Handspring Form 10-Q (3-29-03)

10-Q 1 f90049e10vq.htm FORM 10-Q Handspring Form 10-Q (3-29-03)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 29, 2003


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-30719

HANDSPRING, INC.

(Exact name of registrant as specified in its charter)


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

189 Bernardo Avenue
Mountain View, CA 94043
(Address of Principal Executive Offices, including Zip Code)

(650) 230-5000
(Registrant’s telephone number, including Area Code)

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

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

As of April 30, 2003 there were 148,299,980 shares of the Registrant’s common stock outstanding.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Disclosure Controls and Procedures
	PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
	SIGNATURES
	CERTIFICATIONS

HANDSPRING, INC.

FORM 10-Q

TABLE OF CONTENTS


		Page

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
	Condensed Consolidated Balance Sheets		1
	Condensed Consolidated Statements of Operations		2
	Condensed Consolidated Statements of Cash Flows		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
Item 3. Quantitative and Qualitative Disclosures About Market Risk			22
Item 4. Controls and Procedures			22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings			23
Item 2. Changes in Securities and Use of Proceeds			24
Item 3. Defaults Upon Senior Securities			24
Item 4. Submission of Matters to a Vote of Security Holders			24
Item 5. Other Information			24
Item 6. Exhibits and Reports on Form 8-K			24
SIGNATURES			25
CERTIFICATIONS			26

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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


				March 29, 2003			June 29, 2002

				(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	45,200		$	85,554
	Short-term investments				8,006			15,235
	Accounts receivable, net				536			20,491
	Prepaid expenses and other current assets				3,718			3,667
	Inventories				5,766			20,084
	Restricted investments for committed tenant improvements and other				11,131			—

		Total current assets			74,357			145,031
Restricted investments					—			49,482
Property and equipment, net					6,966			12,478
Construction in progress-Sunnyvale tenant improvements					—			6,614
Construction in progress-Sunnyvale property					13,982			73,979
Other assets					4,089			2,570

		Total assets		$	99,394		$	290,154

			LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	14,820		$	44,490
	Non-cash obligations for construction in progress-Sunnyvale property				—			73,979
	Provision for committed tenant improvements and other				11,131			—
	Accrued liabilities				38,922			48,779

		Total current liabilities			64,873			167,248

Long-term liabilities:
	Non-cash obligations for construction in progress-Sunnyvale property				13,982			—
	Sunnyvale note payable				2,300			—
Stockholders’ equity:
	Common stock				148			143
	Additional paid-in capital				425,844			419,256
	Deferred stock compensation				(2,500	)		(9,468	)
	Accumulated other comprehensive loss				(1,011	)		(793	)
	Accumulated deficit				(404,242	)		(286,232	)

		Total stockholders’ equity			18,239			122,906

		Total liabilities and stockholders’ equity		$	99,394		$	290,154

See accompanying notes to condensed consolidated financial statements.

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


		Three Months Ended						Nine Months Ended

		March 29,			March 30,			March 29,			March 30,
		2003			2002			2003			2002

					(unaudited)
Revenue		$	30,848		$	59,715		$	132,793		$	191,641

	Costs and operating expenses:
	Cost of revenue		25,250			54,241			100,926			168,934
	Research and development		5,734			6,340			16,510			19,318
	Selling, general and administrative		13,069			18,993			51,761			66,679
	Amortization of deferred stock compensation and intangibles (*)		1,730			4,510			6,968			16,476
	Sunnyvale lease restructuring		75,931			—			75,931			—

	Total costs and operating expenses		121,714			84,084			252,096			271,407

Loss from operations			(90,866	)		(24,369	)		(119,303	)		(79,766	)
Interest and other income, net			470			809			1,531			4,520

Loss before taxes			(90,396	)		(23,560	)		(117,772	)		(75,246	)
Income tax provision			38			100			238			950

Net loss		$	(90,434	)	$	(23,660	)	$	(118,010	)	$	(76,196	)

Basic and diluted net loss per share		$	(0.62	)	$	(0.18	)	$	(0.81	)	$	(0.61	)

Shares used in calculating basic and diluted net loss per share			146,657			134,903			144,815			124,568

(*) Amortization of deferred stock compensation and intangibles:
	Cost of revenue	$	228		$	582		$	919		$	2,107
	Research and development		335			1,030			1,415			3,836
	Selling, general and administrative		1,167			2,898			4,634			10,533

		$	1,730		$	4,510		$	6,968		$	16,476

See accompanying notes to condensed consolidated financial statements.

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


		Nine Months Ended

		March 29,			March 30,
		2003			2002

		(unaudited)
Cash flows from operating activities:
	Net loss	$	(118,010	)	$	(76,196	)
	Adjustment to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization		6,370			6,324
	Amortization of deferred stock compensation and intangibles		6,968			16,476
	Amortization of premium or discount on available-for-sale securities, net		49			58
	Gain on sale of available-for-sale securities		—			(784	)
	Write-off of fixed assets		411			—
	Write-off of leases		536			—
	Sunnyvale lease restructuring		75,931			—
	Changes in assets and liabilities:
	Accounts receivable		20,004			(12,818	)
	Prepaid expenses and other current assets		(2,015	)		14,867
	Inventories		14,355			(4,857	)
	Other assets		653			62
	Accounts payable		(26,232	)		(11,247	)
	Accrued liabilities		(7,821	)		(19,107	)

	Net cash used in operating activities		(28,801	)		(87,222	)

Cash flows from investing activities:
	Purchases of available-for-sale securities		(1,989	)		(69,989	)
	Sales and maturities of available-for-sale securities		8,950			118,862
	Reduction of pledged investments		38,350			—
	Purchases of property and equipment and construction in progress-Sunnyvale tenant improvements		(12,855	)		(5,904	)

	Net cash provided by investing activities		32,456			42,969

Cash flows from financing activities:
	Net proceeds from issuance of common stock in private offering, underwritten public offering and upon exercise of underwriter’s over-allotment		—			46,972
	Proceeds from issuance of common stock		2,901			3,905
	Repurchase of common stock		(55	)		—
	Repayment of obligations for construction in progress		(47,219	)		—
	Principal payments on notes payable		(100	)		—

	Net cash provided by (used in) financing activities		(44,473	)		50,877

	Effect of exchange rate changes on cash		464			(641	)

Net increase (decrease) in cash and cash equivalents			(40,354	)		5,983
Cash and cash equivalents:
	Beginning of period		85,554			87,580

	End of period	$	45,200		$	93,563

Supplemental non-cash investing and financing activities:
	Issuance of warrants for lease restructurings	$	3,749			—

	Issuance of notes payable for Sunnyvale lease restructuring	$	4,000			—

See accompanying notes to condensed consolidated financial statements.

