UNITED
    STATES
    SECURITIES AND EXCHANGE COMMISSION
    WASHINGTON, DC 20549**FORM 10-K** **[X]**
      **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF 1934** For
    the fiscal year ended December 31, 2002 **[   ]**
      **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF 1934**For the transition period from ____________
        to ____________ Commission
    file number 1-13810 **SOCKET COMMUNICATIONS, INC.** (Exact name of registrant as specified in its charter)  **Delaware**
      **94-3155066**(State or
          other jurisdiction of incorporation or organization)
      (IRS Employer Identification
          No.)  **37400 Central Court, Newark, CA 94560**(Address of principal executive offices including
    zip code) **(510) 744-2700**(Registrant's telephone number, including area
    code) Securities
    registered under Section 12(b) of the Exchange Act: None Securities
    registered under Section 12(g) of the Exchange Act: Common Stock, $.001 Par
    Value Check whether
    the issuer (1) has filed all reports required to be filed by Section 13 or
    15(d) of the Exchange Act 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
    [   ] Check if
    there is no disclosure of delinquent filers in response to Item 405 of Regulation
    S-K contained herein, and no disclosure will be contained, to the best of
    registrant's knowledge, in definitive proxy or information statements incorporated
    by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
    YES [ X ] NO [   ] Indicate by check mark whether the registrant is an accelerated
    filer (as defined by Exchange Act Rule 12b-2). YES
    [ X ] NO [   ] Aggregate
    market value of Common Stock ($0.001 par value) held by non-affiliates on
    June 28, 2002 based on the closing price on such date: $21,747,068. For purposes
    of this disclosure, shares of Common Stock held by persons who hold more than
    5% of the outstanding shares of Common Stock and shares held by officers and
    directors of the registrant have been excluded, because such persons may be
    deemed to be affiliates. This determination of affiliate status is not necessarily
    conclusive for other purposes. Number of
    shares of Common Stock ($0.001 par value) outstanding as of March 14, 2003
    was 24,241,259 shares. Documents
    Incorporated by Reference: Items 10, 11, 12, and 13 of Part III are incorporated by reference
    from the Registrant's Proxy Statement for the Annual Meeting of Stockholders
    to be held on June 19, 2003. Such Proxy Statement will be filed within 120
    days after the end of the fiscal year covered by this Annual Report on Form
    10-K. 
 
  TABLE
          OF CONTENTSPART
        IItem
        1.
      Business
      1Item
        2.
      Description
        of Property
      10Item
        3.
      Legal
        Proceedings
      10Item
        4.
      Submission
        of Matters to a Vote of Security Holders
      10PART
        IIItem
        5.
      Market for Registrant's Common Equity and Related Stockholder Matters
      11Item
        6.
      Selected Consolidated Financial Data
      12Item
        7.
      Management's
        Discussion and Analysis of Financial Condition and Results of Operations
      13Item
        7a.
      Quantitative
        and Qualitative Disclosure about Market Risk
      33Item
        8.
      Financial
        Statements and Supplementary Data
      34Item
        9.
      Changes
        in and Disagreements with Accountants on Accounting and Financial Disclosures
      59PART
        IIIItem
        10.
      Directors and Executive Officers of the Registrant
      59Item
        11.
      Executive Compensation
      59Item
        12.
      Security
        Ownership of Certain Beneficial Owners and Management
      59Item
        13.
      Certain
        Relationships and Related Transactions
      60Item
        14.
      Controls
        and Procedures
      60PART
        IVItem
        15.
      Exhibits, Financial Statement Schedules, and Reports on Form 8-K
      61SIGNATURES
      62 CERTIFICATIONS
      63Index
        to Exhibits
      65  
 
  (Table of Contents) PART I


This report contains
  forward-looking statements within the meaning of Section 27A of the Securities
  Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking
  statements are based on current expectations, estimates, and projections about
  our industry, management's beliefs, and assumptions made by management. Words
  such as "may," "will," "predicts," "anticipates,"
  "expects," "intends," "plans," believes,"
  "seeks," "estimates," variations of such words, and similar
  expressions are intended to identify such forward-looking statements. These
  forward-looking statements are not guarantees of future performance and are
  subject to certain risks, uncertainties, and assumptions that are difficult
  to predict; therefore, actual results and outcomes may differ materially from
  what is expressed or forecasted in any such forward looking statements. Factors
  that might cause such a difference include, but are not limited to, the development
  of markets for the Company's products and the acceptance of those products in
  these markets as well as those discussed under "Other Factors Affecting
  Future Operations" and "Management's Discussion and Analysis of Financial
  Condition and Results of Operations." We assume no obligation to update
  such forward-looking statements or to update the reasons why actual results
  could differ materially from those anticipated in such forward-looking statements.

Item 1. Business

The Company

We design, manufacture
  and sell products that connect handheld and notebook computers to the Internet,
  computer networks, and peripherals through both wireless and cable connections.
  Our products are designed for use with a broad range of handheld and notebook
  computers, and employ innovative designs that reduce battery power consumption
  and make them easy to install and use. Our products have been designed specifically
  for handheld computers and other battery-powered devices with standard expansion
  slots for plug-in cards. The expansion slots we support include CompactFlash,
  PC Card, and Secure Digital (SDIO). We believe that growth in the mobile workforce,
  combined with technical advances and cost reductions in handheld computers and
  networking technologies, is driving broader adoption of mobile data communications.
  Our products are designed to address the growing need for connectivity by enabling
  the use of handheld devices to extend data communications capabilities beyond
  location-dependent wired networks or telephone lines, thereby enabling mobile
  computer users to enhance their productivity, exploit time sensitive opportunities
  and improve customer satisfaction. Our products easily integrate hardware, software
  and services into complete mobile connectivity solutions.

Socket Communications was
  incorporated in Delaware in 1995. Our common stock trades on the NASDAQ SmallCap
  under the symbol "SCKT" and on the Pacific Exchange under the symbol
  "SOK". Our principal executive offices are located at 37400 Central
  Court, Newark, CA 94560, and our phone number is (510) 744-2700. Our internet
  home page is located at http://www.socketcom.com; however, the information
  in, or that can be accessed through our home page, is not part of this report.
  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
  on Form 8-K, and the amendments to such reports are available free of charge
  on, or through our Internet home page, as soon as reasonably practical after
  we electronically file such material with, or furnish to, the Securities and
  Exchange Commission, or SEC.

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Products

Our products may be classified
  into four broad product families:

- Network connection products;
- Bar code scanning products;
- Serial products; and
- Embedded products and
    services.

Our network connection products are connection devices that can be plugged
  into standard expansion slots in handheld and notebook computers. These products
  allow users to connect their devices to the Internet via mobile phone services,
  or to private networks, or to communicate with other electronic devices such
  as desktop computers and printers. Our products offer both wireless and cable
  connections to external devices such as mobile phones and printers. Wireless
  connection products include cards using the Bluetooth standard for short-range
  wireless connectivity, and cards for connecting to local wireless networks using
  the Wireless LAN (or WiFi) standard. Cable connection products include modems
  for telephone connections, Ethernet cards for local area network connections
  and digital phone cards for wide area network connections through mobile phones.

Our bar code scanning
  products plug into handheld or notebook computers and turn handheld or notebook
  computers into portable bar code scanners that can be used in various retail
  and industrial workplaces.

Our serial products
  add connection ports to a notebook or handheld computer that allow users to
  connect these portable computers to standard peripherals designed for desktop
  PCs.

Our embedded products
  and services, consisting of Bluetooth modules, interface chips, and engineering
  design services to install these products, allow manufacturers of mobile phones,
  handheld computers and other devices to build wireless connection functions
  into their products.

We target the consumer
  markets with our network connection and serial products. Most of these products
  are sold through wholesale distribution channels that service electronic retailers.
  We are further expanding the availability of our products to consumers through
  retail chains. We target the industrial markets with our bar code scanning products
  and embedded products and services. We work directly with value-added resellers
  and end users. We sell the majority of our bar code scanning products through
  our wholesale distribution channels.

Our products are manufactured
  primarily by third party manufacturers who have the equipment, know-how and
  capacity to manufacture products to our specifications. During the year ended
  December 31, 2002, 58 percent of our sales were in North America, 24 percent
  in Europe, and 18 percent in Asia.

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Market Dynamics

Handheld computers have
  evolved over the past several years from simple devices used mainly to hold
  personal information into small portable units with functionality similar to
  desktop PCs. Advances in mobile network access and transfer speeds are enabling
  handheld computer users to access the Internet, send and receive email, access
  corporate data files, and exchange mobile instant messages anywhere and at any
  time.

Growth in the mobile workforce
  and increasing reliance on the Internet and email are increasing the demand
  for mobile data communications. Advances in wireless connection technologies,
  particularly Bluetooth and Wireless LAN, are being commercialized to allow handheld
  computers to interact wirelessly with nearby computers and with a wide array
  of electronic appliances, including mobile phones, printers, digital cameras,
  LAN access points, automobile communications systems, bar code scanners, home
  entertainment and security systems, public kiosks, public Internet access locations
  and vending machines.

Current market dynamics
  driving adoption of mobile data communications include:Functionality of today's handheld computers is extensive and improving while
  costs are declining. Unlike early models, most handheld mobile computers
  now offer bright outdoor screens, run popular personal information management
  and business programs, have entertainment and educational software allowing
  their use as music players and electronic book readers, and have standard expansion
  slots to transfer data in and out. Popular desktop programs are available for
  today's handheld computers enabling users to send and receive emails with full
  attachments, view and interact with the Internet with full Internet graphics,
  have direct access to corporate data files (subject to business security arrangements),
  and use instant messaging over mobile networks. At the same time, the price
  and costs of using mobile handheld computing devices have been declining.

Manufacturers are poised
  to aggressively market handheld computers. Handheld manufacturers are positioned
  to more actively market their handheld computers during 2003, which will assist
  in educating the market on the capabilities of handheld computers using our
  connection products. Handheld computers using the Microsoft Windows CE operating
  system are called "Pocket PCs." Pocket PC manufacturers include Hewlett-Packard,
  Dell, Toshiba and Casio. Other large manufacturers, including Panasonic, NEC
  and Samsung, have announced their intention to start shipping Pocket PCs during
  2003. In addition, Palm has announced a new operating system to be introduced
  in 2003 that will support expansion slots, making Palm handhelds more competitive
  with the Pocket PC platform. Increased competition among manufacturers is expected
  to result in increased availability and greater promotion of handheld computers
  that can be used with our products during 2003 and beyond.

Mobile phone networks
  are being upgraded to provide faster connections at reduced cost. Mobile
  phone service providers are making substantial investments to upgrade their
  networks to support high-speed data transfer applications. The introduction
  of new networking equipment and technologies during 2002 has substantially increased
  data transfer speeds over regular digital cellular phone networks. Available
  data rates today are at or near the speeds experienced today on a desktop computer
  connected over a phone line with a dial-up modem. These higher speeds are expected
  to make mobile data applications more attractive to users and drive demand for
  products to connect mobile computers to cellular phone networks.



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The mobile workforce
  is growing and is increasingly reliant on email and the Internet. The mobile
  workforce in the U.S. has been estimated to exceed 40 million persons, and at
  least double that number on a worldwide basis. Before recent advancements in
  handheld computers and mobile phone networks, the mobile workforce had been
  unable to effectively stay connected with email, the Internet or corporate data
  except through laptops. With the growth in the use of the Internet and email
  for business and personal applications, workers and consumers are increasingly
  dependent on instant access to the Internet and email for managing their business
  and personal lives. Recent improvements in connectivity and deployment of handheld
  computers by corporations to their mobile workforce are expected to be major
  factors driving growth in mobile data applications over the next several years.

Growth is Projected
  in Windows CE Handheld Computers. Growth in Pocket PCs and tablet computers
  designed to use our plug-in connection solutions is expected to continue, assisted
  by the availability of lower priced Pocket PC computers in the price range of
  $199 to $299 that became available in the fourth quarter of 2002.

Marketing Strategy

We intend to capitalize
  on our relationships with key software and hardware providers, expand the range
  of connection products we offer, introduce our products into new markets by
  expanding our distribution channels, and encourage device manufacturers to build
  our technology directly into their products.

Capitalize on Strategic
  Partner Relationships. We support and encourage direct endorsements and
  referrals for our products from our strategic partners, including operating
  system providers, device manufacturers, phone carriers, distribution partners,
  and end-user customers. We have a team of employees that manages each strategic
  partner relationship. Each of these employee teams specializes in one or two
  of our product families. We have built close working relationships with a number
  of companies that help us rapidly expand and market our products as new standards,
  technologies and markets emerge. Of particular importance are close working
  relationships with Microsoft, Symbol Technologies and Nokia. We coordinate our
  product development efforts with Microsoft on an ongoing basis, with the goal
  of ensuring that our current and future products are compatible with new releases
  of Microsoft's operating systems. We also cooperate with Microsoft in scheduling
  product innovations and implementing new features. Symbol Technologies supplies
  our bar code laser scanning modules that are utilized in our In-Hand Scan Bar
  Code Scanning Card and also manufactures our WiFi plug-in card. Symbol recommends
  to its customers the use of our Bluetooth connection products with its bar code
  scanning products. In 2002, we acquired from Nokia Corporation, through a business
  transfer agreement and related licensing agreements, key Bluetooth CompactFlash
  card technology, including Nokia's antenna technology, that allows us to offer
  the only plug-in CompactFlash Bluetooth card on the market today that fits entirely
  within the standard CompactFlash slot of a device. Bluetooth is an emerging
  wireless communication standard that allows devices to communicate with each
  other at close range. Bluetooth phones began shipping in Europe during the second
  half of 2001 and began appearing in the US markets during 2002. Our Bluetooth
  CompactFlash plug-in card carries the "Nokia OK" logo, and Nokia recommends
  the purchase of our Bluetooth card to its customers.

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Offer Comprehensive
  Product Range. We offer a wide range of connection products used with handheld
  devices, and we encourage our distributors to carry a complete range of our
  products. The goal is for customers to view Socket as a single source for their
  connection needs, instead of having to rely on the individual products or less
  complete product offerings of our competitors.

Build Strong Brand Name.
  We are building a brand image of being "The Mobile Connection Company."
  This image emphasizes quality and standards-based connection products that are
  "Mobility Friendly," which means connection products that are compact,
  low power, and easy to use.

Diversify Distribution
  Channels. We market our products primarily through leading distributors
  that specialize in the distribution of electronic products. We support our distributors
  by providing education, training and customer assistance through our sales,
  marketing and technical support staff. We have approximately 50 distributors
  covering our principal markets in North America, Europe, Asia and the rest of
  the world. Our products are sold by approximately 20 online resellers, which
  are supplied mainly through our distributors. Online resellers today include
  Amazon.com, Mobile Planet, CDW and AOL. We also expanded our distribution channels
  in 2002 to include two major retail store chains, Fry's Electronics and Office
  Depot. Our products are currently being sold by Fry's Electronics, and several
  of our products are being offered by Office Depot commencing in the first quarter
  of 2003. As the volume and popularity of handheld computers grows, we intend
  to continue to expand our retail distribution presence in major retail electronic
  stores worldwide.

Provide OEM Product
  Development Support. To capture embedded connection business, we have built
  relationships with certain mobile device manufacturers and work with them to
  integrate our products, particularly our Bluetooth products, into their own
  product designs. We have an internal team of employees that manages our embedded
  connection business. We also provide engineering services to our mobile device
  manufacturer customers to assist them as needed to integrate our embedded products
  into their electronic devices. Customers for our embedded connection products
  include major bar code scanning companies Symbol Technologies, HandHeld Products,
  and Intermec; bar code scanning printer companies O'Neil and Zebra; Electronics
  for Imaging for an electronic whiteboard product; and Parker Hannifin for integrating
  Bluetooth technology into their industrial valves.

Competition and Competitive
  Risks

The overall market for
  communications products is both complex and competitive, and we expect competition
  in our market areas to intensify, particularly for our network connection products,
  which compete with similar products manufactured by lower cost Taiwanese and
  other Asian companies. However, our longtime focus on creating connectivity
  products for mobile devices has resulted in good brand name recognition and
  reputation. In addition, we continue to innovate and be first to market in a
  number of product categories. We also believe that our brand name identifying
  our products as low power, rugged, and easy to use, and the breadth of our product
  offerings, will continue to differentiate us relative to our competitors. The
  competition in each of our product families is discussed in more detail below.

