restructuring the lease or subleasing the space, the expense related to the Sunnyvale Leases 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 $249 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. 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.

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     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 September 28, 2002 was $301.5 million. We had net losses of $15.3 million during the quarter ended September 28, 2002 and $32.7 million during the same quarter of the previous fiscal year. As of September 28, 2002, we had a total of $6.5 million of deferred compensation to be amortized, with $5.2 million to be amortized in remaining quarters of fiscal year 2003 and $1.3 million to be amortized in fiscal year 2004. 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.

     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, if our revenues are lower or our expenses higher than we anticipate, our resources may prove to be insufficient for working capital and capital expenditure requirements and may cause existing and potential customers and vendors to question our viability. 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;
	•		address 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.

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

     We sell our products through carriers and 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. As our product mix shifts more from organizers to communicators, we will be more dependent upon carriers and their retail and distribution channels. We also sell in international markets and offer our products through distributors in Asia Pacific, Canada, Europe, Mexico 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 carriers, retailers and distributors, including the following:

	•		product returns from carriers, retailers and distributors;
	•		carriers, 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;

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	•		carriers, retailers and distributors may emphasize our competitors’ products or decline to carry our products;
	•		with respect to our communicator products, our existing retailers and distributors may not maintain relationships with carriers on whose networks our communicator products are designed to operate;
	•		as the global information technology market weakens, the likelihood of the erosion of the financial condition of 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 carrier, 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 carriers, 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 wireless technology components for our Treo 180 and 270 communicators and AirPrime is the sole supplier of certain wireless technology components for our Treo 300 communicator. 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:

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	•		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, Toshiba, Dell and Acer;
	•		mobile handset manufacturers such as Audiovox, Ericsson, Kyocera, LG, Motorola, Nokia, Sanyo, HTC Corporation 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 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:

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

We rely on third parties for order fulfillment, repair services and technical support and for outsourced services. 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. We also rely on Visto Corporation for network operations of our Treo Mail e-mail service. If Visto Corporation or 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 important to increasing demand for and achieving widespread acceptance of our products. However, currently we have limited our marketing resources in response to reducing our overall costs. Some of our competitors and potential competitors have better name recognition, more marketing resources, and more powerful brands. Promoting and positioning our brands will depend largely on the success of the marketing efforts of our carrier customers and our ability to produce well received new products..

Our products may contain errors or defects that could result in the rejection of our products and damage to our reputation, as well as lost revenues, diverted development resources and increased service costs and warranty claims.

     Our products are complex and must meet stringent user requirements. We must develop our products quickly to keep pace with the rapidly 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.

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

     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. While we have numerous patent applications pending, to date few U.S. or foreign patents have been granted to us.

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

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     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 patent in suit, that the patent in suit is invalid, and that it is unenforceable. Handspring has filed motions for summary judgment, which were renewed in filings made on October 29, 2002, and the Company 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. The parties have signed an agreement in principle setting out the fundamental terms under which RIM will license certain RIM keyboard patents to the Company and dismiss pending litigation against the Company. However, a definitive agreement settling the matter has not been signed.

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     On September 30, 2002, Digcom, Inc. filed suit against the Company, Anritsu Company, Matsushita Electric Corporation of America, Mitsubishi Electric and Electronics USA Inc., Rohde & Schwartz, Inc., and Tektronix, Inc. in the United States District Court for the Eastern District of California. The complaint alleges infringement of one U.S. patent. The complaint seeks unspecified compensatory and treble damages. The Company has not yet filed an answer to the complaint. The Company has sought indemnification from Wavecom, Inc., the Company’s supplier of GSM radios.

     On April 24, 2002, MLR, LLC filed suit against U.S. Robotics Corporation, Kyocera Corporation, Toshiba Corporation, Telefonaktiebolaget LM Ericsson and Samsung Electronics Co., Ltd in the United States District Court for the Northern District of Illinois. On November 1, 2002, MLR filed leave with the Court to file a Second Amended Complaint to add additional parties to the suit, including Handspring, Sony Ericsson Mobile Communications AB, Nokia Corporation and Sierra Wireless. The amended complaint alleges infringement by Handspring of at least four U.S. patents. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. The Second Amended Complaint was filed on or about November 6, 2002; however, as of the date of filing, Handspring had not been served.

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.

Failure to comply with Nasdaq’s listing standards could result in our delisting by Nasdaq from the Nasdaq National Market.

     Our common stock is currently traded on the Nasdaq National Market. Under Nasdaq’s listing maintenance standards, if the closing bid price of our common stock remains under $1.00 per share for thirty consecutive trading days and does not subsequently close at or above $1.00 per share for a minimum of ten consecutive trading days during the following ninety calendar days, Nasdaq may delist our common stock from the Nasdaq National Market. To avoid a delisting from the Nasdaq National Market, we may decide to take various measures including effecting a reverse split of our common stock, repurchasing some portion of our outstanding common stock or moving our stock listing to the Nasdaq Small Cap Market. Even if we undertake any of these actions, we cannot be certain that any of these measures will enable us to avoid delisting. In addition, the delisting of our common stock may adversely affect our ability to generate new sales of our products and may cause existing customers and vendors to question our viability. If our common stock were delisted, the ability of our stockholders to sell any of our common stock could be severely limited. As a result, the value of our common stock would likely decline.