HANDSPRING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and accounting principles generally accepted in the United States of America. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments necessary (which are of a normal and recurring nature except as discussed herein) for the fair presentation of the results of the interim periods presented. These financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended June 29, 2002 contained in our 10-K/A filed on February 12, 2003. The results of operations for the three and nine months ended March 29, 2003 are not necessarily indicative of the operating results for the full fiscal year or any future period.

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

Certain prior period balances have been reclassified to conform to current period presentation. In addition, certain current period balances have been reclassified subsequent to our April 15, 2003 press release reporting our results for the quarter ended March 29, 2003.

2. Recently Issued Accounting Pronouncements

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 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 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 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Handspring adopted this standard, which did not have an impact on the Company’s financial position or results of operations.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure, which amends SFAS 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 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 123 or the intrinsic value method described in APB Opinion 25, Accounting for Stock Issued to Employees. SFAS 148’s amendment of the transition and annual disclosure provisions of SFAS 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. Handspring currently uses the intrinsic value method of accounting for stock-based employee compensation described by APB Opinion 25. Handspring adopted 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 FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 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 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies to the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds

a variable interest that is acquired before February 1, 2003. The adoption of FIN 46 is not expected to have a material impact on the Company’s financial position or results of operations.

3. Net Loss Per Share

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

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


		Three Months Ended						Nine Months Ended

		March 29,			March 30,			March 29,			March 30,
		2003			2002			2003			2002

Net loss		$	(90,434	)	$	(23,660	)	$	(118,010	)	$	(76,196	)

Basic and diluted:
	Weighted average common shares outstanding		146,900			142,205			145,353			135,559
	Weighted average common shares subject to repurchase		(243	)		(7,302	)		(538	)		(10,991	)

Weighted average common shares used to compute basic and diluted net loss per share			146,657			134,903			144,815			124,568

Basic and diluted net loss per share		$	(0.62	)	$	(0.18	)	$	(0.81	)	$	(0.61	)

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


	March 29,		March 30,
	2003		2002

Common stock subject to repurchase		165		5,502
Shares issuable under stock options		22,952		28,670
Shares issuable under warrants		9,150		—

The weighted average repurchase price of unvested stock was $0.59 and $0.07 as of March 29, 2003 and March 30, 2002, respectively. The weighted-average exercise price of stock options outstanding was $1.17 and $10.73 as of March 29, 2003 and March 30, 2002, respectively. As part of our lease restructurings, in the third quarter of fiscal year 2003 we issued warrants to purchase a total of 10.2 million shares of common stock. The weighted-average exercise price of warrants outstanding was $1.08 as of March 29, 2003.

4. Inventories

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


	March 29,		June 29,
	2003		2002

Raw materials	$	—	$	380
Finished goods		5,766		19,704

	$	5,766	$	20,084

5. Construction in progress-Sunnyvale property

Under Emerging Issues Task Force 97-10 (“EITF 97-10”), The Effect of Lessee Involvement in Asset Construction, the Company is considered to be the owner (for accounting purposes only) of the buildings subject to the Company’s Sunnyvale leases, during the construction period. The application of the provisions of EITF 97-10 has resulted in the inclusion of $14.0 million as construction in progress with a corresponding non-cash obligation for construction in progress of $14.0 million as of March 29, 2003.

6. Lease restructurings

On January 29, 2003, the Company restructured the leases that were entered into in February 2001 for two new buildings under construction in Sunnyvale, California (the “Sunnyvale leases”).

The Sunnyvale leases had initial terms of twelve years each, with monthly rent expense of approximately $1.7 million, plus monthly operating expenses of approximately $300,000 per month, for a total monthly expense of approximately $2.0 million. Including annual increases, the Company estimates that the total obligation to the landlord would have been approximately $350 million over 12 years. The Company 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, the Company determined that there was no longer a need for additional office space. It 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 Silicon Valley, no subtenants could be secured. Consequently, the Company entered into negotiations with the landlord to restructure the Sunnyvale leases.

As a result of this restructuring, a charge of $75.9 million was taken in the third quarter of fiscal 2003. The components of this charge include $15.3 million paid from cash, cash equivalents and short-term investments, $40.9 million paid from the release of certain letters of credit which had secured the obligations under the Sunnyvale leases, $5.0 million for future lease payments and note payable obligations, $3.7 million for warrants to purchase 10 million shares of common stock, $10.4 million net write-off of tenant improvements and rent expenses and $600,000 for legal fees and expenses. Of the $40.9 million of restricted cash, the landlord has drawn down $31.9 million. A provision for the remaining $9.0 million has been set up to account for this commitment. Of the $5.0 million obligation for future lease and note payable payments, $4.0 million will be paid over the next five years in monthly installments of principal and interest, and $1.0 million without interest will be paid in a lump sum on January 28, 2004, all pursuant to the terms of the Amended and Restated Lease Agreement that was entered into in connection with the restructuring. This restructuring also resulted in the impairment of construction in progress for the Sunnyvale property and the corresponding liability.