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Network Connection Products
  - Wireless Connections. Our CompactFlash Wireless LAN card faces competition
  in the market today principally from Symbol Technologies. Symbol primarily sells
  its card to end user customers for the Wireless LAN systems it installs. A number
  of other companies are developing CompactFlash Wireless LAN cards, including
  Bromax and Ambicom, and we expect competition to become intense in the future.
  We compete based on our brand name, distribution and customer support infrastructure,
  as well as software enhancements, including power management capabilities to
  minimize the power drain on mobile devices. We are the first company to add
  security software (802.1.x) to a WiFi card software driver compatible with most
  corporate networking environments, which we made available during the first
  quarter of 2003 for Pocket PC devices. The market for Bluetooth wireless communications
  technology is expected to be highly competitive. A number of companies are currently
  developing various Bluetooth interface chips. CompactFlash and SD Bluetooth
  cards are expected to be offered by mobile phone handset and notebook computer
  manufacturers and by traditional plug-in card manufacturers such as 3Com, Anycom
  and Xircom. Our Bluetooth CompactFlash plug-in card is the only card in the
  market that fits within a Type 1 CompactFlash slot (all competitive products
  protrude), and our Bluetooth software, which continues to be improved, provides
  a functional easy-to-use Bluetooth solution. Nonetheless, certain original equipment
  manufacturers of personal computers, mobile phones and handheld computers may
  make our wireless network connection products less significant by incorporating
  built-in functions, such as Bluetooth and WiFi, into their products.

Network Connection Products
  - Cable Connections. We are not aware of any major vendor that currently
  offers products that compete directly with our Digital Phone Card products.
  We face indirect competition for our Digital Phone Cards from alternative methods
  of downloading information into a mobile computer from remote locations, such
  as connecting over telephone landlines through a modem, or connecting a mobile
  phone through a cable to a serial port on a notebook computer. The market for
  our Ethernet cards is highly competitive. Market leaders for Ethernet cards
  include Pretec, 3Com and Xircom, all of which have introduced CompactFlash Ethernet
  cards for Windows-powered handheld computers. Our modem cards face competition
  from a number of manufacturers. The largest suppliers of CompactFlash modem
  cards are Pretec and Viking. Other companies offering CompactFlash modem cards
  include Xircom, Compaq, Casio, Pharos, Ambicom, New Media and Targus.

Bar Code Scanning Products.
  Our bar code scanning products face competition from alternative scanning technologies,
  specifically charge-coupled device (CCD) scanning technology, which is less
  expensive than our technology, and from ruggedized bar code scanning devices
  from Symbol Technologies. Our laser scanning products are targeted to address
  specific market segments, such as field sales and service, retail store shelf
  management and pharmaceutical distribution management. We produce our bar code
  scanning products under technology licenses from Symbol Technologies, which,
  to date, has not licensed its laser bar code scanning technology to our potential
  competitors. Symbol has historically been selective in licensing its technology
  to third parties, and we have no reason to anticipate that its practice will
  change. Nonetheless, the continued availability of our licenses and the continued
  absence of other licensees are dependent upon future licensing decisions by
  Symbol Technologies.

Serial Connection Products.
  We have no major direct competition for our peripheral connection cards. We
  compete from time to time with similar products from small manufacturers such
  as Quatech, Silicom, SeaLevel, BlackBox, Advanteck and Brainbox.

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Embedded Products and
  Services. Our competition for our embedded products and services is primarily
  the same competition we face for the applicable plug-in product in one or more
  other product families, as plug-in connection cards are an alternative to embedded
  connections. For example, we sell our serial interface chips for embedding in
  third party devices. Interface chips with similar functions and features are
  available from other chip manufacturers. In addition, our early-to-market Bluetooth
  software works well with our Bluetooth modules, which has provided us a first-to-market
  solution for embedding Bluetooth wireless connections into third party devices.

Proprietary Technology

We have developed a number
  of technological building blocks that enhance our ability to design new hardware
  and software products, to offer products which run on multiple software and
  hardware platforms, and to manufacture and package products efficiently.

Our most important hardware
  building block is the universal bus interface, which is a highly flexible interface
  for PC Cards and CompactFlash cards that enables our products to work with all
  major handheld and notebook computers that have PC Card or CompactFlash slots,
  regardless of their design. We have incorporated our universal bus interface
  into the interface chips used in our connection products cards to control signal
  transmission between these products and the handheld or notebook computer's
  PC Card or CompactFlash slot.

We have also developed
  a library of software drivers and control modules that allow our products to
  operate in handheld computers running the Windows CE operating system and in
  notebooks running various Windows operating systems. Since 1999 we have applied
  for 11 patents covering our proprietary technology. On March 5, 2002, we were
  awarded US Patent 6,353,870 covering our design for cards combining connectivity
  and removable memory.

We rely on a combination
  of patent, copyright, trademark and trade secret laws, and confidentiality procedures
  to protect our proprietary rights. As part of our confidentiality procedures,
  we generally enter into non-disclosure agreements with our employees, distributors,
  and strategic partners, and limit access to our software, documentation, and
  other proprietary information. Despite these precautions, it may be possible
  for a third party to copy or otherwise obtain and use our products or technology
  without authorization, or to develop similar technology independently. In addition,
  we may not be able to effectively protect our intellectual property rights in
  certain foreign countries. We cannot assure you that we will not receive future
  communications from third parties asserting that our products infringe, or may
  infringe, the proprietary rights of third parties. In connection with any such
  claims, litigation could be brought against us that could result in significant
  additional expenses or compel us to discontinue or redesign some of our products.

Personnel

In the fourth quarter of
  2000 and first quarter of 2001, we increased our engineering resources and extended
  our sales and marketing teams in order to capitalize on the substantial market
  growth opportunities created by an expanding handheld market, the benefits of
  an early market presence with Bluetooth CompactFlash and Wireless LAN products,
  and the opportunity to expand Bluetooth products to embedded devices such as
  digital cameras and other platforms such as Palm. In October 2000, we acquired
  3rd Rail Engineering, an engineering embedded design and services company, which
  doubled our engineering personnel and added systems and know-how supporting
  embedded design services. Our future success will depend in significant part
  upon the continued service of certain key technical and senior management personnel,
  and our continuing ability to attract, assimilate and retain highly qualified
  technical, managerial and sales and marketing personnel. Our total employee
  headcount as of March 14, 2003 was 58 persons. Our employees are not represented
  by a union and we consider our employee relationships to be good.



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Sales and Marketing

We market our products
  through a worldwide network of distributors and resellers, as well as through
  original equipment manufacturers (OEMs) and value added resellers. We support
  our distributors and resellers by providing education, training and customer
  assistance through our sales, marketing, and technical support staff. In February
  2001, we established a wholly owned subsidiary, Socket Communications Europe,
  based in France, to support the marketing and sale of our products in Europe.
  In July 2001, we established a branch office in Tokyo, Japan to serve the Asian
  markets. As of March 14, 2003, we had 25 persons in sales, marketing and technical
  support. United States distributor Ingram Micro accounted for 22% of our revenue
  in 2002, 23% of our revenue in 2001, and 26% of our revenue in 2000. We intend
  to moderately increase our sales and marketing effort during 2003 by adding
  personnel and increasing promotional activities, particularly in support of
  our distribution partners.

Consistent with industry
  practice, we provide our distributors with stock balancing and price protection
  rights which permit these distributors to return slow-moving products to us
  for credit, and to receive price adjustments for inventories of our products
  held by distributors if we lower the price of those products. The immediate
  effect of returns and adjustments on our quarterly operating results is minimized
  since we recognize revenues on products shipped to distributors at the time
  the merchandise is sold by the distributor. To date, we have not experienced
  any significant returns or price protection adjustments.

We rely significantly on
  our OEMs, distributors, and resellers for marketing and distribution of our
  products. Our agreements with OEMs, distributors, and resellers generally are
  nonexclusive and may be terminated on short notice by either party without cause.
  Furthermore, our OEMs, distributors, and resellers are not within our control,
  are not obligated to purchase products from us, and may represent other lines
  of products. If any OEMs, distributors, and resellers reduce or discontinue
  efforts to sell our products, our revenues and operating results could be materially
  adversely affected.

Export sales represented
  approximately 42%, 38%, and 21% of our revenue for the years ended December
  31, 2002, 2001, and 2000, respectively. The lower percentage of export sales
  in 2000 resulted from most of the revenue growth in 2000 occurring in the US
  where Pocket PC handheld computer sales had been more heavily concentrated.
  Export sales are subject to the complications of complying with laws of various
  countries and the risk of import/export restrictions and tariff regulations.



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Manufacturing

We subcontract the manufacturing
  of substantially all of our products to independent third party contract manufacturers
  who are located in the US, China, and Taiwan. We perform final product testing
  and package our products at our Newark, California facility for most of our
  sales, with the exception of large bulk orders where we perform final product
  testing and package our products at the third party contract manufacturer locations.
  As of March 14, 2003, we had ten persons employed in manufacturing operations
  including planning, buying, manufacturing engineering, quality control, product
  assembly, and shipping and receiving.

Sole source components
  include our proprietary interface chip that controls the signal transmission
  between many of our products (all products except our Ethernet, Modem and Wireless
  LAN cards) and the card slot on the mobile or handheld computer, our Ethernet
  chip, and certain cable and connector components. Although to date we have generally
  been able to obtain adequate supplies of these components, these components
  are generally purchased on a purchase order basis under standard commercial
  terms and conditions, and we do not have long-term supply contracts for these
  components. Accordingly, the manufacturers could stop providing these components
  to us at any time. Alternatively, although our suppliers are generally large,
  well-financed organizations, they could encounter financial difficulties that
  interfere with our product supplies. In such an event, we could experience a
  decline in revenues until we establish sufficient manufacturing supply through
  an alternative source. Locating and qualifying alternative suppliers, and commencing
  new manufacturing operations, could take a significant period of time, although
  we believe that we can relocate manufacturing or find alternative suppliers
  for sole sourced components should it become necessary. We generally stock higher
  inventory quantities of sole sourced components as safety stocks to mitigate
  the risk of supply disruption.

Research and Development

Since our inception, we
  have made substantial investments in research and development. We believe that
  our future performance will depend in large part on our ability to develop significant
  enhancements to our existing connection products and to develop successful new
  products for emerging and existing markets. In particular, we believe that the
  following initiatives are important for maintaining our competitive position:

- Continuing development
    of our Bluetooth wireless connection products
- Expanding our family
    of products for bar code scanning and other data collection applications
- Developing Secure Digital
    (SD) format connection products.

As of March 14, 2003, we
  had fourteen persons on our product development staff, and we hire engineering
  consultants to perform additional engineering services as required. We anticipate
  that we will continue to commit substantial resources to research and development
  in the future.

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General and Administration

We have nine persons responsible
  for our financial and administrative activities including accounting and finance,
  personnel, reception, and administrative support.

Item 2. Description
  of Property

We lease a 26,000 square
  foot facility in Newark, California under a lease expiring in December 2006.
  We believe that we will be able to extend our lease in our current facility
  at lease expiration or locate acceptable alternative space. We believe that
  our current facilities are sufficient to meet our needs for the foreseeable
  future.

Item 3. Legal Proceedings

We are currently not a
  party to any material legal proceedings.

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

No matters were submitted
  for vote by security holders during the fourth quarter of 2002.









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PART
  II

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

Common Stock

The Company's Common Stock
  is traded on the Nasdaq SmallCap Market under the symbol "SCKT" and
  on the Pacific Stock Exchange under the symbol "SOK

The quarterly high and
  low sales prices of our common stock, as reported on the Nasdaq National Market
  or the Nasdaq SmallCap Market through March 14, 2003 and for the last two fiscal
  years are as shown below.
  Common Stock

|                                                | Common
        Stock
|--------------------------------------------------- | --------------------
|Quarter
        Ended                               | High                
|2001                                               
|  March
        31, 2001                        | $
        7.25      
| June
        30, 2001                          | $
        4.45      
| September
        30, 2001                     | $
        2.74      
| December
        31, 2001                      | $
        2.55      
|2002                                               
|March
        31, 2002                              | $
        2.55      
| June
        30, 2002                          | $
        1.95      
| September
        30, 2002                     | $
        1.20      
| December
        31, 2002                      | $
        0.95      
|2003                                               
| March
        31, 2003(through March 14, 2003) | $
        0.87      

On March 14, 2003, the
  closing sales price for our common stock as reported on the Nasdaq National
  Market was $0.74. We had approximately 375 stockholders of record as of March
  14, 2003, and an additional 10,000 beneficial stockholders. We have not paid
  dividends on our common stock, and we currrently intend to retain future earnings
  for use in our business and do not anticipate paying dividends in the foreseeable
  future.

The information required
  by this item regarding equity compensation plans is incorporated by reference
  to the information set forth in Item 12 of this Annual Report on Form 10-K.

Recent Sales of Unregistered
  Securities

On March 20, 2003 the Company
  sold 276,269 shares of its Series F Convertible Preferred Stock, $0.001 par
  value, at $7.22 per share (total of $2,000,000) pursuant to Section 4(2) of
  the Securities Act of 1933, as amended. Proceeds will be used for general working
  capital purposes. Each share of Series F Convertible Preferred Stock is convertible
  into 10 shares of common stock at the option of the holder, in whole or in part,
  at any time for a period of three years following the date of sale with a mandatory
  conversion date three years from date of issue. The Series F stock will convert
  into a total of 2,762,690 shares of common stock at a conversion price of $0.722
  per share. The Company also issued three-year warrants to investors to acquire
  827,807 shares of common stock at $0.722 per share. The Company also issued
  five-year warrants to the placement agent, Spencer Trask Ventures, Inc., to
  acquire up to 718,300 shares of common stock at $0.722 per share.



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Series F Preferred Stock
  is convertible into common stock anytime at the option of the Holder prior to
  the mandatory conversion date of three years after issue and automatically converts
  in the event of a merger or consolidation of the Company if, as a result of
  such transaction, the holders of common stock immediately prior to such merger
  or consolidation would hold less than 50% of the voting securities of the surviving
  entity immediately following such merger or consolidation. The holders of Series
  F Preferred Stock have voting rights equal to the number of common shares issuable
  upon conversion. In the event of liquidation, holders of Series F Preferred
  Stock are entitled to liquidation preferences over common stockholders equal
  to their initial investment plus all accrued but unpaid dividends. Dividends
  accrue at the rate of 8% per annum and are payable quarterly in cash or in common
  stock, at the option of the Company.

Item 6. Selected Financial
  Data

The following selected
  consolidated financial data should be read in conjunction with Item 7, "Management's
  Discussion and Analysis of Financial Condition and Results of Operations,"
  and the consolidated financial statements and the notes thereto in Item 8, "Financial
  Statements and Supplementary Data."



|                                                           | Year
      Ended December 31,
|---------------------------------------------------------- | -----------------------------
|(Amounts
      in Thousands except per share)              | 1998                         
|Revenue                                                    | $5,478                       
|Net loss                                                   | (1,068)                      
|Net loss
      applicable to common stockholders           | (1,539)                      
|Net loss
      per share applicable to common stockholders | (0.22)                       
|Weighted
      average shares outstanding                  | 7,103                        
|Total
      assets                                         | 2,662                        
|Capital
      lease obligations - long term portion        | --                           
|Preferred
      stock                                      | 4,050                        
|Total
      stockholders' equity (deficit)                 | 296                          

(1) Net
  income and net loss applicable to common stockholders in 2000 and 2001 includes
  amortization of goodwill of $0.4 million and $1.5 million, respectively. Amortization
  of goodwill has been discontinued commencing in the first quarter of 2002 in
  accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
  and Other Intangible Assets."





