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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File No. 0-30719

Handspring, Inc.

189 Bernardo Avenue

(650) 230-5000

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

     None.

Table of Contents

HANDSPRING, INC.

2003 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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PART I

Item 1.     Business

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

Overview

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

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

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

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

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

Products and Services

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

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

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

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

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

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

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

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

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

Sales and Marketing

      We have worked to develop strong relationships with a variety of wireless carriers around the world including Sprint, T-Mobile, Cingular and AT&T Wireless in the United States and Orange in Europe. We work with carriers in different ways, depending on each carrier’s unique situation and requirements.

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

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

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

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

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

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

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Customer Service and Support

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

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

Product Development and Technology

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

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

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

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

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

Manufacturers and Suppliers

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

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

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

Competition

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

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

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

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

      To be competitive, we must continue to invest significant resources in research and development as well as sales and marketing. We cannot be sure that we will have sufficient resources to make these investments or that we will be able to make the technological advances necessary to be competitive.

Intellectual Property

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

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

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Employees

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

Item 2.     Properties

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

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

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

Item 3.     Legal Proceedings

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

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

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

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

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

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

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

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

      None.

PART II

Market for Registrant’s Common Equity

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

Sales of Unregistered Securities

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

Holders

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

Dividends

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

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Item 6.     Selected Financial Data

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

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

Overview

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

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

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

Significant Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

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

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

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Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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Recently Issued Accounting Pronouncements

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

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

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

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

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

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

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

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

Factors Affecting Future Results

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to Handspring

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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	•	PalmSource does not continuously upgrade the Palm OS and otherwise maintain the competitiveness of the Palm OS platform.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

      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

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

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

      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.

      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.

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

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

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

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

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

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

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

      Our 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.

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Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

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

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

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

      None.

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PART III

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

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

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

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

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

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

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

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

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

Executive Officers and Key Employees

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

(1)	Additional information with respect to Mr. Hawkins and Ms. Dubinsky is set forth herein under “Directors.”

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

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

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

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

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

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

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

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

Section 16(a) Beneficial Ownership Compliance

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

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

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

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

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

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Executive Compensation

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

Summary Compensation Table:

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

Grant of Stock Options

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

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Option Grants in Fiscal 2003

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

Exercise of Stock Options

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

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