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

7. Commitments and Guarantees

The Company leases its facilities under various operating leases, which expire through February 2011. As a result of the lease restructurings, as detailed in Note 6, the Company’s future minimum lease commitments have been significantly reduced. As of March 29, 2003 the future minimum lease commitments under all operating leases were as follows (in thousands):


Fiscal Years Ending

2003 (three months)	$	920
2004		2,678
2005		1,202
2006		927
2007		713
Thereafter		768

Total minimum lease payments	$	7,208

Product Warranties

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


	Amount of Liability

Balance at June 29, 2002	$	14,436
Accrual for warranties issued during the period		6,405
Payments		(8,574	)

Balance at March 29, 2003	$	12,267

8. Deferred Stock Compensation

The Company accounts for its stock compensation using the method prescribed by APB No. 25. Had the Company determined its stock compensation cost based on the fair value at the grant dates for its employee stock options (including shares granted under the ESPP) according to the method prescribed by SFAS No. 123, the Company’s net loss would have been increased to the pro forma amounts indicated below:


		Three Months Ended						Nine Months Ended

		March 29,			March 30,			March 29,			March 30,
		2003			2002			2003			2002

		(In thousands, except per share data)
Net loss:
	As reported	$	(90,434	)	$	(23,660	)	$	(118,010	)	$	(76,196	)
	Pro forma	$	(91,691	)	$	(36,551	)	$	(122,896	)	$	(125,883	)
Basic and diluted net loss per share:
	As reported	$	(0.62	)	$	(0.18	)	$	(0.81	)	$	(0.61	)
	Pro forma	$	(0.63	)	$	(0.27	)	$	(0.85	)	$	(1.01	)

9. Comprehensive Loss

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


		Three Months Ended						Nine Months Ended

		March 29,			March 30,			March 29,			March 30,
		2003			2002			2003			2002

Net loss		$	(90,434	)	$	(23,660	)	$	(118,010	)	$	(76,196	)
Other comprehensive loss:
	Unrealized loss on securities		(41	)		(161	)		(219	)		(196	)
	Foreign currency translation adjustments		(55	)		8			1			(1,330	)

Comprehensive loss		$	(90,530	)	$	(23,813	)	$	(118,228	)	$	(77,722	)

10. Business Segment Reporting

The Company operates in one operating segment; handheld computing, which includes integrated wireless devices, with its

headquarters and most of its operations located in the United States. The Company also conducts sales, marketing and customer service activities throughout the world. Geographic revenue information is based on the location of the end customer. Geographic long-lived assets information is based on the physical location of the assets at the end of each period. Revenue from unaffiliated customers and long-lived assets by geographic region are as follows (in thousands):


	Three Months Ended				Nine Months Ended

	March 29, 2003		March 30, 2002		March 29, 2003		March 30, 2002

Revenue:
North America	$	27,072	$	48,292	$	107,249	$	166,820
Rest of the world		3,776		11,423		25,544		24,821

Total	$	30,848	$	59,715	$	132,793	$	191,641


			June 29,
	March 29, 2003		2002

Long-Lived Assets:
North America	$	23,231	$	92,632
Rest of the world		581		1,847

Total	$	23,812	$	94,479

Long-lived assets does not include securities included in other assets in the amount of $1.2 million and $1.1 million for the nine months ended March 29, 2003 and fiscal year ended June 29, 2002, respectively.

11. Litigation

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

On March 14, 2001, NCR Corporation filed suit against Handspring and Palm, Inc. in the United States District Court for the District of Delaware. The complaint alleges infringement of two U.S. patents. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. Handspring filed an answer on April 30, 2001, denying NCR’s allegations and asserting counterclaims for declaratory judgments that it does not infringe the patents in suit, that the patents in suit are invalid, and that they are unenforceable. On June 14, 2002, following the retirement of the judge hearing the case, the case was referred to a magistrate. On July 11, 2002, the magistrate granted the Company’s motion for summary judgment finding that the Company did not infringe the patents. On August 29, 2002, NCR filed an objection to the magistrate’s ruling, to which the Company has filed a response. On January 6, 2003, the case was referred to a newly appointed district judge, who will review and rule upon NCR’s objection. The Company asserts that NCR’s allegations are without merit, and intends to defend itself vigorously.

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, No. 6,058,304. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin Handspring from infringing the patent in the future. The Company filed an answer on August 1, 2001, denying DataQuill’s allegations and asserting counterclaims for declaratory judgments that the Company does not infringe the patent in suit, that the patent in suit is invalid, and that it is unenforceable. On August 7, 2002, the Company filed motions for summary judgment for non-infringement and invalidity, which were renewed in filings made on October 29, 2002. On February 28, 2003, the Court granted in part and denied in part the Company’s summary judgment motions. DataQuill then filed a motion for this ruling to be reconsidered, which on April 16, 2003 the Court granted in part and denied in part. The Company asserts that DataQuill’s allegations are without merit, and intends to defend itself vigorously.

the underwriters for the offering. The complaints 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 also name as defendants the underwriters for Handspring’s initial public offering. The Company has sought indemnification from its underwriters pursuant to the Underwriting Agreement dated as of June 20, 2000 with the underwriters in connection with Handspring’s initial public offering. Neither Handspring nor its officers have responded to the complaints. These cases have been consolidated with many cases brought on similar grounds against other parties in the United States District Court for the Southern District of New York. The Handspring officers named as defendants have been dismissed from these cases by court order.

On September 18, 2002, Research in Motion (RIM) filed suit against Handspring in the United States District Court for the District of Delaware. The complaint alleges infringement of one U.S. patent. The complaint sought unspecified compensatory and treble damages and to permanently enjoin Handspring from infringing the patents in the future. The parties have signed an agreement under which Handspring has licensed certain RIM keyboard patents. In conjunction with that agreement, the matter was dismissed by court order on March 20, 2003.

On September 30, 2002, Digicom, Inc. filed suit against the Company, Anritsu Company, Matsushita Electric Corporation of America, Mitsubishi Electric and Electronics USA Inc., Rohde & Schwartz, Inc., and Tektronix, Inc. in the United States District Court for the Eastern District of California. The complaint alleged infringement of one U.S. patent. The complaint sought unspecified compensatory and treble damages. The Company sought indemnification from Wavecom, Inc., the Company’s supplier of GSM radios, who vigorously contested Digcom’s allegation. The Company was dismissed from the suit by court order on April 9, 2003.

On November 6, 2002, MLR, LLC filed an amended complaint in a patent lawsuit that had been pending against other defendants, adding, among others, Handspring as a defendant. The case is pending in the United States District Court for the Northern District of Illinois, no. 02-CV-2898. As to Handspring, the complaint alleges infringement of one U.S. patent. On February 5, 2003, the Company filed an answer in the Illinois case denying infringement, and asserting counterclaims for declaratory judgments that the Company does not infringe the patents in suit and that the patents in suit are invalid. On January 24, 2003, the Company filed a related lawsuit in the United States District Court for the Northern District of California, seeking declaratory judgments that the MLR patents are invalid and not infringed by Handspring, and that MLR, by seeking to coerce businesses to buy unwanted and unneeded patent licenses, is engaged in conduct in violation of California Business & Professions Code section 17200. This second case has been 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. The Company asserts that MLR’s allegations are without merit, and intends to defend itself vigorously.