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

This item contains forward-looking
  statements within the meaning of Section 27A of the Securities Act of 1933 and
  Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements
  are based on current expectations, estimates, and projections about our industry,
  management's beliefs, and assumptions made by management. Words such as "may,"
  "will," "predicts," "anticipates," "expects,"
  "intends," "plans," believes," "seeks," "estimates,"
  variations of such words, and similar expressions are intended to identify such
  forward-looking statements. These forward-looking statements are not guarantees
  of future performance and are subject to certain risks, uncertainties, and assumptions
  that are difficult to predict; therefore, actual results and outcomes may differ
  materially from what is expressed or forecasted in any such forward looking
  statements. Factors that might cause such a difference include, but are not
  limited to, those discussed below and under "Other Factors Affecting Future
  Operations". We assume no obligation to update such forward-looking statements
  or to update the reasons why actual results could differ materially from those
  anticipated in such forward-looking statements.

Critical Accounting
  Policies

Our significant accounting
  policies are described in Note 1 to our consolidated financial statements for
  the year ended December 31, 2002. The application of these policies requires
  us to make estimates and judgments that affect the reported amount of assets,
  liabilities, revenues and expenses, and related disclosure of contingent assets
  and liabilities. We base our estimates on a combination of historical experience
  and reasonable judgment applied to other facts. Actual results may differ from
  these estimates and such differences may be material to the financial statements.
  In addition, the use of different assumptions or judgments may result in different
  estimates. We believe our critical accounting policies that are subject to these
  estimates are: Revenue Recognition and Accounts Receivable Reserves, Inventory
  Valuation, and Valuation of Goodwill and Other Intangible Assets.

Revenue Recognition
  and Accounts Receivable Reserves

We defer revenue recognition
  on products sold to distributors until our distributors sell the products to
  their customers because our distributors generally have rights to return products
  to us for stock rotation, stock reduction, or replacement of defective product.
  The amount of deferred revenue net of related cost of revenue is classified
  as deferred revenue on our balance sheet. We use inventory reports received
  from our distributors at the end of each reporting period to determine the extent
  of inventory at the distributor, and thus, the amount of revenue to defer. Stock
  rotation and stock reduction from our distributors generally results in a balance
  sheet adjustment to our deferred revenue and does not impact our revenue or
  cost of revenue.

We generally recognize
  revenues on sales to customers other than distributors at the time delivery
  has occurred, persuasive evidence of an arrangement exists, the price is fixed
  and determinable, and collectibility is reasonably assured. Most of our customers
  other than distributors do not have rights of return except under warranty.

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We also estimate the amount
  of uncollectible receivables at the end of each reporting period based on the
  aging of the receivable balance, historical trends, and communications with
  our customers. If actual bad debts are significantly different from our estimates
  our operating results will be affected.

Inventory Valuation

Our inventories primarily
  consist of component parts used to assemble our connection card products after
  we receive orders from our customers. We purchase the component parts required
  by our engineering bill of materials. The timing and quantity of our purchases
  are based on order forecasts, the lead time requirements of our vendors, and
  on economic order quantities. At the end of each reporting period, we compare
  our inventory on hand to our forecasted requirements for the next nine month
  period, and we reserve the cost of any inventory that is surplus, less any amounts
  that we believe we can recover from disposal of goods that we specifically believe
  will be saleable past a nine month horizon. Our sales forecasts are based upon
  historical trends, communications from customers, and marketing data regarding
  market trends and dynamics, which we discuss in Item 1, Business. Surpluses
  can also be created by changes to our engineering bill of materials. Changes
  in the amounts we record for surplus or obsolete inventory are included in cost
  of revenue.

Goodwill and Other Intangible
  Assets

Our acquisition of the
  CompactFlash Bluetooth card business including a product line and technology
  license from Nokia Corporation in March 2002 and our acquisition of 3rd Rail
  Engineering in October 2000 added goodwill and intangible assets to our balance
  sheet. We allocated the purchase price based on an analysis of the fair market
  value of the assets we acquired. Beginning with the first quarter of 2002, in
  accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
  and Other Intangible Assets," we ceased amortizing goodwill, and will evaluate
  whether the value of the goodwill has been impaired, at which time any impaired
  balances will be written down. We periodically evaluate intangible and other
  long lived assets for potential impairment indicators. Our judgments regarding
  the existence of impairment indicators are based on legal factors, market conditions
  and operational performance of our acquired businesses. In addition, we also
  review the market capitalization of the Company in conjunction with our analysis
  of goodwill impairment. As of December 31, 2002, in our judgment, there is no
  impairment of goodwill or intangible assets. Future events could cause us to
  conclude that impairment indicators exist and that goodwill and intangible assets
  associated with our acquired businesses is impaired. Any resulting impairment
  loss could have a material adverse impact on our financial condition and results
  of operations.



Revenue

We design, manufacture
  and sell connectivity plug-in card products to the handheld and notebook computing
  markets. Total revenue in 2002 was $16.3 million, an increase of 32% over 2001
  revenue of $12.3 million. Revenue in 2001 increased 7% over revenue in 2000
  of $11.6 million. Our revenue growth during 2002 was primarily due to the introduction
  of new connectivity products (Bluetooth, Wireless LAN, and modems) in the second
  half of 2001 for handheld computers based on the Microsoft Windows CE operating
  system. Our revenue growth rate moderated in the 2001 fiscal year over fiscal
  year 2000 as demand for our handheld computer products was constrained by a
  slowdown in sales of Windows CE devices. This was primarily due to consumers
  deferring purchases of handheld computers in anticipation of new models with
  new bright outdoor screens, which were in short supply during 2001 but available
  in 2002. Availability of the new models contributed to revenue growth in 2002.

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Our products cover a wide
  range of connection solutions in four product families:

- Our network connection
    products are connection devices that can be plugged into standard expansion
    slots in handheld and notebook computers. They allow users to connect their
    computers to the Internet or to private networks, or to communicate with other
    electronic devices such as desktop computers and printers. Our products offer
    both wireless and cable connections to external devices such as cell phones
    and printers. Wireless connection products include cards using the Bluetooth
    standard for short-range wireless connectivity, and cards for connecting to
    local wireless networks using the Wireless LAN (or WiFi) standard.
- Our bar code scanning
    products plug into handheld computers or notebooks and turn handheld or
    notebook computers into portable bar code scanners that can be used in various
    retail and industrial workplaces.
- Our peripheral connection
    products add connection ports to a notebook or handheld computer that
    allow users to connect these portable computers to standard peripherals designed
    for desktop PCs.
- Our embedded products
    and services allow manufacturers of cell phones, handheld computers and
    other devices to build wireless connection functions into their products.

Our network connection
  product revenue in 2002 was $6.0 million compared to $3.4 million in each
  of the years 2001 and 2000. In the third and fourth quarters of 2001 we introduced
  Bluetooth CompactFlash plug-in cards, Wireless LAN plug-in cards, and modem
  cards, which contributed $0.5 million to revenues in that year. Revenue growth
  of $3.5 million from sales of these new products in 2002 were offset by declines
  of $0.9 million primarily in digital phone cards and modest declines in Ethernet
  plug-in cards. Ethernet revenues declined $0.6 million in 2001 compared to 2000
  while revenue from the sale of phone connection cards was flat. The growth in
  network connection product revenue tends to follow the sales volumes for Pocket
  PC handheld computers, which grew rapidly in 2000 following their introduction
  in April of that year. Growth of Pocket PCs in 2001 was moderate compared to
  the year-earlier period because of manufacturing supply shortages during the
  first half of the year and reduced inventory manufactured in the third quarter
  of 2001 in anticipation of new model introductions in the fourth quarter. Pocket
  PC sales approximately doubled in the fourth quarter of 2001 compared to the
  previous quarter, and growth continued in 2002. Sales of our network connection
  products tend to lag sales of Pocket PCs by several months as customers often
  purchase peripheral connection products after they purchase and become familiar
  with their Pocket PC.

Our bar code scanning
  product revenue in 2002 was $3.9 million compared to revenue of $3.1 million
  in 2001 and $2.2 million in 2000. The revenue growth is primarily due to one
  product, the In-Hand Scan card, which is a laser scanner attached to a CompactFlash
  card which plugs into a Pocket PC, notebook, or other mobile computer to turn
  the computer into a portable laser scanner. The product is sold both through
  general distribution and through value added resellers who contract with customers
  to provide scanning solutions. This solution is becoming more widely adopted
  by the value added reseller community for lightweight portable scanning.

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Our peripheral connection
  card revenue in 2002 was $3.8 million compared to $4.4 million in 2001 and
  $4.4 million in 2000. Standard peripheral connection cards are primarily sold
  to connect peripheral devices or other electronic equipment to notebook computers.
  Revenue from our peripheral connection products has fluctuated within a moderate
  range over several years.

Our embedded products
  and services revenue in 2002 was $2.6 million compared to $1.5 million in
  2001 and $1.5 million in 2000. Our chip sales included in these totals, which
  we began selling in 2000, were $1.1 million in 2002, compared to $0.4 million
  in 2001 and $1.0 million in 2000. Chip sales are highly dependent upon engineering
  design-wins and the timing of third party design projects. In 2000, almost all
  of the sales were to a single customer, whereas in 2001, we broadened the customer
  base but were at early design stages with a larger number of customers who in
  2002 have adopted our chip. Engineering services revenue included in these totals
  was $0.5 million in 2002 compared with $0.8 million in 2001 and $0.4 million
  in 2000. We also include Bluetooth module sales in this category. Bluetooth
  modules began shipping in the fourth quarter of 2001 and represented $0.1 million
  of initial sales during the fourth quarter of 2001 increasing to $1.0 million
  in 2002. Embedded products and services also included sale of developer kits
  of $40 thousand in 2002, $0.2 million in 2001 and $0.1 million in 2000. We have
  expanded the number of developer kits that we offer and encourage developers
  to work with our products through programs such as our Empowering Mobility Program.

Gross Profit

Gross profit for 2002 was
  50% of revenue compared to gross profit of 53% of revenue in 2001, and 55% of
  revenue in 2000. We generally price our products as a markup from our cost,
  and we offer discount pricing for higher volume purchases. The moderate declines
  in gross margin percentages in 2002 and 2001 reflect the introduction of newer
  products that tend to have a higher initial cost and a lower initial gross margin
  until volumes increase, higher fixed manufacturing costs as we staff for management
  of growth, and higher volume discount pricing.



Research and Development
  Expense

Research and development
  expense in 2002 was $3.5 million, a decrease of 6% over expenses in 2001 of
  $3.7 million. Research and development expense in 2001 increased 35% over research
  and development expense in 2000 of $2.8 million. Decreases in 2002 of $0.3 million
  from reduced expenditures on developed software and outside services, and $0.2
  million in personnel costs and travel, were partially offset by increases of
  $0.2 million in engineering consulting services and $0.1 million from patent
  development and miscellaneous expenses. The increase in 2001 was due primarily
  to an increase of $0.9 million in staffing expenses resulting from the acquisition
  of 3rd Rail Engineering in October 2000. To date, we have not capitalized any
  software development costs.

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Sales and Marketing
  Expense

Sales and marketing expense
  in 2002 was $4.9 million, a decrease of 5% compared to sales and marketing expense
  in 2001 of $5.1 million. Sales and marketing expense in 2001 increased 36% compared
  to sales and marketing expense in 2000 of $3.8 million. Decreases in 2002 of
  $0.2 million in advertising and promotion and $0.2 million in reduced travel
  were partially offset by increases in occupancy costs. The increase in 2001
  reflects $1.1 million in higher staffing expenses due to staff added late in
  2000 that were present in 2001 for the entire year. We also experienced increases
  of $0.2 million in advertising, promotion and travel expenses. $0.5 million
  of these cost increases related to the costs of foreign offices that were established
  in 2001. We also expanded our advertising and increased our attendance at trade
  shows to reach new markets for our newer products such as our bar code scanning
  cards.

General and Administrative
  Expense

General and administrative
  expense in 2002 was $2.1 million, flat with 2001. Increases totaling $0.2 million
  in business insurance, occupancy costs, and payroll expense were offset by reductions
  in stock exchange listing fees, equipment, supplies, and shareholder communications.
  General administrative expense for 2001 increased 30% compared to general and
  administrative expense in 2000 of $1.6 million. Approximately half of the increase
  in 2001 reflects increased personnel costs resulting, in part, from the appointment
  of Kevin Mills as CEO in late March 2000, replacing Charlie Bass who served
  from April 1997 to March 2000 without cash remuneration, and from increases
  in the administrative support staff. 39% of the increase in 2001 over 2000 was
  due to higher costs of business insurance and higher professional fees associated
  with our growth. In July 2000, our Common Stock was listed on the Nasdaq National
  Market System, and our expenses in 2001 reflect the higher fees associated with
  that listing. We also experienced significant growth in our shareholder base
  during 1999 and early 2000, increasing the costs of our shareholder printing
  and mailing costs.

Charges Related to Compensatory
  Stock Option Grants

Our charges related to
  compensatory stock option grants were zero in 2002 and nominal in 2001. We reported
  stock-based compensation expense of $1.8 million in 2000 relating to the value
  of stock options vesting during the year held by consultants and others that
  are not employees or members of the board of directors (limited to grants for
  services solely in their capacity as a director). $1.5 million of the expense
  in 2000 is attributed to the change of status of Mr. Charlie Bass in late March
  2000 from Chairman and CEO to Chairman, which required us to reclassify a stock
  option grant he received relating to his services as CEO from an employee grant
  (while CEO) to a non-employee grant subject to compensatory charges to operations.
  Mr. Bass' grant was accelerated to fully vest during the third quarter of 2000
  and no additional charges relating to this grant will be incurred. The remaining
  expense of $0.3 million in 2000 related to the accelerated vesting of remaining
  stock options for two terminating directors that occurred in the second quarter
  of 2000. This expense is a non-cash expense and the same amount is credited
  to additional paid-in capital.

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Amortization of Goodwill
  and Intangibles

In March 2002 the Company
  acquired from Nokia its CompactFlash Bluetooth Card business including a product
  line and a sole, non-exclusive, non-transferable, worldwide license to use,
  make and sell the related product line technology for $2.6 million, of which
  approximately $1.0 million was attributed to intangible technology and licensing
  agreements and approximately $1.4 million was attributed to goodwill. The intangible
  assets are being amortized over their estimated useful lives of 1 to 3 years.
  Amortization of goodwill has been discontinued commencing in the first quarter
  of 2002 in accordance with Statement of Financial Accounting Standards No. 142,
  "Goodwill and Other Intangible Assets." Amortization of goodwill (including
  assembled workforce) in 2001 and 2000 was $1.5 million and $0.4 million, respectively,
  relating solely to the acquisition of 3rd Rail Engineering in October 2000.
  During 2002 goodwill was analyzed for impairment of value and no impairment
  was found. Amortization of all intangible assets was $0.5 million in 2002 and
  $0.2 million in 2001.

Interest Income and
  Interest Expense

Interest income in 2002
  was not significant and interest income in 2001 was approximately $0.2 million.
  Interest income in 2000 of approximately $0.4 million reflects interest on higher
  cash balances during the year. Interest expense in 2002 is due primarily to
  interest on the note payable to Nokia for the acquisition in March 2002 of its
  CompactFlash Bluetooth Card business and related product line technology. Remaining
  interest in all three years relates to interest on equipment lease financing
  obligations.

Income Taxes

There were no provisions
  for Federal or state income taxes for the years ended December 31, 2002, 2001,
  and 2000, as the Company incurred net operating losses in all periods. We have
  established a valuation allowance for the net deferred tax asset. There can
  be no assurance that the deferred tax assets subject to the valuation allowance
  will be realized.

Preferred Stock Dividend
  and Accretion of Preferred Stock

Preferred stock dividends
  in 2002 reflect dividends accrued at the rate of 12% per annum on Series E redeemable
  convertible preferred stock issued in October 2002 and the associated stock
  accretion of $82,714 arising from the accounting treatment of the Series E issuance.
  We will accrete the value assigned to the preferred stock up to its redemption
  value over 18 months. Preferred stock dividends in 2000 reflect dividends accrued
  at a rate of 8% per annum on unconverted Series B convertible preferred stock,
  on Series C convertible preferred stock, and on Series D convertible preferred
  stock. These preferred shares were convertible into common stock at the discretion
  of the holder. The preferred shares were substantially converted into common
  shares during 1999, and the balance converted in 2000.