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.

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     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.

Item 3. 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 4. Disclosure Controls and Procedures

     Evaluation of Disclosure Controls and Procedures. Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities

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Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Our chief executive officer and our chief financial officer, based on their evaluation of our disclosure controls and procedures within 90 days before the filing date of this report, concluded that our disclosure controls and procedures were effective for this purpose.

     Changes in Internal Controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced above.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     On March 14, 2001, NCR Corporation filed suit against Handspring and Palm, Inc. in the United States District Court for the District of Delaware. The complaint alleges infringement of two U.S. patents. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. We filed an answer on April 30, 2001, denying NCR’s allegations and asserting counterclaims for declaratory judgments that we do not infringe the patents in suit, that the patents in suit are invalid, and that they are unenforceable.

     On June 19, 2001, DataQuill Limited filed suit against Handspring and Kyocera Wireless Corp. in the United States District Court for the Northern District of Illinois. The complaint alleges infringement of one U.S. patent. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. We filed an answer on August 1, 2001, denying DataQuill’s allegations and asserting counterclaims for declaratory judgments that we do not infringe the patent in suit, that the patent in suit is invalid, and that it is unenforceable. On August 7, 2002, the Company filed motions for summary judgment, which were renewed in filings made on October 29, 2002, and the Company 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 securities class action lawsuit filed in United States District Court for the Southern District of New York. On September 6, 2001, a substantially identical suit was filed. The complaints assert that the prospectus for Handspring’s June 20, 2000 initial public offering failed to disclose certain alleged actions by the underwriters for the offering. The complaints allege claims against Handspring and two of our officers under Sections 11 and 15 of the Securities Act of 1933, as amended, and under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended. The complaints also name as defendants the underwriters for Handspring’s initial public offering. We have sought indemnification from our underwriters pursuant to the Underwriting Agreement dated as of June 20, 2000 with our underwriters in connection with our initial public offering. Neither Handspring nor our officers have responded to the complaints. 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. The Handspring officers named as defendants have been dismissed from these cases by court order. A Motion to Dismiss has been filed by a number of defendants, including Handspring, 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. The parties have signed an agreement in principle setting out the fundamental terms under which RIM will license certain RIM keyboard patents to the Company and dismiss pending litigation against the Company. However, a definitive agreement settling the matter has not been signed.

     On September 30, 2002, Digcom, Inc. filed suit against the Company, Anritsu Company, Matsushita Electric Corporation of America, Mitsubishi Electric and Electronics USA Inc., Rohde & Schwartz, Inc., and Tektronix, Inc. in the United States District Court for the Eastern District of California. The complaint alleges infringement of one U.S. patent. The complaint seeks unspecified compensatory and treble damages. The Company has not yet filed an answer to the complaint. The Company has sought indemnification from Wavecom, Inc., the Company’s supplier of GSM radios.

     On April 24, 2002, MLR, LLC filed suit against U.S. Robotics Corporation, Kyocera Corporation, Toshiba Corporation, Telefonaktiebolaget LM Ericsson and Samsung Electronics Co., Ltd in the United States District Court for the Northern District of Illinois. On November 1, 2002, MLR filed leave with the Court to file a Second Amended Complaint to add additional parties to the suit, including Handspring, Sony Ericsson Mobile Communications AB, Nokia Corporation and Sierra Wireless. The amended complaint alleges infringement by Handspring of at least four U.S. patents. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. The Second Amended Complaint was filed on or about November 6, 2002; however, as of the date of filing, Handspring had not been served.

Item 2. Changes in Securities and Use of Proceeds

     Not applicable.

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Item 3. Defaults Upon Senior Securities

     Not applicable.

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

     Not applicable.

Item 5. Other Information

     The Audit Committee of Handspring, Inc. has considered whether any reasonably anticipated non-audit services to be rendered by PricewaterhouseCoopers LLP during the course of fiscal year 2003 are compatible with maintaining PricewaterhouseCoopers LLP’s independence as auditors of the Company’s fiscal year 2003 consolidated financial statements, and have approved the anticipated non-audit services, maintaining that they would not impair PricewaterhouseCoopers LLP’s independence. The Audit Committee has approved the following non-audit services anticipated to be performed by PricewaterhouseCoopers LLP: quarterly reviews of the Company’s financial statements; and domestic and international tax compliance and tax consulting services.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits.

(b)

Reports on Form 8-K.

     We did not file any reports on Form 8-K during the quarter.

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SIGNATURES

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

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OFFICER CERTIFICATION

I, Donna L. Dubinsky, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Handspring, Inc.

2. Based on my knowledge, this quarterly 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 this quarterly report.

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 this quarterly report.

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

     b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

     c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

     a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

     b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

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OFFICER CERTIFICATION

I, William R. Slakey, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Handspring, Inc.

2. Based on my knowledge, this quarterly 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 this quarterly report.

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 this quarterly report.

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

     b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

     c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

     a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

     b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

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EXHIBIT INDEX