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. Handspring has sought indemnification from its underwriters pursuant to the Underwriting Agreement dated as of June 20, 2000 with its underwriters in connection with its initial public offering. Neither Handspring nor our officers have responded to the complaints.

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

We may make statements in this Form 10-Q, such as statements regarding our plans, objectives, expectations and intentions that are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We may identify these statements by the use of words such as believe, expect, anticipate, intend, plan, and similar expressions. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of these risks and uncertainties, including those we discuss in Factors Affecting Future Results and elsewhere in this Form 10-Q. These forward-looking statements speak only as of the date of this Form 10-Q, and we caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business as addressed in this Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

We were incorporated in July 1998 to develop innovative handheld computers. Shipments of our first Visor handheld organizers began in October 1999. As a result of significant adverse changes in the handheld computing market, including lower demand and compressed gross margins, in the fourth quarter of fiscal 2001 we began to shift our strategic focus toward the potentially high growth market for integrated devices offering voice, data, email and personal information management. As of the completion of the third quarter of fiscal 2003, we had substantially completed this transition.

We shipped our first communicator product, the GSM Treo 180, in December 2001, and subsequently have shipped the GSM/GPRS Treo 270 and the Sprint CDMA Treo 300. We also have evolved our business strategy to focus on strategic relationships with wireless carriers to create custom versions of our communicator products tailored for their networks. Strategic carrier partners give us significant purchase commitments in exchange for our customized development and integration services. For the current generation of Treo, we have worked with both Sprint PCS and T/Mobile in the U.S. as strategic carrier partners. In addition, we recently announced the addition of Orange SA in Europe as a strategic carrier partner for our next generation product. We believe that a communicator focused product strategy, along with a partnership-based carrier strategy, will give Handspring the potential to become a leader in a potentially large, new category of computing and communications devices.

Significant Accounting Policies

The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts. Actual results could differ materially from these estimates. The following significant accounting policies are impacted by judgments, assumptions, and estimates used in the preparation of the condensed consolidated financial statements.

Revenue recognition. Revenue to date is comprised almost entirely of sales of our organizers and communicators. Retail and carrier sales orders are placed in our internal order processing system. Product orders placed by end user customers are received via our Web site or over the telephone via our third-party customer support partner. All orders are then transmitted to our logistics partners. We recognize revenue when a purchase order has been received, the product has been shipped, title has transferred to the customer, the sales price is fixed or determinable and collection of the resulting receivable is probable. Sales of our handheld communicators also may include subsidy revenue from wireless carriers for new customer service contracts or the extension of existing customer contracts. In these cases, the customer has a specified period of time in which they may cancel their service. All revenue related to these subsidies is deferred until this specified period of time has elapsed. No significant post-delivery obligations exist with respect to revenue recognized.

Returns reserve. We offer limited return rights on our products and accordingly, at the time the related sale is recorded, we reduce revenues for estimated returns. The estimates for returns are adjusted periodically and are based upon various factors including historical rates of returns, inventory levels in the channel, and the customer’s contractual return rights. 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. We invest our excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers. All highly liquid debt or equity instruments purchased with an original maturity of three months or less from the date of purchase are considered to be cash equivalents. Those with original maturities greater than three months and current maturities less than twelve months from the balance sheet date are considered short-term investments.

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.

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

Results of Operations

Revenue. Revenue for the third quarter of fiscal 2003 was $30.8 million compared with $59.7 million for the same quarter of the previous fiscal year, a decline of $28.9 million or 48%. Revenue for the first nine months of fiscal 2003 was $132.8 million compared with $191.6 million during the same period of the previous fiscal year, a decline of $58.8 million or 31%. Revenue decreased during the quarter and nine month period primarily due to the decline in unit shipments of our organizers as we have transitioned our product development and marketing efforts from organizer products to communicator products. The decrease in revenue was offset in part by revenue generated from Treo communicators. Our communicator products represented 69% of the net revenue for the third quarter of fiscal 2003, or $21.1 million, compared with 37%, or $22.1 million, for the third quarter of fiscal 2002, and 68% of the net revenue for the first nine months of fiscal 2003, or $90.6 million, compared with 12%, or $23.8 million, for the first nine months of fiscal 2002. Revenues from Sprint account for a substantial portion of communicator revenue for the third quarter and nine month period of fiscal year 2003.

Revenue outside North America declined to 12% of revenue during the third quarter of fiscal 2003 from 19% during the same period of the previous fiscal year primarily due to the rescaling of our international infrastructure. Revenue outside North America increased to 20% of revenue during the first nine months of fiscal 2003 from 13% during the same period of the previous fiscal year, primarily due to the introduction of communicator products and our entry into Latin America and China.

Cost of revenue. Cost of revenue was $25.3 million for the third quarter of fiscal 2003 compared to $54.2 million for the same quarter of the previous fiscal year. For the first nine months of fiscal 2003 and 2002, cost of revenue was $100.9 million and $168.9 million, respectively. Excluding the amortization of deferred stock compensation, gross margins increased from 9% during the third quarter of fiscal 2002 to 18% during the third quarter of fiscal 2003, and from 12% during the first nine months of fiscal 2002 to 24% during the first nine months of fiscal 2003. This increase was primarily attributable to the increase in communicator sales, which typically have higher gross margins than our organizer products. Gross margins may be affected adversely 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, seasonal effects, promotional funding and timing and amount of carrier subsidies.

Research and development. Research and development expenses decreased to $5.7 million during the third quarter of fiscal 2003 from $6.3 million during the same quarter of the previous fiscal year, and decreased to $16.5 million during the first nine months of fiscal 2003 from $19.3 million during the same period of fiscal 2002. The decline in research and development for the third quarter of fiscal 2003 compared to the same period for the prior year was due to the timing of projects and reductions in our workforce. In addition to these third quarter changes, the decrease in the first nine months of fiscal 2003 compared to the same period of the prior year was also due to $1.3 million in carrier-reimbursed development costs. 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 decreased to $13.1 million and $51.8 million during the third quarter and the first nine months of fiscal 2003, respectively, from $19.0 million and $66.7 million during the same periods of the previous fiscal year. The decreases were primarily due to general cost reductions made company-wide, including reductions in advertising and marketing activities and reductions in our workforce. This reduction was partially offset by a restructuring charge 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. We will continue to reduce any expenses that do not serve our key goals in order to manage costs.