Quarterly Results of
  Operations

The following table sets
  forth summary quarterly statements of operations data for each of the quarters
  in 2001 and 2002. This unaudited quarterly information has been prepared on
  the same basis as the annual information presented elsewhere herein, and, in
  our opinion, includes all adjustments (consisting only of normal recurring entries)
  necessary for a fair presentation of the information for the quarters presented.
  The operating results for any quarter are not necessarily indicative of results
  for any future period.

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|                                                                                | Quarter
        Ended
|------------------------------------------------------------------------------- | ---------------------
|(in
      thousands, except per share)                                          | Mar 31,              
|                                                                                | 2001                 
|Summary
      Quarterly Data:                                                  
|Revenue                                                                         | $
        2,927      
|Cost of
      Revenue                                                           | 1,372                
|Gross
      Profit                                                              | 1,555                
|Operating
      expenses:                                                      
| 
      Research and development                                            | 995                  
| 
      Sales and marketing                                                 | 1,390                
| 
      General and administrative                                          | 533                  
| 
        Amortization of compensatory 
            stock option grants | 12                   
| 
      Amortization of goodwill and 
          intangibles             | 421                  
|Total
      operation expense                                                   | 3,351                
|Interest
      income (expense), net                                            | 67                   
|Net loss                                                                        | (1,729)              
|Preferred
      stock dividends                                                 | --                   
|Net loss
      applicable to common stockholders                                | $
        (1,729)    
|Net loss per share
        applicable to common stockholders                    | $
        (0.07)     

We have experienced
  significant quarterly fluctuations in operating results and we anticipate such
  fluctuations to continue in the future. We generally ship orders as received
  and as a result typically have little or no backlog. Quarterly revenue and operating
  results therefore depend on the volume and timing of orders received during
  the quarter, which are difficult to forecast. Historically, we have often recognized
  a substantial portion of our revenue in the last month of the quarter, often
  in the last week. Operating results may also fluctuate due to factors such as
  the demand for our products, the size and timing of customer orders, the introduction
  of new products and product enhancements by ourselves or our competitors, changes
  in the proportion of revenue attributable to contract engineering, product mix,
  timing of software enhancements, changes in the level of operating expenses,
  and competitive conditions in the industry. Because our staffing and other operating
  expenses are based on anticipated revenue, a substantial portion of which is
  not typically generated until the end of each quarter, delays in the receipt
  of orders can cause significant variations in operating results from quarter
  to quarter.

Liquidity and Capital
  Resources

We have historically financed
  our operations through the sale of equity securities, equipment financing, and
  revolving bank lines of credit. Since our inception we have raised approximately
  $44 million in equity capital and preferred stock. We have incurred significant
  quarterly and annual operating losses in every fiscal period since our inception,
  and we may continue to incur quarterly operating losses at least through the
  first quarter of 2003 and possibly longer. We have historically needed to raise
  capital to fund our operating losses.

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Cash used in operating
  activities was $1.9 million in 2002 compared to $4.2 million in 2001 and $1.7
  million in 2000. The use of cash resulted from financing our net loss of $3.0
  million in 2002, $6.1 million in 2001, and $3.7 million in 2000. Adjustments
  for non cash items including depreciation, amortization, stock option charges,
  amortization of goodwill and intangibles, and fluctuations on forward currency
  forward exchange contracts, totaled $0.9 million in 2002, $2.1 million in 2001,
  and $2.5 million in 2000. Changes in working capital balances resulted in a
  source of cash in 2002 of $0.2 million and a use of cash in 2001 and 2000 of
  $0.3 million and $0.5 million. Changes in working capital balances during 2002
  reflect changes between the end of the year and the beginning of the year including
  increased accounts receivable balances from higher levels of shipments in the
  fourth quarter, increases in inventories due primarily to initial stocking of
  a major retailer, offset by increases in accounts payable resulting from deferred
  payments. Changes in working capital balances during 2001 include lower accounts
  receivable balances from increased collections and the timing of shipments earlier
  in the fourth quarter, a decrease in inventories, lower accounts payable balances
  reflecting lower inventory purchases in the fourth quarter, lower accrued expense
  balances reflecting salary reductions and mandatory vacation policies in effect
  during the fourth quarter, and lower deferred revenue balances that reflected
  inventory shipped into retail channels at the end of 2000 that had either been
  sold or returned by the end of 2001. Changes in working capital balances in
  2000 are primarily related to growth including increases in accounts receivables
  as a direct result of increased revenues, and higher inventories to support
  anticipated increased revenues, partially offset by increases in accounts payable
  related to increased levels of inventories, higher accrued payroll related to
  increased headcount, and higher deferred revenue relating to inventory shipped
  into retail channels for which revenue recognition had been deferred.

Cash used in investing
  activities was $1.3 million in 2002, $0.2 million in 2001, and $1.2 million
  in 2000. In March 2002 we used $0.9 million to acquire from Nokia Corporation
  its CompactFlash Bluetooth Card business including a product line and a sole,
  non-exclusive, worldwide license to make, use and sell the related product line
  technology (balance of acquisition secured with note payable). In October 2000
  we used $1.0 million ($0.7 million net of purchased cash and cash equivalents)
  as part of the purchase price for the acquisition of 3rd Rail Engineering. The
  remaining amounts for investing activities reflect the cost of furniture, new
  computer equipment, purchased software for new employees, and tooling costs
  for new products totaling $0.5 million, $0.2 million, and $0.5 million for the
  years 2002, 2001, and 2000.

Cash provided by financing
  activities was $1.5 million in 2002, $1.9 million in 2001, and $6.0 million
  in 2000. Net cash provided from using our bank line of credit was $0.6 million
  in 2002 and $1.3 million in 2001. At the end of 2002 we drew $1.9 million in
  cash against our credit line which we repaid in January 2003. We did not use
  our credit line in 2000. During 2002 we completed two private placement financings
  to increase our working capital balances. In March we issued 0.5 million shares
  of common stock and warrants which provided us with $0.4 million in net proceeds
  after placement fees and legal expenses. In October we issued convertible redeemable
  preferred stock and warrants which provided us with $0.8 million in net proceeds
  after issuance costs. Additional proceeds in 2002 resulted from the exercise
  of options and warrants. During 2002 we made payments of $0.4 million on the
  note payable to Nokia related to the acquisition of its CompactFlash Bluetooth
  Card business and related product line technology. In 2001 proceeds of $0.6
  million resulted from the exercise of options and warrants to acquire 0.9 million
  shares of common stock. During 2000, holders exercised $4.5 million of our public
  warrants to acquire 2.3 million shares of common stock, holders exercised $0.4
  million of other warrants to acquire 0.4 million shares of common stock, and
  holders exercised $0.5 million of employee stock options to acquire 0.8 million
  shares of common stock. During 2000, we also sold $0.5 million in common stock
  upon exercise of preemptive rights by holders of our Series D preferred stock.

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Our cash balances as of
  December 31, 2002 were $3.1 million including cash of $1.9 million drawn against
  our bank line of credit. In March 2003 we renewed our bank line of credit which
  now expires on April 15, 2004. On March 20, 2003 we issued Series F redeemable
  convertible preferred stock and warrants to increase our working capital balances
  by $1.7 million, net of issuance costs. We have remaining outstanding warrants
  from our private placement financings and outstanding employee stock options
  that, if exercised, would further increase our cash and equity balances. We
  do not anticipate the need to raise additional capital in 2003 to fund operations,
  but we may raise additional capital if market conditions are appropriate. If
  the need does arise there are no assurances that additional capital will be
  available on acceptable terms, if at all. In the event we are unable to raise
  sufficient additional needed capital to meet our requirements, we may not be
  able to continue some or all of our current operations. We believe our existing
  cash plus funds raised subsequent to year end, our ability to reduce costs,
  and the renewed bank line will be sufficient to meet our funding requirements
  through at least December 31, 2003.

The Company's contractual
  obligations are outlined in the table below:

|                                                                     | Payments
        Due by Period
|-------------------------------------------------------------------- | ------------------------------
|Contractual
        Obligations                                      | Total                         
|Long Term
      Debt                                                 | $
        44,000              
|Purchase
      of Nokia Technology                                   | 1,398,000                     
|Operating
      Leases                                               | 1,994,000                     
|Unconditional
      Purchase Obligations with Contract Manufacturers | 8,361,000                     
|Total
      Contractual Cash Obligations                             | $
        11,797,000          



Recent Accounting Pronouncements

In June 2002, the Financial
  Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for
  Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
  the timing and amount of costs recognized as a result of restructuring and similar
  activities. We will apply SFAS No. 146 prospectively to activities initiated
  after December 31, 2002. SFAS No. 146 had no significant impact at the point
  of adoption on our consolidated statements of operations or financial position.

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In November 2002, the FASB
  issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
  Requirements for Guarantees." FIN 45 requires a guarantor to recognize,
  at the inception of a guarantee, a liability for the fair value of the obligation
  it has undertaken in issuing the guarantee. We will apply FIN 45 to guarantees,
  if any, issued after December 31, 2002. FIN 45 also requires guarantors to disclose
  certain information for guarantees, including product warranties, outstanding
  at December 31, 2002. At adoption, FIN 45 did not have a significant impact
  on our consolidated statements of operations or financial position.

In December 2002, the FASB
  issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
  and Disclosure." SFAS 148 amends SFAS 123 to provide alternative methods
  of transition to SFAS 123's fair value method of accounting for stock-based
  employee compensation. SFAS 148 also amends the disclosure provisions of SFAS
  123 and APB No. 28, "Interim Financial Reporting," to require disclosure
  in the summary of significant accounting policies of 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.
  While SFAS 148 does not amend SFAS 123 to require companies to account for employee
  stock options using the fair value method, the disclosure provisions of SFAS
  148 are applicable to all companies with stock-based employee compensation,
  regardless of whether they account for that compensation using the fair value
  method of SFAS 123 or the intrinsic value method of APB 25. Since we account
  for our stock-based compensation under APB 25, and have no current plans on
  switching to SFAS 123, the impact of SFAS 148 will be limited to the annual
  and interim reporting of the effects on net income and earnings per share as
  if we accounted for stock-based compensation under SFAS 123. SFAS 148 is effective
  for fiscal years ending after December 15, 2002. The adoption of the disclosure
  provisions of SFAS 148 did not have a material impact on our results of operations
  and financial position in 2002.













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Other Factors Affecting
  Future Operations

We have a history of
  operating losses, we cannot assure you that we will achieve ongoing profitability
  and we have monthly payment obligations.

We have incurred significant
  operating losses since our inception. We expect to incur operating losses through
  the first quarter of 2003 and possibly longer. For the fiscal years ended December
  31, 2002 and 2001, we incurred a net loss of $2,971,830 and $6,063,239, respectively.
  To sustain profitability, we must accomplish numerous objectives, including
  the development of successful new products. We cannot foresee with any certainty
  whether we will be able to achieve these objectives in the future. Accordingly,
  we cannot assure you that we will generate sufficient net revenue to achieve
  ongoing profitability.

We also have debt payment
  obligations to Nokia Corporation under a Business Transfer Agreement that we
  entered into with Nokia in March 2002. These payments are in the amount of approximately
  $87,600, plus accrued interest, per month through November 2003, with a final
  payment of approximately $437,300 plus accrued interest, due in December 2003.
  In addition, we sold 100,000 shares of Series E Preferred in a private placement
  financing in October 2002. We are obligated to pay one-fifteenth of the original
  value of the Series E Preferred ($66,667) in cash or shares of Common Stock,
  together with accrued dividends, at the end of every month commencing on January
  31, 2003. If we cannot achieve profitability, we will not be able to support
  our operations from positive cash flows, make debt payments to Nokia or make
  cash amortization payments on the Series E Preferred, in which case we would
  need to raise more capital. We cannot assure you that additional capital will
  be available on acceptable terms, if at all, and such terms may be dilutive
  to existing stockholders. If we are unable to secure the necessary capital,
  we will need to suspend some or all of our current operations.

Our Common Stock may
  be delisted from the Nasdaq stock market and the Pacific Exchange, which would
  have a materially adverse effect on the liquidity and price of our Common Stock.

We recently transferred
  our Common Stock listing from the Nasdaq National Market to the Nasdaq SmallCap
  Market, because we were not able to maintain the requirements for listing on
  the National Market. However, our SmallCap Market listing and our listing on
  the Pacific Exchange are also contingent on meeting specific quantitative standards,
  including a minimum bid price of $1.00. We may not be able to meet these requirements
  in the future, particularly if our Common Stock fails to trade at above $1.00
  per share. Our Common Stock last traded above $1.00 on September 10, 2002. We
  expect that our Common Stock will continue to be listed on the Nasdaq SmallCap
  Market until August 15, 2003, after which it may be delisted. With respect to
  the Pacific Exchange, we have been advised that our listing status will be reviewed
  monthly, and while there can be no assurances as to our continued listing, we
  believe there is a reasonable possibility that our listing on the Pacific Exchange
  will be continued until August 15, 2003. If our Common Stock is delisted from
  the SmallCap Market and the Pacific Exchange, and is thereafter traded only
  on the over-the-counter market, our stockholders' ability to purchase and sell
  our Common Stock could be less orderly and efficient and more costly. Furthermore,
  a delisting of our Common Stock could have a materially adverse impact on our
  business operations by damaging our general business reputation and impairing
  our ability to obtain additional capital. As a result of the negative impact
  on the liquidity of our Common Stock and on our business, a delisting would
  also likely decrease the market price of our Common Stock and increase the volatility
  of our stock price.

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A significant portion
  of our revenue currently comes from a single distributor, and any decrease in
  revenue from this distributor could harm our business.

A significant portion of
  our revenue comes from one distributor, Ingram Micro, which represented approximately
  22 percent of our worldwide revenue in fiscal 2002 and 23 percent of our worldwide
  revenue for 2001. We expect a significant portion of our revenue will continue
  to depend on sales to Ingram Micro. We do not have long-term commitments from
  Ingram Micro to carry our products, and it could choose to stop selling some
  or all our products at any time. If we lose our relationship with Ingram Micro,
  we could experience disruption and delays in marketing our products.

If the market for handheld
  computers fails to grow, we might not achieve our sales projections.

Substantially all of our
  products are designed for use with mobile personal computers, including handhelds,
  notebook computers and tablets. If the mobile personal computer industry does
  not grow or growth slows, we might not achieve our sales projections.

Our sales would be hurt
  if the new technologies used in our products do not become widely adopted.

Many of our products use
  new technologies, such as the Bluetooth wireless standard and 2D bar code scanning,
  which are not yet widely adopted in the market. If these technologies fail to
  become widespread, our sales will suffer.

If third parties do
  not produce and sell innovative products with which our products are compatible,
  we may not achieve our sales projections.

Our success is dependent
  upon the ability of third parties in the mobile personal computer industry to
  complete development of products that include or are compatible with our technology
  and to sell their products into the marketplace. Our ability to generate increased
  revenue depends significantly on the commercial success of Windows-powered handheld
  devices, particularly the Pocket PC, and other devices, such as the new line
  of handhelds with expansion options expected to be offered by Palm. If manufacturers
  are unable to ship new products such as Pocket PC and other Windows-powered
  devices or Palm devices on schedule, or if these products fail to achieve or
  maintain market acceptance, the number of our potential new customers would
  be reduced and we would not be able to meet our sales expectations.

We could face increased
  competition in the future, which would adversely affect our financial performance.
  The market for handheld computers in which we operate is very competitive. Our
  future financial performance is contingent on a number of unpredictable factors,
  including that:



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- consolidation among
    our competitors is resulting in companies with greater financial, marketing,
    and technical resources than ours;
- we periodically face
    intense price competition, particularly when our competitors have excess inventories
    and discount their prices to clear their inventories; and
- certain original equipment
    manufacturers of personal computers, mobile phones and handheld computers
    may make our products less significant by incorporating built-in functions,
    such as Bluetooth and WiFi, into their products.

Increased competition could
  result in price reductions, fewer customer orders, reduced margins, and loss
  of market share. Our failure to compete successfully against current or future
  competitors could harm our business, operating results, or financial condition.