Amortization of deferred stock compensation and intangibles. We recognized $1.7 million of amortization of deferred stock compensation and intangibles during the third quarter of fiscal 2003 compared with $4.5 million during the third quarter of fiscal 2002, and $7.0 million during the first nine months of fiscal 2003 compared with $16.5 million during the same period of fiscal 2002. These amounts are primarily related to the stock options that we granted to our officers and employees prior to our initial public offering on June 20, 2000, at prices subsequently deemed to be below the fair value of the underlying stock. The cumulative difference between the fair value of the underlying stock at the date the options were granted and the exercise price of the granted options was $102.0 million. In addition, in February 2001, we recorded $3.9 million of deferred stock compensation in relation to the unvested stock options and restricted stock assumed in the acquisition of BlueLark Systems. All of the deferred stock compensation is being amortized, using the multiple option method, over the vesting period of the related options and restricted stock. Accordingly, our results of operations will include amortization of deferred stock compensation through fiscal 2004.

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

Future amortization of deferred stock compensation is estimated to be $1.2 million and $1.3 million for the remainder of fiscal year 2003 and fiscal year 2004, respectively. However, the amortization of deferred stock compensation and intangibles may be higher than these expected amounts if we acquire additional companies or technologies.

Sunnyvale restructuring. On January 29, 2003, we restructured the Sunnyvale leases that we entered into in February 2001 for two new buildings under construction in Sunnyvale, California (the “Sunnyvale leases”).

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 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 Silicon Valley, 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 million shares of common stock, $10.4 million net write-off of tenant improvements and rent expenses and $600,000 for legal fees and expenses.

Interest and other income, net. Interest and other income, net, decreased to $470,000 during the third quarter of fiscal 2003 from $809,000 during the same quarter of fiscal 2002, and decreased to $1.5 million during the first nine months of fiscal 2003 from $4.5 million during the same period of the previous year. The decreases in both periods were primarily attributable to lower average cash balances and lower interest rates during fiscal 2003 compared to fiscal 2002. In addition, the first nine months of fiscal 2002 included gains on available-for-sale securities. Also included within this line item are gains and losses from fluctuations

in foreign currency exchange rates. These fluctuations caused losses, which offset interest income earned on our cash and investment balances during the third quarter of both fiscal 2002 and 2003. During the first nine months of fiscal 2003 we recorded losses from fluctuations in foreign currency exchange rates, which offset the interest income compared to previous year gains. We have in the past entered into foreign exchange forward contracts to minimize the impact of foreign currency fluctuations on assets and liabilities denominated in currencies other than the functional currency of the reporting entity. We will continue to assess the need to utilize financial instruments to hedge currency exposures.

Income Tax Provision. The provision for income taxes consists of foreign taxes related to our business outside of the United States of America. The provision for income taxes decreased to $38,000 during the third quarter of fiscal 2003 from $100,000 during the third quarter of fiscal 2002, and to $238,000 during the first nine months of fiscal 2003 from $950,000 during the same period of fiscal 2002. The decreases during fiscal 2003 are due to a decrease in the level of our operations outside of the United States.

No provision for federal and state income taxes was recorded because we have experienced significant net losses, which have resulted in deferred tax assets. We provided a full valuation allowance for all deferred tax assets because, in light of our history of operating losses, 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 March 29, 2003, we had cash and cash equivalents and short-term investments of $53.2 million, down $47.6 million from the balances as of June 29, 2002. The decrease was primarily attributable to the cash used for operations and for settlement of the Sunnyvale leases, partially offset by a reduction of restricted investments pledged under the Sunnyvale leases.

During the first nine months of fiscal 2003, we used $28.8 million of cash for operating activities. This usage was primarily attributable to our net loss during the nine month period, offset by non-cash charges for depreciation and amortization, amortization of deferred stock compensation and intangibles and the Sunnyvale lease restructuring. A decrease in our current liabilities contributed to this usage, but was offset by a decrease in accounts receivable and inventories that resulted from lower business volumes. During the first nine months of fiscal 2002, we used $87.2 million of cash for operating activities. This usage was primarily attributable to our net loss during the nine month period, offset by non-cash charges for depreciation and amortization, and amortization of deferred stock compensation and intangibles. An increase in our accounts receivable, due to a large number of shipments at the end of the third quarter of fiscal 2002, and a decrease in current liabilities contributed to this usage. In October 2001, we changed our business practice with one of our logistics partners, whereby we now own all product inventory held at their facilities. This change in practice caused a decrease in prepaid expenses, and an increase in inventory on the balance sheet during the first nine months of fiscal 2002.

Net cash provided by investing activities during the first nine months of fiscal 2003 was $32.5 million, consisting primarily of a 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 property and equipment. Net cash provided by investing activities during the first nine months of fiscal 2002 was $43.0 million, consisting primarily of cash received from the sales and maturities of available-for-sale securities, partially offset by purchases of available-for-sale securities and, to a much lesser extent, property and equipment.

Net cash used in financing activities was $44.5 million during the first nine months of fiscal 2003, primarily due to the repayment of obligations for construction in progress related to our Sunnyvale lease restructuring, partially offset by cash received upon the issuance of common stock for stock option exercises and for purchases under our employee stock purchase program. Net cash provided by financing activities was $50.9 million during the first nine months of fiscal 2002, primarily from the public sale of our common stock and a $10.0 million investment from QUALCOMM Incorporated. We also received $3.9 million upon the issuance of common stock for stock option exercises and for purchases under our employee stock purchase program during this period.

We currently anticipate that our available cash resources will be sufficient to meet our anticipated working capital and capital expenditure requirements for the next twelve months. However, we believe that it is prudent to raise additional funds through public or private debt or equity financing, and we are actively pursuing such financing. 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 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, additional financing may not be available on terms acceptable to us, or at all. If adequate funds are not available our business could be harmed.