If we fail to develop
  and introduce new products rapidly and successfully, we will not be able to
  compete effectively, and our ability to generate sufficient revenues will be
  negatively affected.

The market for our products
  is prone to rapidly changing technology, evolving industry standards and short
  product life cycles. If we are unsuccessful at developing and introducing new
  products and services on a timely basis that include the latest technologies
  conforming with the newest standards and that are appealing to end users, we
  will not be able to compete effectively, and our ability to generate significant
  revenues will be seriously harmed.

The development of new
  products and services can be very difficult and requires high levels of innovation.
  The development process is also lengthy and costly. Short product life cycles
  expose our products to the risk of obsolescence and require frequent new product
  introductions. We will be unable to introduce new products and services into
  the market on a timely basis or compete successfully, if we fail to:

- identify emerging standards
    in the field of mobile computing products;
- enhance our products
    by adding additional features;
- invest significant resources
    in research and development, sales and marketing, and customer support;
- maintain superior or
    competitive performance in our products; and
- anticipate our end users'
    needs and technological trends accurately.

We cannot be sure that
  we will have sufficient resources to make adequate investments in research and
  development or that we will be able to make the technological advances necessary
  to be competitive.

If we do not correctly
  anticipate demand for our products, our operating results will suffer.

The demand for our products
  depends on many factors and will be difficult to forecast. We expect that it
  will become more difficult to forecast demand as we introduce and support more
  products and as competition in the market for our products intensifies.



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If demand increases beyond
  forecasted levels, we would have to rapidly increase production at our third-party
  manufacturers. We depend on suppliers to provide additional volumes of components
  and those suppliers might not be able to increase production rapidly enough
  to meet unexpected demand. Even if we were able to procure enough components,
  our third-party manufacturers might not be able to produce enough of our devices
  to meet our 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 could lower
  our profit margins. Further, if production is increased rapidly, manufacturing
  yields could decline, which may also lower operating results.

If demand is lower than
  forecasted levels, we could have excess production resulting in higher inventories
  of finished products and components, which could lead to write-offs of some
  or all of the excess inventories. Lower than forecasted demand could also result
  in excess manufacturing capacity at our third-party manufacturers and our failure
  to meet some minimum purchase commitments, each of which may lower our operating
  results.

We depend on alliances
  and other business relationships with a small number of third parties, and a
  disruption in any one of these relationships would hinder our ability to develop
  and sell our products.

We depend on strategic
  alliances and business relationships with leading participants in various segments
  of the communications and mobile personal computer markets to help us develop
  and market our products. Our strategic partners may revoke their commitment
  to our products or services at any time in the future or may develop their own
  competitive products or services. Accordingly, our strategic relationships may
  not result in sustained business alliances, successful product or service offerings,
  or the generation of significant revenues. Failure of one or more of such alliances
  could result in delay or termination of product development projects, failure
  to win new customers, or loss of confidence by current or potential customers.

We have devoted significant
  research and development resources to design activities for Windows-powered
  mobile products and, more recently, to design activities for Palm devices. Such
  design activities have diverted financial and personnel resources from other
  development projects. These design activities are not undertaken pursuant to
  any agreement under which Microsoft or Palm is obligated to continue the collaboration
  or to support the products produced from the collaboration. Consequently, Microsoft
  or Palm may terminate their collaborations with us for a variety of reasons
  including our failure to meet agreed-upon standards or for reasons beyond our
  control, such as changing market conditions, increased competition, discontinued
  product lines, and product obsolescence.

We rely primarily on
  distributors, resellers, retailers and original equipment manufacturers to sell
  our products, and our sales would suffer if any of these third parties stops
  selling our products effectively.

Because we sell our products
  primarily through distributors, resellers, retailers and original equipment
  manufacturers, we are subject to risks associated with channel distribution,
  such as risks related to their inventory levels and support for our products.
  Our distribution channels may build up inventories in anticipation of growth
  in their sales. If such growth in their sales does not occur as anticipated,
  the inventory build up could contribute to higher levels of product returns.
  The lack of sales by any one significant participant in our distribution channels
  could result in excess inventories and adversely affect our operating results.



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Our agreements with distributors,
  resellers, retailers and original equipment manufacturers are generally nonexclusive
  and may be terminated on short notice by them without cause. Our distributors,
  resellers, retailers and original equipment manufacturers are not within our
  control, are not obligated to purchase products from us, and may represent competitive
  lines of products. 
  Our current sales growth expectations are contingent in part on our ability
  to enter into additional distribution relationships and expand our retail sales
  channels. We cannot predict whether we will be successful in establishing new
  distribution relationships, expanding our retail sales channels or maintaining
  our existing relationships. A failure to enter into new distribution relationships
  or to expand our retail sales channels could adversely impact our ability to
  grow our sales.

We allow our distribution
  channels to return a portion of their inventory to us for full credit against
  other purchases. We also supply some retailers on a consignment basis, which
  means that their inventory can be returned to us at any time. In addition, in
  the event we reduce our prices, we credit our distributors for the difference
  between the purchase price of products remaining in their inventory and our
  reduced price for such products. Actual returns and price protection may adversely
  affect future operating results, particularly since we seek to continually introduce
  new and enhanced products and are likely to face increasing price competition.

Our intellectual property
  and proprietary rights may be insufficient to protect our competitive position.

Our business depends on
  our ability to protect our intellectual property. We rely primarily on patent,
  copyright, trademark, trade secret laws, and other restrictions on disclosure
  to protect our proprietary technologies. We cannot be sure that these measures
  will provide meaningful protection for our proprietary technologies and processes.
  We cannot be sure that any patent issued to us will be sufficient to protect
  our technology. The failure of any patents to provide protection to our technology
  would make it easier for our competitors to offer similar products. In connection
  with our participation in the development of various industry standards, we
  may be required to license certain of our patents to other parties, including
  our competitors, that develop products based upon the adopted standards.

We also generally enter
  into confidentiality agreements with our employees, distributors, and strategic
  partners, and generally control access to our documentation and other proprietary
  information. Despite these precautions, it may be possible for a third party
  to copy or otherwise obtain and use our products, services, or technology without
  authorization, develop similar technology independently, or design around our
  patents.

Effective copyright, trademark,
  and trade secret protection may be unavailable or limited in certain foreign
  countries. Furthermore, certain of our customers have entered into agreements
  with us which provide that the customers have the right to use our proprietary
  technology in the event we default in our contractual obligations, including
  product supply obligations, and fail to cure the default within a specified
  period of time.

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We may become subject
  to claims of intellectual property rights infringement, which could result in
  substantial liability.

In the course of our business,
  we may receive claims of infringement or otherwise become aware of potentially
  relevant patents or other intellectual property rights held by other parties.
  Many of our competitors have large intellectual property portfolios, including
  patents that may cover technologies that are relevant to our business. In addition,
  many smaller companies, universities, and individuals have obtained or applied
  for patents in areas of technology that may relate to our business. The industry
  is moving towards aggressive assertion, licensing, and litigation of patents
  and other intellectual property rights.

If we are unable to obtain
  and maintain licenses on favorable terms for intellectual property rights required
  for the manufacture, sale, and use of our products, particularly those products
  which must comply with industry standard protocols and specifications to be
  commercially viable, our results of operations or financial condition could
  be adversely impacted.

In addition to disputes
  relating to the validity or alleged infringement of other parties' rights, we
  may become involved in disputes relating to our assertion of our intellectual
  property rights. Whether we are defending the assertion of intellectual property
  rights against us or asserting our intellectual property rights against others,
  intellectual property litigation can be complex, costly, protracted, and highly
  disruptive to business operations by diverting the attention and energies of
  management and key technical personnel. Plaintiffs in intellectual property
  cases often seek injunctive relief, and the measures of damages in intellectual
  property litigation are complex and often subjective or uncertain. Thus, any
  adverse determinations in this type of litigation could subject us to significant
  liabilities and costs.

New industry standards
  may require us to redesign our products, which could substantially increase
  our operating expenses.

Standards for the form
  and functionality of our products are established by standards committees. Separate
  committees establish standards, which evolve and change over time, for different
  categories of our products. We must continue to identify and ensure compliance
  with evolving industry standards so that our products are interoperable and
  we remain competitive. Unanticipated changes in industry standards could render
  our products incompatible with products developed by major hardware manufacturers
  and software developers. Should any unanticipated changes occur, we would be
  required to invest significant time and resources to redesign our products to
  ensure compliance with relevant standards. If our products are not in compliance
  with prevailing industry standards for a significant period of time, we would
  miss opportunities to have our products specified as standards for new hardware
  components designed by mobile computer manufacturers and original equipment
  manufacturers.

Undetected flaws and
  defects in our products may disrupt product sales and result in expensive and
  time-consuming remedial action.



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Our hardware and software
  products may contain undetected flaws, which may not be discovered until customers
  have used the products. From time to time, we may temporarily suspend or delay
  shipments or divert development resources from other projects to correct a particular
  product deficiency. Efforts to identify and correct errors and make design changes
  may be expensive and time consuming. Failure to discover product deficiencies
  in the future could delay product introductions or shipments, require us to
  recall previously shipped products to make design modifications, or cause unfavorable
  publicity, any of which could adversely affect our business and operating results.

Our quarterly operating
  results may fluctuate in future periods, which could cause our stock price to
  decline.

We expect to experience
  quarterly fluctuations in operating results in the future. We generally ship
  orders as received and as a result typically have little or no backlog. Quarterly
  revenue and operating results therefore depend on the volume and timing of orders
  received during the quarter, which are difficult to forecast. Historically,
  we have often recognized a substantial portion of our revenue in the last month
  of the quarter. This subjects us to the risk that even modest delays in orders
  may adversely affect our quarterly operating results. Our operating results
  may also fluctuate due to factors such as:

- the demand for our products;
- the size and timing
    of customer orders;
- unanticipated delays
    or problems in the introduction of our new products and product enhancements;
- the introduction of
    new products and product enhancements by our competitors;
- the timing of the introduction
    of new products that work with our connection products;
- changes in the proportion
    of revenues attributable to royalties and engineering development services;
- product mix;
- timing of software enhancements;
- changes in the level
    of operating expenses;
- competitive conditions
    in the industry including competitive pressures resulting in lower average
    selling prices; and
- timing of distributors'
    shipments to their customers.

Because we base our staffing
  and other operating expenses on anticipated revenue, delays in the receipt of
  orders can cause significant variations in operating results from quarter to
  quarter. As a result of any of the foregoing factors, our results of operations
  in any given quarter may be below the expectations of public market analysts
  or investors, in which case the market price of our common stock would be adversely
  affected.



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The loss of one or more
  of our senior personnel could harm our existing business.

A number of our officers
  and senior managers have been employed for seven to ten years by us, including
  our President, Chief Financial Officer, Chief Technical Officer, Vice President
  of Marketing, and Senior Vice President for Business Development/General Manager
  Embedded and Industrial Systems Unit. Our future success will depend upon the
  continued service of key officers and senior managers. Competition for officers
  and senior managers is intense and there can be no assurance that we will be
  able to retain our existing senior personnel. The loss of key senior personnel
  could adversely affect our ability to compete.

If we are unable to
  attract and retain highly skilled sales and marketing and product development
  personnel, our ability to develop new products and product enhancements will
  be adversely affected.

We believe our ability
  to achieve increased revenues and to develop successful new products and product
  enhancements will depend in part upon our ability to attract and retain highly
  skilled sales and marketing and product development personnel. Our products
  involve a number of new and evolving technologies, and we frequently need to
  apply these technologies to the unique requirements of mobile connection products.
  Our personnel must be familiar with both the technologies we support and the
  unique requirements of the products to which our products connect. Competition
  for such personnel is intense, and we may not be able to attract and retain
  such key personnel. In addition, our ability to hire and retain such key personnel
  will depend upon our ability to raise capital or achieve increased revenue levels
  to fund the costs associated with such key personnel. Failure to attract and
  retain such key personnel will adversely affect our ability to develop new products
  and product enhancements.

We may not be able to
  collect revenues from customers who experience financial difficulties.

Our accounts receivable
  are derived primarily from distributors and original equipment manufacturers.
  We perform ongoing credit evaluations of our customers' financial conditions
  but generally require no collateral. Reserves are maintained for potential credit
  losses, and such losses have historically been within such reserves. However,
  many of our customers may be thinly capitalized and may be prone to failure
  in adverse market conditions. Although our collection history has been good,
  from time to time a customer may not pay us because of financial difficulty,
  bankruptcy or liquidation.

We may be unable to
  manufacture our products because we are dependent on a limited number of qualified
  suppliers for our components.

Several of our component
  parts, including our serial interface chip, our Ethernet chip, and our bar code
  scanning modules, are produced by one or a limited number of suppliers. Shortages
  could occur in these essential materials due to an interruption of supply or
  increased demand in the industry. If we are unable to procure certain component
  parts, we could be required to reduce our operations while we seek alternative
  sources for these components, which could have a material adverse effect on
  our financial results. To the extent that we acquire extra inventory stocks
  to protect against possible shortages, we would be exposed to additional risks
  associated with holding inventory, such as obsolescence, excess quantities,
  or loss.



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Our operating results
  could be harmed by economic, political, regulatory and other risks associated
  with export sales.

Export sales (sales to
  customers outside the United States) accounted for approximately 42 percent
  of our revenue in 2002 and approximately 38 percent of our revenue for 2001.
  Accordingly, our operating results are subject to the risks inherent in export
  sales, including:

- longer payment cycles;
- unexpected changes in
    regulatory requirements, import and export restrictions and tariffs;
- difficulties in managing
    foreign operations;
- the burdens of complying
    with a variety of foreign laws;
- greater difficulty or
    delay in accounts receivable collection;
- potentially adverse
    tax consequences; and
- political and economic
    instability.

Our export sales are predominately
  denominated in United States dollars and in Euros for a portion of our sales
  to European distributors. Accordingly, an increase in the value of the United
  States dollar relative to foreign currencies could make our products more expensive
  and therefore potentially less competitive in foreign markets. Declines in the
  value of the Euro relative to the United States dollar may result in foreign
  currency losses relating to collection of Euro denominated receivables.

Our operations are vulnerable
  to interruption by fire, earthquake, power loss, telecommunications failure,
  and other events beyond our control.

Our corporate headquarters
  is located near an earthquake fault. The potential impact of a major earthquake
  on our facilities, infrastructure, and overall business is unknown. Additionally,
  we may experience electrical power blackouts or natural disasters that could
  interrupt our business. We do not have a detailed disaster recovery plan. We
  do not carry sufficient business interruption insurance to compensate us for
  losses that may occur. Any losses or damages incurred by us as a result of these
  events could have a material adverse effect on our business.

The sale of a substantial
  number of shares of Common Stock could cause the market price of our Common
  Stock to decline.

Sales of a substantial
  number of shares of our Common Stock in the public market could adversely affect
  the market price for our Common Stock. The market price of our Common Stock
  could also decline if one or more of our significant stockholders decided for
  any reason to sell substantial amounts of our Common Stock in the public market.

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As of March 14, 2003, we had 24,241,259 shares of Common Stock outstanding.
  Substantially all of these shares are freely tradable in the public market,
  either without restriction or subject, in some cases, only to S-3 or S-8/S-3
  prospectus delivery requirements, and, in some cases, only to manner of sale,
  volume, and notice requirements of Rule 144 under the Securities Act of 1933,
  as amended.

As of March 14, 2003, we
  had 100,000 shares of Series E Preferred outstanding that are convertible into
  996,168 shares of Common Stock at $0.87 per share. If the share price of the
  Common Stock exceeds $0.87 per share, the holder of Series E Preferred may decide
  to convert some or all of the Series E Preferred into Common Stock and such
  Common Stock would be freely tradable in the public market and subject only
  to S-3 prospectus delivery requirements.

As of March 14, 2003, we
  also had 5,251,440 shares subject to outstanding options under our stock option
  plans and 1,511,901 shares were available for future issuance under the plans.
  We have registered the shares of Common Stock subject to outstanding options
  and reserved for issuance under our stock option plans. Accordingly, shares
  underlying vested options will be eligible for resale in the public market as
  soon as the options are exercised.