Factors Affecting Future Results

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

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

• use leading technologies effectively;

• continue to develop our technical expertise, particularly with wireless technologies;

• enhance our current products and develop new products that meet changing customer needs and carrier requirements;

• timely develop products that meet carrier product planning cycles;

• time new product introductions in a way that minimizes the impact of customers delaying purchases of existing products in anticipation of new product releases;

• certify our wireless products for use on carrier networks;

• adjust the prices of our existing products to increase demand; and

• influence and respond to emerging industry standards, technological changes and carrier requirements.

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

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

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

• the wireless carriers’ interest in testing Treo on their networks;

• the quality and coverage area of voice and data services offered by the wireless carriers for use with Treo;

• the degree to which wireless carriers will facilitate the successful introduction of Treo and actively promote, distribute and resell Treo;

• the extent to which wireless carriers will require specific hardware and software features on Treo communicators to be used on their networks;

• the timely build out of advanced wireless carrier networks such as General Packet Radio Services (GPRS) and 1xRTT, which are expected to enhance the user experience for email and other services through higher speed and “always on” functionality;

• the extent to which wireless carriers will sell and promote competitive products over Treo;

• the conditions imposed on us in our agreements with wireless carriers that, in some circumstances, could limit our ability to make similar products available through competitive carriers in certain markets;

• the wireless carriers’ pricing requirements and subsidy programs; and

• the pricing and terms of voice and data rate plans that the wireless carriers will offer for use with Treo. For example, flat data rate pricing plans offered by some carriers may expose us to risk. While flat data pricing helps customer adoption of the data services offered by carriers and therefore highlights the advantages of the data applications of Treo, such plans may not allow Treo to contribute as much average revenue per user (ARPU) to carriers as when they were pricing incrementally, and therefore reduces our differentiator from other products.

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

In August 2002, we began selling the Treo 300, a jointly developed and co-labeled CDMA version of the Treo communicator that operates on Sprint’s 3G network. The Treo 300 is principally sold and promoted by Sprint and sales of this product constituted a

substantial portion of our revenues for the third quarter, and will represent a significant portion of our revenues for the remainder of the fiscal year. Since the Treo 300 is customized for the Sprint network, Handspring currently manufactures the product only in volumes that are supported by Sprint purchase orders or if Sprint assumes financial liability for long lead time components. If Sprint does not sell and promote the product to the extent we anticipate, future purchase orders from Sprint may be deferred and our business will be substantially harmed. In addition, our dependency on Sprint may cause our revenue to fluctuate, as it is highly dependent on product purchased by Sprint and such sales may be affected due to the timing of Sprint’s product launches.

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

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

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

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

• product returns from carriers and distributors;

• carriers and distributors may not maintain inventory levels sufficient to meet customer demand or may elect not to carry our new wireless communicator products such as Treo;

• 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;

• as the global information technology market weakens, the likelihood of the erosion of the financial condition of distributors increases, which could cause a disruption in distribution as well as a loss of any of our outstanding accounts receivable;

• conflicts may develop between the carrier and distribution channels and direct sales of our products through our handspring.com Web site and by our e-commerce partners;

• we may experience difficulty collecting accounts receivables from retail and distribution channels after our relationships terminate; and

• if we reduce the prices of our products, as we have in the past, in order to maintain good business relations, we may compensate carriers and distributors for the difference between the higher price they paid to buy their inventory and the new lower prices.

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

Our accumulated deficit as of March 29, 2003 was $404.2 million. We had net losses of $118.0 million during the nine months ended March 29, 2003 and $76.2 million during the same period of the previous fiscal year. As of March 29, 2003, we had a total of $2.5 million of deferred compensation to be amortized, with $1.2 million to be amortized in the remaining quarter of fiscal year 2003 and $1.3 million to be amortized in fiscal year 2004. We expect these net losses to continue.

We currently anticipate that our available cash resources will be sufficient to meet our anticipated working capital and capital expenditure requirements for the next twelve months. However, we believe that it is prudent to raise additional funds through public or private debt or equity financing, and we are actively pursuing such financing. 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 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. If adequate funds are not available our business could be harmed.

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

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

• our dependence on third parties to supply components, such as AirPrime which provide radios for our CDMA based Treo communicators;

• our ability to manufacture our Treo products in sufficient volumes on a timely basis;

• the type of distribution channels where Treo will be available;

• our ability to forecast demand accurately, especially for products such as Treo communicators which are in a new product category for which relevant data is incomplete or not available;

• the end user price of Treo; and

• the extent of consumer acceptance of this new product category, which combines multiple functions in a pocket sized device.

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

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

Economic conditions could lead to reduced demand for our products.

The downturn in general economic conditions and the substantial decline in the stock market have led to reduced demand for a variety of goods and services, including many technology products. If conditions continue to decline, or fail to improve, we could see a significant additional decrease in the overall demand for our products that could harm our operating results. This is particularly true with respect to our Treo communicators as they typically carry a list price between $249 and $699 and therefore are expensive purchases for many consumers.

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

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

• we were to breach the license agreement and PalmSource terminated the license;

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

• 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 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 infinges 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.

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

A portion of our revenue is generated through our Web site. As a result, we must maintain our computer systems in good operating order and protect them against damage from fire, water, power loss, telecommunications failures, computer viruses, vandalism and other malicious acts and similar unexpected adverse events. Our Web servers currently are co-located with the Exodus Service provided by Cable & Wireless plc. Any disruption in these services or the failure of these services to handle current or higher volumes of use could have a material adverse affect on our business. While we carry business interruption insurance, it might not be sufficient to cover any serious or prolonged emergencies.

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

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

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

Many of our suppliers are located in Asia. The recent outbreak of SARS could impact the ability of our Asian suppliers, particularly those located in China, to provide necessary components for our products if they are required to suspend, reduce or close operations in light of the outbreak.

We also rely on third parties for network operations, order fulfillment, repair services and technical support and for outsourced services. For example, Visto Corporation is the network operator for our Treo Mail e-mail service. If the services provided by Visto are interrupted or experience quality problems, our ability to meet customer demands would be harmed, causing a loss of revenue and harm to our reputation. Although we have the ability to add new service providers or replace existing ones, transition difficulties and lead times involved in developing additional or new third-party relationships could cause interruptions in services and harm our business.