As of March 14, 2003, we
  also had warrants outstanding to purchase a total of 598,058 shares of our Common
  Stock.

Volatility in the trading
  price of our Common Stock could negatively impact the price of our Common Stock.

During the period from
  January 1, 2002 through March 14, 2003, our Common Stock price fluctuated between
  a high of $2.55 and a low of $0.51. The trading price of our Common Stock could
  be subject to wide fluctuations in response to many factors, some of which are
  beyond our control, including general economic conditions and the outlook of
  securities analysts and investors on our industry. In addition, the stock markets
  in general, and the markets for high technology stocks in particular, have experienced
  high volatility that has often been unrelated to the operating performance of
  particular companies. These broad market fluctuations may adversely affect the
  trading price of our Common Stock.

We may require additional
  capital in the future and we cannot assure you that capital will be available
  on reasonable terms, if at all, or on terms that would not cause substantial
  dilution to your stock holdings.

We have historically needed
  to raise capital to fund our operating losses. We expect to continue to incur
  operating losses through the first quarter of 2003 and possibly longer. Our
  forecasts are highly dependent on factors beyond our control, including market
  acceptance of our products and sales of handheld computers. If capital requirements
  vary materially from those currently planned, we may require additional capital
  sooner than expected. There can be no assurance that such capital will be available
  in sufficient amounts or on terms acceptable to us, if at all. Any sale of a
  substantial number of additional shares will cause dilution to your investment
  and could also cause the market price of our Common Stock to fall.





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(Table
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market
  risk for changes in interest rates relates primarily to invested cash. Our cash
  is invested in short-term money market investments backed by U.S. Treasury notes
  and other investments that mature within one year and whose principal is not
  subject to market rate fluctuations. Accordingly, interest rate declines would
  adversely affect our interest income but would not affect the carrying value
  of our cash investments. Based on a sensitivity analysis of our cash investments
  during the quarter ended December 31, 2002, a decline of 1% in interest rates
  would reduce our quarterly interest income by approximately $3,000.

Our bank credit line facilities
  of up to $4.0 million have variable interest rates based upon the lenders index
  rate plus 0.75% for the domestic line (up to $2.5 million) and the index rate
  plus 0.5% for the international line (up to $1.5 million). Accordingly, interest
  rate increases would increase our interest expense on outstanding credit line
  balances. We utilized our credit line facility only at the end of the quarters
  ended March 30, 2002, June 30, 2002 and December 31, 2002, and did not subject
  ourselves to interest rate exposure. Based on a sensitivity analysis, an increase
  of 1% in the interest rate would increase our borrowing costs by $10,000 for
  each $1 million of borrowings, if outstanding for the entire year, against our
  bank credit facility or a maximum of $40,000 if we utilized our entire credit
  line.

Foreign Currency Risk

A substantial majority
  of our revenue, expense and purchasing activities are transacted in U.S. dollars.
  However, we allow certain of our European distributors to purchase our products
  in Euros, we pay the expenses of our European subsidiary in Euros, we pay the
  expenses of our Japan office in Japanese Yen, and we expect to enter into selected
  future purchase commitments with foreign suppliers that will be paid for in
  the local currency of the supplier. To date these balances have been small and
  we have not been subject to significant losses from material foreign currency
  fluctuations. We have payment obligations of approximately 1.6 million Euros
  as a result of the recent purchase of Nokia's CompactFlash Bluetooth Card business
  and related product line technology. We have purchased forward purchase contracts
  and swap contracts for Euros in order to minimize our foreign currency exposure.
  Based on a sensitivity analysis of our net assets denominated in Euros at the
  beginning, during and at the end of the quarter ended December 31, 2002, an
  adverse change of 10% in exchange rates would result in an increase in our net
  loss for the quarter of approximately $27,000. For 2002 the total adjustment
  for the effects changes in foreign currency on cash balances, collections, payables,
  and derivatives, was a net gain of $34,000. We will continue to monitor and
  assess the risk associated with these exposures and may at some point in the
  future take actions to hedge or mitigate these risks.



33

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(Table
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Item 8. Financial Statements
  and Supplementary Data

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
  Socket Communications, Inc.

We have audited the accompanying consolidated balance sheets of Socket Communications,
  Inc. as of December 31, 2002 and 2001, and the related consolidated statements
  of operations, redeemable preferred stock and stockholders' equity and cash
  flows for each of the three years in the period ended December 31, 2002. These
  financial statements are the responsibility of the Company's management. Our
  responsibility is to express an opinion on these financial statements based
  on our audits.

We conducted our audits
  in accordance with auditing standards generally accepted in the United States.
  Those standards require that we plan and perform the audit to obtain reasonable
  assurance about whether the financial statements are free of material misstatement.
  An audit includes examining, on a test basis, evidence supporting the amounts
  and disclosures in the financial statements. An audit also includes assessing
  the accounting principles used and significant estimates made by management,
  as well as evaluating the overall financial statement presentation. We believe
  that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated
  financial statements referred to above present fairly, in all material respects,
  the financial position of Socket Communications, Inc. at December 31, 2002 and
  2001 and the consolidated results of its operations and its cash flows for each
  of the three years in the period ended December 31, 2002, in conformity with
  accounting principles generally accepted in the United States.

As discussed in Note 1
  to the consolidated financial statements, the Company changed its method of
  accounting for goodwill and other intangible assets in fiscal 2002.





Ernst &
  Young LLP

San Jose,
  California
  February 10, 2003,
  except for Note 14, 
  as to which the date is March 28, 2003



34

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(Table of Contents)





|SOCKET
        COMMUNICATIONS, INC. 
        CONSOLIDATED BALANCE SHEETS                                                                                                                                                                                                  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                      
|ASSETS                                                                                                                                                                                                                                                                    
|Current assets:                                                                                                                                                                                                                                                           
|Cash
        and cash equivalents                                                                                                                                                                                                                                         
|Accounts
        receivable, net of allowance for doubtful accounts of 
          $100,761at December 31, 2002 and $83,606 at December 31, 2001                                                                                                                           
|Inventories                                                                                                                                                                                                                                                               
|Prepaid
        expenses &
        other current assets                                                                                                                                                                                                                   
|Total
        current assets                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                      
|Property and equipment:                                                                                                                                                                                                                                                   
|Machinery
        and office equipment                                                                                                                                                                                                                                    
|Computer
        equipment                                                                                                                                                                                                                                                
|Total
        property and equipment                                                                                                                                                                                                                                      
|Accumulated
        depreciation & amortization                                                                                                                                                                                                                           
|Total
        property and equipment net of depreciation                                                                                                                                                                                                                  
|Intangible
      technology                                                                                                                                                                                                                                               
|Goodwill                                                                                                                                                                                                                                                                  
|Other
        assets                                                                                                                                                                                                                                                      
|Total
        assets                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                      
|LIABILITIES,
        REDEEMABLE PREFERRED STOCK 
        AND STOCKHOLDERS' EQUITY                                                                                                                                                                                         
|Current liabilities:                                                                                                                                                                                                                                                      
|Accounts
        payable                                                                                                                                                                                                                                                  
|Accrued
      expenses                                                                                                                                                                                                                                                    
|Accrued
        payroll and related expenses                                                                                                                                                                                                                              
|Bank
        line of credit                                                                                                                                                                                                                                               
|Deferred
        revenue                                                                                                                                                                                                                                                  
|Current
      portion of capital leases and equipment financing notes                                                                                                                                                                                                     
|Notes
        payable                                                                                                                                                                                                                                                     
|Total
        current liabilities                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                      
|Long
      term portion of capital leases and equipment financing notes                                                                                                                                                                                                   
|Commitments and contingencies                                                                                                                                                                                                                                             
|Series
        E Redeemable Convertible Preferred Stock, $0.001 par value: 
          Authorized Shares - 100,000, Issued and outstanding shares
        - 
          100,000 at December 31, 2002, Redemption amount - $1,000,000
        at 
          December 31, 2002
|Stockholders' equity:                                                                                                                                                                                                                                                     
|Common
        stock, $0.001 par value: Authorized shares - 100,000,000
          Issued and outstanding shares - 24,113,998 at December 31, 2002
          and 23,604,501 at December 31, 2001                                                                       
|Additional
        paid-in capital                                                                                                                                                                                                                                        
|Accumulated
        deficit                                                                                                                                                                                                                                               
|Total
        stockholders' equity                                                                                                                                                                                                                                        
|Total
        liabilities, redeemable preferred stock 
              and stockholders' equity                                                                                                                                                                             



See accompanying notes. 35








(Table
  of Contents)



|SOCKET COMMUNICATIONS, INC.
        CONSOLIDATED STATEMENTS OF OPERATIONS                                                       
|--------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Revenues                                                                                                                        
|Cost of revenue                                                                                                                 
|Gross profit                                                                                                                    
|Operating expenses:                                                                                                             
|Research and development                                                                                                        
|Sales and marketing                                                                                                             
|General and administrative                                                                                                      
|Amortization of deferred
        compensation 
             related to compensatory stock option 
             grants (See Note)
|Amortization of intangible
        technology                                                                                   
|Amortization of goodwill                                                                                                        
|Total
        operating expenses                                                                                                
|Operating loss                                                                                                                  
|Interest income                                                                                                                 
|Interest expense                                                                                                                
|Net loss                                                                                                                        
|Preferred stock dividends and accretion                                                                                         
|Net loss applicable to common stockholders                                                                                      
|Basic and diluted net loss per
      share applicable to common stockholders                                                    
|Weighted average shares outstanding, basic
      and diluted                                                                    





See accompanying
  notes.

> Note:
>         Amortization of deferred compensation related to compensatory stock option
>         grants includes general and administrative expense of $1,532,190 in 2000
>         and sales and marketing expense of $33,604, and $312,508 in 2001 and 2000,
>         respectively.

36

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(Table of Contents)



|SOCKET COMMUNICATIONS, INC.
        CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK 
        AND STOCKHOLDERS' EQUITY
|--------------------------------------------------------------------------------------------------------------------------
|                                                                                                                          
|                                                                                                                          
|Balance at December 31, 1999                                                                                              
|Exercise of Warrants                                                                                                      
|Issuance of Common Stock                                                                                                  
|Acquisition of 3rd Rail Engineering, Inc.                                                                                 
|Conversion of Series B Convertible Preferred
        Stock to Common Stock                                                
|Conversion of Series C Convertible Preferred
        Stock to Common Stock                                                
|Conversion of Series D Convertible Preferred
        Stock to Common Stock                                                
|Dividends Paid/Payable in Common Stock                                                                                    
|Exercise of Stock Options                                                                                                 
|Charge for Compensatory Stock Options                                                                                     
|Net Loss and Comprehensive Net Loss                                                                                       
|Balance at December 31, 2000                                                                                              
|Exercise of Warrants                                                                                                      
|Exercise of Stock Options                                                                                                 
|Charge for Compensatory Stock Options                                                                                     
|Net Loss and Comprehensive Net Loss                                                                                       
|Balance at December 31, 2001                                                                                              
|Exercise of Warrants                                                                                                      
|Exercise of Stock Options                                                                                                 
|Issuance of Common Stock                                                                                                  
|Issuance of Common Stock Warrants                                                                                         
|Issuance of Series
      E Redeemable Convertible Preferred Stock                                                         
|Series E Dividends/Stock Accretion to Redemption
        Value                                                            
|Net Loss and Comprehensive Net Loss                                                                                       
|Balance at December 31, 2002                                                                                              



See accompanying
  notes.

37

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  of Contents)



|SOCKET COMMUNICATIONS, INC.
        CONSOLIDATED STATEMENTS OF CASH FLOWS                           
|----------------------------------------------------------------------------------------------------
|                                                                                                    
|                                                                                                    
|Operating activities                                                                                
|Net loss                                                                                            
|Adjustments to reconcile net loss
      to net cash used in operating activities:                   
|Depreciation                                                                                        
|Amortization                                                                                        
|Charges for stock option
        grants                                                             
|Gain on forward exchange
        contract                                                           
|Currency exchange loss on
        note payable                                                      
|Net gain on foreign currency
        translations                                                   
|Amortization of goodwill
        and intangibles                                                    
|Changes in operating assets
      and liabilities:                                                  
|Accounts receivable                                                                                 
|Inventories                                                                                         
|Prepaid expenses and other
        current assets                                                   
|Other assets                                                                                        
|Accounts payable                                                                                    
|Accrued expenses                                                                                    
|Accrued payroll and related
        expenses                                                        
|Deferred revenue                                                                                    
|Net
        cash used in operating activities                                                       
|Investing activities                                                                                
|Purchase of equipment                                                                               
|Acquisition of Nokia Compact
        Flash Bluetooth business                                       
|Acquisition of 3rd Rail
        Engineering, net of acquired cash                                   
|Net
        cash used in investing activities                                                       
|Financing activities                                                                                
|Payments on capital leases
        and equipment financing notes                                    
|Payments on notes payable                                                                           
|Gross proceeds from bank
        line of credit                                                     
|Gross payments on bank line
        of credit                                                       
|Stock options exercised                                                                             
|Net proceeds from sale of
        common stock and warrants 
             to purchase common stock  
|Net proceeds from sale of
        preferredstock and warrants 
             to purchase common stock
|Warrants exercised                                                                                  
|Net
        cash provided by financing activities                                                   
|Effect of exchange rate changes
      on cash and cash equivalents                                  
|Net increase (decrease) in cash
      and cash equivalents                                          
|Cash and cash equivalents at beginning
      of year                                                
|Cash and cash equivalents at end
      of year                                                      
|Supplemental cash flow information                                                                  
|Cash paid for interest                                                                              
|Warrants issued                                                                                     
|Acquisition of Nokia CompactFlash
        Bluetooth with 
             notes payable                
|Dividends paid/payable in
        common stock                                                      
|Conversion of preferred
        stock to common stock                                               
|Common stock issued to 3rd
        Rail Engineering for acquisition                                 
|Purchase of equipment under
        capital lease                                                   

See accompanying notes.

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NOTE 1 - Summary of Significant Accounting Policies

Organization and BusinessSocket Communications,
  Inc. ("Socket" or the "Company") develops and sells connection
  solutions for handheld computers including notebooks, handheld PCs, Palm-size
  PCs, tablet PCs, and H/PC Professionals (mini notebooks). Using either our wired
  or our wireless connection products, handheld computer users can connect to
  wide area networks, local area networks, and personal area networks to reach
  the Internet, email, or other electronic appliances. The Company also offer
  a family of bar code scanning cards that enable handheld computers to be used
  as portable bar code scanners. We have developed a worldwide distribution network,
  and our products are endorsed and recommended by many of the leading manufacturers
  and distributors of mobile devices that use the Windows CE operating system
  from Microsoft Corporation ("Microsoft") and for mobile computers
  that use Microsoft's Windows 9x and NT operating systems. These connection solutions
  include families of low power PC Card adapters for peripheral connections, Ethernet
  network connectivity, mobile data collection (bar code scanning), and wireless
  communications. The Company's connection products are its principal sources
  of revenues. The Company also recognizes revenues from funded engineering services
  and from the sale of interface chips to original equipment manufacturers. The
  Company is incorporated in the state of Delaware.

The Company has incurred
  losses and negative cash flows from operations since its inception. As of December
  31, 2002, the Company had working capital of $264,547, and an accumulated deficit
  of $32,010,432. For the year ended December 31, 2002 the Company used cash for
  operating activities of $1,889,459 and had a net loss of $2,971,830. At December
  31, 2002 the Company had borrowings on its bank line of credit of $1,906,000
  that were repaid in January 2003. The Company's ability to meet its obligations
  in the ordinary course of business is dependent on its ability to raise additional
  financing and ultimately on its ability to establish profitable operations.
  Management believes its cash plus funds raised subsequent to year-end, its ability
  to reduce costs, and renewal of the Company's bank line (See Note 14) are sufficient
  to meet its funding requirements through at least December 31, 2003.

Principles of Consolidation
  The consolidated financial statements include all the accounts of the Company
  and those of its wholly-owned subsidiary. All significant intercompany accounts
  and transactions have been eliminated. The expenses associated with the operations
  of our foreign offices were $1,018,729 in 2002.

Use of Estimates
  The preparation of financial statements in conformity with accounting principles
  generally accepted in the United States requires management to make estimates
  and assumptions that affect the reported amounts of assets and liabilities,
  and the disclosure of contingent assets and liabilities at the date of the financial
  statements as well as the reported amounts of revenue and expense during the
  reporting period. Actual results could differ from those estimates, and such
  differences may be material to the financial statements.

Reclassification of
  Prior Year Balances
  Certain reclassifications have been made to prior year's balance sheet and statement
  of operations to conform to the current year presentation. Amounts that were
  reclassified were not material.



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Cash Equivalents
  The Company considers all highly liquid investments purchased with a maturity
  date of three months or less at date of purchase to be cash equivalents. As
  of December 31, 2002 and 2001, all of the Company's cash and cash equivalents
  consisted of amounts held in demand and money market deposits in banks.

Fair Value of Financial
  Instruments
  The carrying value of the Company's cash and cash equivalents, accounts receivable,
  accounts payable, debt and foreign exchange contracts approximate fair value
  due to the relatively short period of time to maturity, and interest rates related
  to the instruments approximate the Company's cost of capital.

Derivative Financial Instruments
  The Company's primary objective for holding derivative financial instruments
  is to manage foreign currency risks. The Company's derivative financial instruments
  are recorded at fair value and are included in other current assets, other assets,
  other accrued liabilities or long-term debt depending on the contractual maturity
  and whether the Company has a gain or loss. The Company's accounting policies
  for these instruments are based on whether they meet the Company's criteria
  for designation as hedging transactions, either as cash flow or fair value hedges.
  A hedge of the exposure to variability in the cash flows of an asset or a liability,
  or of a forecasted transaction, is referred to as a cash flow hedge. A hedge
  of the exposure to changes in fair value of an asset or a liability, or of an
  unrecognized firm commitment, is referred to as a fair value hedge. The criteria
  for designating a derivative as a hedge include the instrument's effectiveness
  in risk reduction and, in most cases, a one-to-one matching of the derivative
  instrument to its underlying transaction. Gains and losses on derivatives that
  are not designated as hedges for accounting purposes are recognized currently
  in earnings.

Accounts Receivable
  The Company estimates the amount of uncollectible accounts receivable at the
  end of each reporting period based on the aging of the receivable balance, current
  and historical industry and customer trends, and communications with its customers.
  Amounts are written off only after considerable collection efforts have been
  made and the amounts are determined to be uncollectible. The following describes
  activity in the allowance for doubtful accounts for the years ended December
  31, 2002, 2001, and 2000:



|Year | Balance
        at Beginning of Year | Charged
        to Costs and Expenses | Amounts
        Written Off | Balance
        at End of Year
|---- | ------------------------------------ | ------------------------------------- | --------------------------- | ------------------------------
|2002 | $
        83,606                     | $
        21,002                      | $3,847                      | $100,761                      
|2001 | $
        46,365                     | $
        57,113                      | $
        19,872            | $
        83,606              
|2000 | $
        67,417                     | $
        81,770                      | $
        102,822           | $
        46,365              



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Inventories
  Inventories consist principally of raw materials and sub-assemblies stated at
  the lower of standard cost, which approximates actual costs (first-in, first-out
  method), or market. Market is defined as replacement cost, but not in excess
  of estimated net realizable value or less than estimated net realizable value
  less a normal margin. At the end of each reporting period, the Company compares
  its inventory on hand to its forecasted requirements for the next nine month
  period and the Company reserves the cost of any inventory that is surplus, less
  any amounts that the Company believes it can recover from the disposal of goods
  that it specifically believes will be saleable past a nine month horizon. The
  Company's sales forecasts are based upon historical trends, communications from
  customers, and marketing data regarding market trends and dynamics. Changes
  in the amounts recorded for surplus or obsolete inventory are included in cost
  of revenue.

|                                 | December 31,
|-------------------------------- | ------------
|                                 | 2002        
|Raw materials and sub-assemblies | $ 1,526,220 
|Finished goods                   | 602,119     
|Total inventory                  | $2,128,339  

Property and Equipment
  Property and equipment are stated at cost. Depreciation and amortization are
  computed using the straight-line method, over the estimated useful lives of
  the assets ranging from one to five years. Assets under capital leases are amortized
  over the shorter of the asset life or the remaining lease term.

Accounting Change
  Effective the beginning of fiscal 2002, the Company completed the adoption of
  Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations,"
  and SFAS No. 142, "Goodwill and Other Intangible Assets." As required
  by SFAS No. 142, the Company discontinued amortizing the remaining balances
  of goodwill as of the beginning of fiscal 2002. All remaining and future acquired
  goodwill will be subject to impairment tests in the fourth quarter of each year,
  or earlier if indicators of potential impairment exist, using a fair-value-based
  approach. The Company completed the initial goodwill impairment review as of
  the beginning of 2002 and completed the annual impairment review during the
  fourth quarter of 2002, and found no impairment. All other intangible assets
  will continue to be amortized over their estimated useful lives and assessed
  for impairment under SFAS No. 144, "Accounting for the Impairment or Disposal
  of Long-Lived Assets."

Upon adoption of the new
  Business Combination rules, assembled workforce no longer meets the definition
  of an identifiable intangible asset. As a result, the net balance of $149,229
  was reclassified to goodwill on January 1, 2002.











41

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A reconciliation of previously
  reported net loss per share to the amounts adjusted for the exclusion of goodwill
  and workforce-in-place amortization is as follows:

|                                                                                      | Years Ended December 31,
|------------------------------------------------------------------------------------- | ------------------------
|                                                                                      | 2002                    
|Reported net loss applicable to
      common stockholders                             | $ (3,083,475)           
|Goodwill and workforce amortization                                                   | --                      
|Adjusted net loss                                                                     | $ (3,083,475)           
|                                                                                     
|Reported basic and diluted net
      loss per share applicable to common stockholders | $ (0.13)                
|Goodwill and workforce amortization                                                   | --                      
|Adjusted basic and diluted net
      loss per share                                   | $ (0.13)                



Identified intangible assets
  as of December 31, 2002 consisted of the following:

|                                           | Gross
        Assets | Accumulated
        Amortization | Net              
|------------------------------------------ | -------------------- | -------------------------------- | -----------------
|Project
      management tools             | $
        570,750    | $
        (151,080)              | $
        419,670
|Development
      software                 | 111,375              | (83,531)                         | 27,844           
|Schematic
      Library                    | 153,000              | (137,700)                        | 15,300           
|Bluetooth
      CompactFlash technology    | 900,00               | (241,129)                        | 658,871          
|Licensing
      agreement                  | 80,000               | (80,000)                         | --               
|Subtotal
      developed technology        | 1,815,125            | (693,440)                        | 1,121,685        
|Goodwill                                   | 11,695,760           | (1,897,814)                      | 9,797,946        
|Total
        identified intangible assets | $13,510,885          | $(2,591,254)                     | $10,919,631      



42

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(Table
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Identified intangible assets
  as of December 31, 2001 consisted of the following:

|                                             | Gross
        Assets | Accumulated
        Amortization | Net              
|-------------------------------------------- | -------------------- | -------------------------------- | -----------------
|Project
      management tools               | $
        570,750    | $
        (83,932)               | $
        486,818
|Development
      software                   | 111,375              | (46,403)                         | 64,972           
|Schematic
      Library                      | 153,000              | (76,500)                         | 76,500           
|Subtotal
        developed technology        | 835,125              | (206,836)                        | 628,289          
|Goodwill
      including assembled workforce | 10,286,660           | (1,897,814)                      | 8,388,846        
|Total
        identified intangible assets   | $11,121,786          | $(2,104,649)                     | $9,017,136       



Based on identified intangible
  assets recorded at December 31, 2002 and assuming no subsequent impairment of
  the underlying assets, the annual amortization expense is expected to be as
  follows:

|Year                    | Amount             
|----------------------- | -------------------
|2003:                   | $410,291           
|2004:                   | $367,147           
|2005:                   | $126,018           
|2006:                   | $67,147            
|2007
        and beyond | $151,082           
|                        | $
        1,121,685

Identified Intangible
  Assets
  Acquisition-related intangibles include developed technology and licensing agreement,
  and are amortized on a straight-line basis over periods ranging from one to
  nine years. All identified intangible assets are classified within intangible
  technology on the balance sheet.

Identified intangible assets
  are regularly reviewed to determine whether facts and circumstances exist which
  indicate that the useful life is shorter than originally estimated or the carrying
  amount of assets may not be recoverable. The Company assesses the recoverability
  of identified intangible assets by comparing the projected undiscounted net
  cash flows associated with the related asset or group of assets over their remaining
  lives against their respective carrying amounts. Impairment, if any, is based
  on the excess of the carrying amount over the fair value of those assets.

Concentration of Credit
  Risk
  Financial instruments that potentially subject the Company to significant concentrations
  of credit risk consist principally of cash, cash equivalents and accounts receivable.
  The Company's invests its cash in demand and money market deposits in banks.
  The Company limits the credit exposure to any one financial institution or instrument
  and is exposed to credit risk in the event of default by these institutions
  to the extent of the amounts recorded on the balance sheet. To date, the Company
  has not experienced losses on these investments. The Company's trade accounts
  receivables are primarily with distributors and original equipment manufacturers.
  The Company performs ongoing credit evaluations of its customers' financial
  condition but generally requires no collateral. Reserves are maintained for
  potential credit losses, and such losses have been within management's expectations.



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Concentration of Suppliers
  Several of the Company's component parts are produced by a sole or limited number
  of suppliers. Shortages could occur in these essential materials due to an interruption
  of supply or increased demand in the industry. If the Company were unable to
  procure certain of such materials, it would be required to reduce its operations
  which could have a material adverse effect upon its results.

Revenue Recognition
  Revenue from sales of products is recognized when persuasive evidence of an
  arrangement exists including a fixed price to the buyer, delivery has occurred,
  and collectibility is reasonably assured. Estimated product returns are provided
  for in accordance with Statement of Financial Accounting Standards No. 48, "Revenue
  Recognition When Right of Return Exists." Revenues to distributors where
  the right of return exists are recognized upon "sell-through" when
  shipped from the distributor to the end customer.

The Company also earns
  revenues from services performed in connection with consulting arrangements.
  For those contracts that include contract milestones or acceptance criteria
  the Company recognizes revenue as such milestones are achieved or as such acceptance
  occurs. In some instances the acceptance criteria in the contract requires acceptance
  after all services are complete and all other elements have been delivered.
  Revenue recognition is deferred until those requirements are met.

Research and Development
  Research and development expenditures are generally charged to operations as
  incurred. Statement of Financial Accounting Standards No. 86, "Accounting
  for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
  requires the capitalization of certain software development costs subsequent
  to the establishment of technological feasibility. Based on the Company's product
  development process, technological feasibility is established upon the completion
  of a working model. Costs incurred by the Company between the completion of
  the working model and the point at which the product is ready for general release
  have been insignificant. Accordingly, the Company has charged all such costs
  to research and development expenses in the accompanying statements of operations.

Advertising Costs
  Advertising costs are charged to sales and marketing as incurred. The Company
  incurred $383,998, $534,213 and $550,196, in advertising costs during 2002,
  2001, and 2000, respectively.

Income Taxes
  The Company accounts for income taxes in accordance with Statement of Financial
  Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes."
  Under SFAS 109, deferred tax assets and liabilities are determined based on
  differences between financial reporting and tax bases of assets and liabilities
  and are measured using enacted tax rates and laws that will be in effect when
  the differences are expected to reverse. The Company records a valuation allowance
  against deferred tax assets when it is more likely than not that such assets
  will not be realized.



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Shipping costs
  Shipping costs are included in the cost of sales in the statement of operations.

Net Loss Per Share
  The Company calculates earnings per share in accordance with Financial Accounting
  Standards Board Statement No. 128, Earnings per Share.

The following table sets
  forth the computation of basic net loss per share:

|                                                                                                                                | Years Ended December 31,
|------------------------------------------------------------------------------------------------------------------------------- | ------------------------
|                                                                                                                                | 2002                    
|Numerator:                                                                                                                      |                         
|Net
      Loss                                                                                                                  | $ (2,971,830)           
|Preferred stock dividends                                                                                                       | (111,645)               
|Net loss applicable to common stockholders                                                                                      | $ (3,083,475)           
|                                                                                                                               
|Denominator:                                                                                                                    |                         
|Weighted
      average common shares 
           outstanding used in computing basic and 
           diluted net loss per share | 23,976,000              
|Basic and diluted net loss per
      share applicable to common stockholders                                                    | $ (0.13)                



The diluted net loss per
  share is equivalent to the basic net loss per share because the Company has
  experienced losses since inception and thus no potential common shares from
  stock options, warrants, or convertible preferred stock have been included in
  the net loss per share calculation. Options and warrants to purchase 5,854,531,
  5,500,270, and 4,914,083, shares of common stock in 2002, 2001, and 2000, respectively,
  have been omitted from the loss per share calculation as their effect is anti-dilutive.

Stock-Based Compensation
  The Company accounts for employee stock options in accordance with Accounting
  Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
  (APB No. 25), and has adopt the disclosure-only alternative described in Statement
  of Financial Accounting Standards No. 123, "Accounting for Stock-Based
  Compensation" (FAS 123).

The Company has elected
  to follow APB No. 25 and related Interpretations in accounting for its employee
  stock options because, as discussed below, the alternative fair value accounting
  provided for under FASB Statement No. 123, "Accounting for Stock-Based
  Compensation," requires use of option valuation models that were not developed
  for use in valuing employee stock options. Under APB 25, because the exercise
  price of the Company's employee stock options equals the market price of the
  underlying stock on the date of grant, no compensation expense is recognized.



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Pro forma information regarding
  net loss and loss per share is required by Statement 123, and has been determined
  as if the Company had accounted for its employee stock options under the fair
  value method of that Statement. The fair value of these options was estimated
  at the date of grant using the Black-Scholes option pricing model with the following
  weighted average assumptions for the years ended December 31:

|                                             | 2002  | 2001  | 2000 
|-------------------------------------------- | ----- | ----- | -----
|Risk-free interest
      rate (%)            | 4.38% | 4.82% | 5.38%
|Dividend yield                               | --    | --    | --   
|Volatility factor                            | 1.4   | 1.3   | 1.3  
|Expected remaining
      option life (years) | 6.5   | 6.5   | 6.5  



The Black-Scholes option
  valuation model was developed for use in estimating the fair value of traded
  options which have no vesting restrictions and are fully transferable. In addition,
  option valuation models require the input of highly subjective assumptions including
  the expected stock price volatility and expected option life. Because the Company's
  employee stock options have characteristics significantly different from those
  of traded options, and because changes in the subjective input assumptions can
  materially affect the fair value estimate, in management's opinion, the existing
  models do not necessarily provide a reliable single measure of the fair value
  of its employee stock options.

Had compensation cost for
  the Company's stock-based compensation plans been determined based on the fair
  value at the grant dates for awards under those plans consistent with the method
  of Statement 123, the Company's net loss per share would have increased to the
  pro forma amounts indicated below:

|                                                                                         | 2002             | 2001             | 2000            
|---------------------------------------------------------------------------------------- | ---------------- | ---------------- | ----------------
|Net loss applicable
      to common shareholders                                         | $(3,083,475)     | $(6,063,239)     | $(3,794,689)    
|Stock-based employee
      compensation expense determined under fair value based method | $(2,137,054)     | $(1,521,285)     | $(1,749,043)    
|Pro forma net loss
      applicable to common shareholders                               | $(5,220,529)     | $(7,584,524)     | $(5,543,732)    
|                                                                                         |                  |                  |                 
|Basic
      and diluted net loss per share                                               | $
        (0.13) | $
        (0.26) | $
        (0.18)
|Pro forma
      Basic and diluted net loss per share                                     | $
        (0.22) | $
        (0.32) | $
        (0.27)



The Company accounts for
  stock options issued to nonemployees in accordance with the provisions of FAS
  123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity
  Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction
  with Selling, Goods or Services."