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

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

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

• mobile handset manufacturers such as Audiovox, Ericsson, HTC Corporation, Kyocera, LG, Motorola, Nokia, Samsung and Sanyo;

• Research In Motion Limited, a leading provider of wireless email, instant messaging and Internet connectivity;

• personal computer companies such as Acer, Dell, Hewlett-Packard and Toshiba;

• the Palm Solutions Group, a subsidiary of Palm, Inc., which develops, manufactures and markets handheld devices and which is now physically separated from PalmSource, the licensor of Palm OS software;

• consumer electronics companies such as Casio, Sharp and Sony; and

• a variety of privately held start-up companies looking to compete in our current and future markets, such as Danger and Good Technology.

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

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

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

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

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

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

We depend on a single third party manufacturer, Solectron, to produce sufficient volume of our products in a timely fashion and at satisfactory quality levels. The cost, quality and availability of Solectron’s manufacturing operations are essential to the successful production and sale of our products. Under our manufacturing agreement with Solectron we order 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, it could take from three to six months to secure alternative manufacturing capacity and our results of operations could be harmed. In addition, if Solectron were to change the terms under which they manufacture for us, our manufacturing costs could increase and our results of operations could suffer.

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

• unexpected increases in manufacturing and repair costs;

• interruptions in shipments if they are unable to complete production;

• inability to control quality of finished products;

• inability to control delivery schedules;

• the risks associated with international operations in Guadalajara, Mexico where Solectron maintains facilities; and

• unpredictability of manufacturing yields.

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

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

Seasonal variations in our sales may lead to fluctuations in our quarterly operating results. In the past, we experienced seasonality in the sales of our organizer products with increased demand typically occurring in our second fiscal quarter due in part to increased consumer spending on electronic devices during the holiday season. It is not yet known whether we will experience similar patterns of seasonal demand fluctuations with our communicator products, which tend to be purchased by carriers at times necessary to meet product launch windows.

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

We began selling our Visor organizer and generating revenue in the quarter ended January 1, 2000. We began volume shipments of our Treo communicator products during the quarter ended March 30, 2002. We have largely completed the transition from a company primarily focused on organizers, to a company primarily focused on the emerging market for handheld communicators. Given the shift in our focus from organizers to communicators, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. In addition, we recently adopted the policy of providing guidance to investors on anticipated business events or issues, however we no longer provide numeric guidance for anticipated financial results. In some future periods, our results of operations could be below the expectations of investors and public market analysts. In this event, the price of our common stock would likely decline.

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

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

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

Our products are complex and must meet stringent user requirements. We must develop our products quickly to keep pace with the rapidly 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. For example, any such undetected errors or defects in our Treo communicator line of products could adversely impact market acceptance of these products, which would hurt our business. We may experience delays in releasing new products or producing them in significant volumes as problems are corrected.

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

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

Business interruptions could adversely affect our business.

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

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

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

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

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

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

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

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

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

We may be required to spend significant resources to protect, monitor and police our intellectual property rights. We may not be able to detect infringement and may lose competitive position in the market before we do so. In addition, competitors may design around our technology or develop competing technologies.

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

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

Any litigation to determine the validity of intellectual property claims, including claims arising through our contractual indemnification of our business partners, regardless of their merit or resolution, would likely be costly and time consuming and divert the efforts and attention of our management and technical personnel. We cannot assure that we would prevail in such litigation given the complex technical issues and inherent uncertainties in intellectual property litigation. If such litigation resulted in an adverse ruling, we could be required to:

• pay substantial damages and costs;

• cease the manufacture, use or sale of infringing products;

• discontinue the use of certain technology; or

• obtain a license under the intellectual property rights of the third-party claiming infringement, which license may not be available on

reasonable terms, or at all.

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

On March 14, 2001, NCR Corporation filed suit against Handspring and Palm, Inc. in the United States District Court for the District of Delaware. The complaint alleges infringement of two U.S. patents. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. We filed an answer on April 30, 2001, denying NCR’s allegations and asserting counterclaims for declaratory judgments that we do not infringe the patents in suit, that the patents in suit are invalid, and that they are unenforceable. On June 14, 2002, following the retirement of the judge hearing the case, the case was referred to a magistrate. On July 11, 2002, the magistrate granted Handspring’s motion for summary judgment finding that Handspring did not infringe the patents. On August 29, 2002, NCR filed an objection to the magistrate’s ruling, to which the Company has filed a response. On January 6, 2003, the case was referred to a newly appointed district judge, who will review and rule upon NCR’s objection. The Company asserts that NCR’s allegations are without merit and intends to defend itself vigorously.

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

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

• changes in foreign currency exchange rates;

• development risks and expenses associated with customizing our product for local languages;

• difficulty in managing widespread sales and manufacturing operations;

• potentially negative consequences from changes in tax laws;

• trade protection measures and import or export licensing requirements;

• less effective protection of intellectual property; and

• changes in a specific country or region’s political or economic conditions, particularly in emerging markets.

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

Our common stock is currently traded on the Nasdaq National Market. Under Nasdaq’s listing maintenance standards, if the bid price of our common stock does not close at or above $1.00 per share for a minimum of ten consecutive trading days before September 2, 2003, Nasdaq may delist our common stock from the Nasdaq National Market. To avoid a delisting from the Nasdaq National Market, we may decide to take various measures including effecting a reverse split of our common stock or moving our stock listing to the Nasdaq Small Cap Market. Even if we undertake any such actions, we cannot be certain that any of these measures will enable us to avoid delisting. If our common stock were to be delisted our ability to generate new sales of our products might be adversely affected and existing customers and vendors may question our viability. In addition, the ability of our stockholders to sell any of our common stock could be severely limited if our common stock was delisted. As a result, the value of our common stock would likely decline.

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

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

Our officers and directors exert substantial influence over us.

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

Item 4. Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Our chief executive officer and our chief financial officer, based on their evaluation of our disclosure controls and procedures within 90 days before the filing date of this report, concluded that our disclosure controls and procedures were effective for this purpose.

Changes in Internal Controls. There were no significant changes in our internal controls or to in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced above. Given the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The design of any system of controls is also based in part on certain assumptions regarding the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On March 14, 2001, NCR Corporation filed suit against Handspring and Palm, Inc. in the United States District Court for the District of Delaware. The complaint alleges infringement of two U.S. patents. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. We filed an answer on April 30, 2001, denying NCR’s allegations and asserting counterclaims for declaratory judgments that we do not infringe the patents in suit, that the patents in suit are invalid, and that they are unenforceable. On June 14, 2002, following the retirement of the judge hearing the case, the case was referred to a magistrate. On July 11, 2002, the magistrate granted the Company’s motion for summary judgment finding that the Company did not infringe the patents. On August 29, 2002, NCR filed an objection to the magistrate’s ruling, to which the Company has filed a response. On January 6, 2003, the case was referred to a newly appointed district judge, who will review and rule upon NCR’s objection. The Company asserts that NCR’s allegations are without merit and intends to defend itself vigorously.

On August 13, 2001, Handspring and two of our officers were named as defendants in a securities class action lawsuit filed in United States District Court for the Southern District of New York. On September 6, 2001, a substantially identical suit was filed. The complaints assert that the prospectus for Handspring’s June 20, 2000 initial public offering failed to disclose certain alleged actions by the underwriters for the offering. The complaints allege claims against Handspring and two of our officers under Sections 11 and 15 of the Securities Act of 1933, as amended, and under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended. The complaints also name as defendants the underwriters for Handspring’s initial public offering. We have sought indemnification from our underwriters pursuant to the Underwriting Agreement dated as of June 20, 2000 with our underwriters in connection with our initial public offering. Neither Handspring nor our officers have responded to the complaints. These cases have been consolidated with many cases brought on similar grounds against other parties in the United States District Court for the Southern District of New York. The Handspring officers named as defendants have been dismissed from these cases by court order.

order on March 20, 2003.

On September 30, 2002, Digcom, Inc. filed suit against the Company, Anritsu Company, Matsushita Electric Corporation of America, Mitsubishi Electric and Electronics USA Inc., Rohde & Schwartz, Inc., and Tektronix, Inc. in the United States District Court for the Eastern District of California. The complaint alleged infringement of one U.S. patent. The complaint sought unspecified compensatory and treble damages. The Company sought indemnification from Wavecom, Inc., the Company’s supplier of GSM radios, who vigorously contested Digcom’s allegation. The Company was dismissed from the suit by court order on April 9, 2003.

On November 6, 2002, MLR, LLC filed an amended complaint in a patent lawsuit that had been pending against other defendants, adding, among others, Handspring as a defendant. The case is pending in the United States District Court for the Northern District of Illinois, no. 02-CV-2898. As to Handspring, the complaint alleges infringement of one U.S. patent. On February 5, 2003, the Company filed an answer in the Illinois case denying infringement, and asserting counterclaims for declaratory judgments that the Company does not infringe the patents in suit and that the patents in suit are invalid. On January 24, 2003, the Company filed a related lawsuit in the United States District Court for the Northern District of California, seeking declaratory judgments that the MLR patents are invalid and not infringed by Handspring, and that MLR, by seeking to coerce businesses to buy unwanted and unneeded patent licenses, is engaged in conduct in violation of California Business & Professions Code section 17200. This second case has been stayed pending a ruling on MLR’s motion before the Joint Panel on Multidistrcit Litigation to consolidate various cases relating to the patent in question. The Company asserts that MLR’s allegations are without merit, and intends to defend itself vigorously.

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. We have sought indemnification from our underwriters pursuant to the Underwriting Agreement dated as of June 20, 2000 with our underwriters in connection with our initial public offering. Neither Handspring nor our officers have responded to the complaints.

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

Not applicable

(b) Reports on Form 8-K.

On January 31, 2003, we filed a report on Form 8-K describing the restructuring of the Sunnyvale leases.

On March 3, 2003, we filed a report on Form 8-K stating that on February 14, 2003, the Strauss-Hawkins Trust and the Redwood Neuroscience Institute adopted stock trading plans in accordance with the guidelines specified by the Securities and Exchange Commission’s Rule 10b5-1 under the Securities Exchange Act of 1934. Jeffrey C. Hawkins, Handspring’s Chairman and Chief Product Officer is a trustee of the Strauss-Hawkins Trust and he is Chairman and Executive Director of the Redwood Neuroscience Institute.

SIGNATURES

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


Date: May 13, 2003		HANDSPRING, INC.


By:		/s/ William R. Slakey

		William R. Slakey Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

CERTIFICATIONS

I, Donna L. Dubinsky, certify that:

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

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

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

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

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

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

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

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

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

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: May 13, 2003


By:		/s/ Donna L. Dubinsky
		Donna L. Dubinsky
		Chief Executive Officer

CERTIFICATION

I, William R. Slakey, certify that:

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

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

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


Date: May 13, 2003


By:		/s/ William R. Slakey
		William R. Slakey
		Vice President and Chief Financial Officer

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•		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.

•		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.

•		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 wireless communicator products such as Treo;

•		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;

•		as the global information technology market weakens, the likelihood of the erosion of the financial condition of distributors increases, which could cause a disruption in distribution as well as a loss of any of our outstanding accounts receivable;

•		conflicts may develop between the carrier and distribution channels and direct sales of our products through our handspring.com Web site 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 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 products in sufficient volumes on a timely basis;

•		the type of distribution channels where Treo will be available;

•		our ability to forecast demand accurately, especially for products such as Treo communicators which are in a new product category for which relevant data is incomplete or not available;

•		the end user price of Treo; and

•		the extent of consumer acceptance of this new product category, which combines multiple functions in a pocket sized device.

	•		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

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

•		mobile handset manufacturers such as Audiovox, Ericsson, HTC Corporation, Kyocera, LG, Motorola, Nokia, Samsung and Sanyo;

•		Research In Motion Limited, a leading provider of wireless email, instant messaging and Internet connectivity;

•		personal computer companies such as Acer, Dell, Hewlett-Packard and Toshiba;

•		the Palm Solutions Group, a subsidiary of Palm, Inc., which develops, manufactures and markets handheld devices and which is now physically separated from PalmSource, the licensor of Palm OS software;

•		consumer electronics companies such as Casio, Sharp and Sony; and

•		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.

•		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

•		changes in foreign currency exchange rates;

•		development risks and expenses associated with customizing our product for local languages;

•		difficulty in managing widespread sales and manufacturing operations;

•		potentially negative consequences from changes in tax laws;

•		trade protection measures and import or export licensing requirements;

•		less effective protection of intellectual property; and

•		changes in a specific country or region’s political or economic conditions, particularly in emerging markets.