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Comprehensive Loss
  The Company has no items of other comprehensive loss to report in any of the
  years presented.Segment Information
  The Company follows Statement No. 131, "Disclosures about Segments of an
  Enterprise and Related Information." Operating segments are defined as
  components of an enterprise about which separate financial information is available
  that is evaluated regularly by the chief executive officer in deciding how to
  allocate resources and in assessing performance. The Company operates in one
  segment, connection solutions for mobile computers. The Company markets its
  products in the United States and foreign countries through its sales personnel
  and distributors.

Information regarding geographic
  areas for the years ended December 31, 2002, 2001 and 2000 are as follows:

|                               | Years
        Ended December 31,
|------------------------------ | --------------------------------
|Revenues:
      (in thousands) | 2002                            
|United
      States            | $
        9,481                 
|Europe                         | 3,838                           
|Asia and
      rest of world   | 2,994                           
|                           | $
        16,313                



Export revenues are attributable
  to countries based on the location of the customers.

Information regarding product
  families for the years ended December 31, 2002, 2001 and 2000 are as follows:

|                                     | Years
        Ended December 31,
|------------------------------------ | --------------------------------
|Revenues:
      (in thousands)       | 2002                            
|Network
      connection products    | $
        6,018                 
|Bar code
      scanning products     | 3,885                           
|Serial
      products                | 3,785                           
|Embedded
      products and services | 2,625                           
|                                 | $
        16,313                



Major Customers
  Customers who accounted for at least 10% of total revenues were as follows:

|             | Years Ended December 31,
|------------ | ------------------------
|             | 2002                    
|Ingram Micro | 22%                     



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Recent Accounting Pronouncements
  In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
  146, "Accounting for Costs Associated with Exit or Disposal Activities."
  SFAS No. 146 addresses the timing and amount of costs recognized as a result
  of restructuring and similar activities. The Company will apply SFAS No. 146
  prospectively to activities initiated after December 31, 2002. SFAS No. 146
  had no significant impact at the point of adoption on the Company's consolidated
  statements of operations or financial position.

In November 2002, the FASB
  issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
  Requirements for Guarantees." FIN 45 requires a guarantor to recognize,
  at the inception of a guarantee, a liability for the fair value of the obligation
  it has undertaken in issuing the guarantee. The Company will apply FIN 45 to
  guarantees, if any, issued after December 31, 2002. FIN 45 also requires guarantors
  to disclose certain information for guarantees, including product warranties,
  outstanding at December 31, 2002. At adoption, FIN 45 did not have a significant
  impact on the Company's consolidated statements of operations or financial position.

In December 2002, the FASB
  issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
  and Disclosure." SFAS 148 amends SFAS 123 to provide alternative methods
  of transition to SFAS 123's fair value method of accounting for stock-based
  employee compensation. SFAS 148 also amends the disclosure provisions of SFAS
  123 and APB No. 28, "Interim Financial Reporting," to require disclosure
  in the summary of significant accounting policies of 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.
  While SFAS 148 does not amend SFAS 123 to require companies to account for employee
  stock options using the fair value method, the disclosure provisions of SFAS
  148 are applicable to all companies with stock-based employee compensation,
  regardless of whether they account for that compensation using the fair value
  method of SFAS 123 or the intrinsic value method of APB 25. Since the Company
  accounts for its stock-based compensation under APB 25, and has no current plans
  on switching to SFAS 123, the impact of SFAS 148 will be limited to the annual
  and interim reporting of the effects on net income and earnings per share as
  if the Company accounted for stock-based compensation under SFAS 123. SFAS 148
  is effective for fiscal years ending after December 15, 2002. The adoption of
  the disclosure provisions of SFAS 148 did not have a material impact on the
  Company's results of operations and financial position in 2002.



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NOTE 2 - Acquisition
  of Business Including a Product Line and License of Technology from Nokia

On March 16, 2002, the
  Company acquired from Nokia Corporation its CompactFlash ("CF") Bluetooth
  Card business including a product line and a sole, non-exclusive, nontransferable,
  worldwide license to make, use and sell the related product line technology.
  The agreement provided for the transfer of tooling related to the manufacture
  of the Nokia CF Bluetooth Card, rights to manufacture CF Bluetooth connection
  cards using specific Nokia technology, rights to distribute existing CF Bluetooth
  Card products, and rights to develop and distribute new Bluetooth Card products
  based on Nokia-developed technology. Pursuant to the Agreement, Nokia has discontinued
  the sale of its CompactFlash Bluetooth Card and refers its customers to the
  Company. The purchase price was three million Euros (approximately $2,630,000
  using an exchange rate of 0.8822 dollars per Euro, the exchange rate in effect
  at the date of the transaction), of which one million Euros (approximately $881,000)
  was paid at the time the agreement was signed. The initial terms of the agreement
  specified the balance to be payable in three installments with 700,000 Euros
  (approximately $613,200) due September 11, 2002, 700,000 Euros (approximately
  $611,100) due March 11, 2003, and 600,000 Euros (approximately $524,700) due
  September 11, 2003. In August 2002, payment of the balance was reset to fifteen
  monthly installments of 100,000 Euros due each month beginning September 11,
  2002 with a final installment of 500,000 Euros due on December 11, 2003. Outstanding
  balances under the note accrue interest at an annual rate of 6% and the accumulated
  accrued interest is payable at the time of each installment payment. Total interest
  charges in 2002 were $102,798.

The Nokia CompactFlash
  Bluetooth Card business including a product line and technology licenses consisted
  primarily of tooling and intellectual property. The transaction was accounted
  for using the purchase method of accounting.

The purchase price allocation
  is as follows:

|Net
        tangible assets           | $
        240,900  
|------------------------------------- | -------------------
|Intangible
        assets:            |                    
|Developed
      technology            | 900,000            
|Licensing agreement                   | 80,000             
|Goodwill                              | 1,409,100          
|Total
      purchase price allocation | $
        2,630,000



The intangible assets,
  other than the goodwill, are being amortized over lives of one to three years.
  Amortization charges in 2002 were $321,129.

The Company is using foreign
  currency forward exchange contracts and foreign currency swap contracts for
  Euros in order to fix the future payments to Nokia in U.S. dollars. These derivatives
  do not qualify for SFAS 133 hedge accounting treatment. Accordingly, the change
  in fair value of this derivative is recorded immediately to earnings. In 2002
  the net of the currency exchange loss on the note payable of $280,080 and the
  gain on the forward exchange contracts of $271,710 was included in interest
  expense. At December 31, 2002 the Company had forward purchase contracts to
  buy and Euros with a nominal U.S. dollar value equivalent to $1,669,710. The
  fair value of these forward purchase contracts at December 31, 2002 was approximately
  $271,710, and is included in other current assets in the accompanying balance
  sheet.

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NOTE 3 - Common Stock
  Financing

On March 28, 2002, the
  Company sold 381,760 shares of common stock in a private placement financing
  at a price of $1.59 per share. Total proceeds were $607,000, and net proceeds
  after costs and expenses were $419,326. Such proceeds were used for general
  working capital purposes. In conjunction with the financing, the Company issued
  five-year warrants to investors to acquire an additional 95,439 shares of common
  stock at $1.59 per share, and issued a five-year warrant to the placement agent
  to acquire 22,905 shares of common stock at $1.59 per share. Using a Black-Scholes
  valuation formula with the following assumptions: 0.0% dividend yield rate,
  5.13% risk free interest rate, $1.82 fair value of common stock, $1.59 exercise
  price, a life of 5 years, and a volatility of 1.409, $157,475 of the proceeds
  were attributed to the warrants issued to investors, and the warrants issued
  to the placement agent were valued at $37,793. Two directors of the Company
  invested an aggregate of $130,000 in cash in this financing. The issuance of
  these securities was deemed to be exempt from registration under the Securities
  Act of 1933, as amended (the "Securities Act"), in reliance on Section
  4(2) of the Securities Act and Regulation D thereunder. Pursuant to a Registration
  Rights Agreement, the Company filed on May 1, 2002 a registration statement
  on Form S-3 to enable the resale of the shares issued in this offering and the
  shares issuable on exercise of the warrants issued to investors and the placement
  agent in this offering. The Company received stockholder ratification of this
  financing at its June 2002 Annual Meeting of Stockholders.

NOTE 4 - Redeemable Preferred Stock Financing

On October 3, 2002, the
  Company sold 100,000 shares of Series E redeemable convertible preferred stock
  in a private placement financing at a price of $10.00 per share. The net proceeds
  after costs and expenses were $809,873. Proceeds from this financing were used
  for general working capital purposes. The preferred stock converts into shares
  of Socket Communications common stock or will be redeemed for cash in fifteen
  equal monthly installments commencing January 31, 2003. Each share of preferred
  stock will be converted into approximately 11.5 shares of common stock (a conversion
  price of $0.87 per common share) if the market price of the Company's common
  stock at the time of conversion is 125% (approximately $1.09 per share) or more
  of the conversion price. Otherwise, the Company may, at its option, redeem the
  preferred shares for cash or issue additional shares in accordance with the
  financing agreement. The preferred stock carries a dividend preference of 12%
  per year payable in preference to payment of any dividend on the Company's common
  stock. The dividend preference is cumulative and payable monthly commencing
  on December 31, 2002 and on the last business day of each consecutive calendar
  month thereafter. Dividend payments may be made, at the Company's election,
  either in cash or in shares of common stock. The Company may require all or
  a portion of the preferred stock to convert into common stock at any time, subject
  to certain limitations. The number of shares issuable upon such a mandatory
  conversion of a share preferred stock will equal the stated value of such share
  (initially $10) divided by the lower of (1) the conversion price then in effect,
  and (2) 85% of the average of the three lowest closing sale prices of our common
  stock for the 30 trading days prior to the effective date of the conversion.
  Dividends of $28,931 were accrued in the fourth quarter of 2002 and were paid
  in cash in January 2003.

In conjunction with the
  financing, the Company issued five-year warrants to investors to purchase 250,000
  shares of the Company's common stock at a price of $0.957 per share. The warrant
  was valued at $192,500 using the Black-Scholes valuation model with the following
  assumptions: 0.0% dividend yield rate, 2.74% risk free interest rate, $0.87
  fair value of common stock, $0.957 exercise price, a life of 5 years, and volatility
  of 1.408. $161,400 of the value of the financing was attributed to the warrants
  and $648,473 attributed to the value of the redeemable convertible preferred
  stock. Accretion charges in the amount of $351,527 will be recognized over eighteen
  months commencing with the issuance date for the beneficial conversion feature
  on the preferred stock. The Company will accrete the value of the preferred
  stock up to its redemption value. Accretion in the amount of $82,714 was recorded
  in the fourth quarter 2002.

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NOTE 5 - Bank Financing
  Arrangements

In October 2002 the Company
  renewed its credit agreement ("Credit Agreement") with a bank. The
  Credit Agreement, which expires on July 15, 2003, allows the Company to borrow
  up to $4,000,000 based on the level of qualified domestic and international
  trade receivables ($2,500,000 and $1,500,000, respectively), at the lender's
  index rate which is based on prime plus 0.75% and 0.5% on the domestic and international
  lines, on domestic and international trade accounts receivables. In conjunction
  with the renewal the Company issued five-year warrants, valued at $10,950, to
  the bank to acquire 15,000 shares of common stock at $0.82 per share. The rates
  in effect at December 31, 2002 were 5.0% and 4.75% on the domestic and international
  lines. At December 31, 2002 outstanding borrowings under the domestic and international
  lines were $739,000 and $1,167,000, respectively, which were the approximate
  total amounts available on the lines. At December 31, 2001 outstanding amounts
  on the domestic and international lines were $779,000 and $538,000, respectively,
  which were the approximate total amounts available on the lines. The Credit
  Agreement contains certain financial covenants, measured quarterly beginning
  December 31, 2002, including a requirement that the Company's tangible net worth
  must exceed $1,500,000, and the Company maintain a quarterly net profit of $1.00
  before interest, taxes, and other non-cash charges. Because of the net loss
  in the fourth quarter the Company was not in compliance with the covenants at
  December 31, 2002 (see Note 14 for discussion of the subsequent renewal of the
  Company's bank line).

NOTE 6 - Capital Lease Obligations and Equipment Financings

The Company leases certain
  of its equipment under capital leases. The leases are collateralized by the
  underlying assets. At December 31, 2002 property and equipment with a cost of
  $99,739 were subject to such financing arrangements. Related accumulated amortization
  at December 31, 2002 amounted to $23,458. Future minimum payments under capital
  lease and equipment financing arrangements as of December 31, 2002 are as follows:



|2003                                        | 37,644          
|------------------------------------------- | ----------------
|2004                                        | 13,360          
|Total
      minimum payments                | 51,004          
|Less amount
      representing interest     | (6,566)         
|Present
      value of net minimum payments | 44,438          
|Less current
      portion                  | (31,728)        
|Long-term
      portion                     | $
        12,710







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NOTE 7 - Commitments

The Company's headquarters
  are operated under a five-year noncancelable operating lease which expires in
  December 2006. The Company also has acquired noncancelable leases which expire
  in 2003. Future minimum lease payments under all operating leases are:

|2003  | $
        530,454  
|----- | -------------------
|2004  | 468,742            
|2005  | 487,492            
|2006  | 506,991            
|Total | $
        1,993,679

Rental expense under
  all operating leases was $674,599, $284,277, and $226,959, for each of the years
  ended December 31, 2002, 2001, and 2000, respectively. The Company subleases
  a portion of its office space which will expire in 2003. Sublease income was
  $54,490 for the year ended December 31, 2002.

The Company has non-cancelable
  purchase commitments with its vendors for inventory used in the ordinary course
  of business for $8.4 million over the next two years.

NOTE 8 - Stock Option/Stock Issuance Plan

The Company has three Stock
  Option Plans: the 1993 Stock Option/Stock Issuance Plan (the 1993 Plan), the
  1995 Stock Plan (the 1995 Plan), and the 1999 Stock Plan (the 1999 Plan).

The 1993 Plan
  The Company has made no grants from the 1993 Plan since February 1995 and does
  not intend to issue any grants from this Plan in the future. The 1993 Plan provides
  for the grant of incentive stock options and nonstatutory stock options or the
  immediate issuance of the Company's common stock to employees, directors, and
  consultants of the Company at prices not less than 85% of the fair market value
  of the common stock on the date of grant, as determined by the Board of Directors.
  The vesting and exercise provisions are determined by the Board of Directors,
  with a maximum term of ten years. Options granted and shares issued under the
  1993 Plan generally vest over a four-year period, with 25% vesting after one
  year and 2.08% each month afterwards.











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Information with respect
  to the 1993 Plan is summarized as follows:

|                                   |                          | Outstanding
        Options             
|---------------------------------- | ------------------------ | ----------------------------------------
|Shares
        Available For Grant | Number
        of Shares | Weighted
        Average Price Per share
|
|Balance
      at December 31, 1999 | 114,902                  | 68,606                                  
|Exercised                          | --                       | (65,460)                                
|Balance
      at December 31, 2000 | 114,902                  | 3,146                                   
|Balance
      at December 31, 2001 | 114,902                  | 3,146                                   
|Balance
      at December 31, 2002 | 114,902                  | 3,146                                   

As of December 31, 2002,
  2001, and 2000, options to purchase 3,146 shares were exercisable at a weighted
  average exercise price $0.64 for all years presented. The exercise price of
  the options at December 31, 2002 ranged from $0.59 to $0.67. The weighted average
  remaining contractual life for options outstanding under the 1993 Plan at December
  31, 2002 is approximately 1.25 years.

The 1995 Plan
  The Company's 1995 Stock Plan (the 1995 Plan) provides for the grant of incentive
  stock options and nonstatutory stock options to employees, directors, and consultants
  of the Company. The exercise price per share of all incentive stock options
  granted must be at least equal to the fair market value per share of common
  stock on the date of grant. The exercise price per share of all nonstatutory
  stock options shall be not less than 85% of the fair market value of the common
  stock on the date of grant. The vesting and exercise provisions are determined
  by the Board of Directors, with a maximum term of ten years.

Information with respect
  to the 1995 Plan is summarized as follows:

|                                      |                          | Outstanding
        Options             
|------------------------------------- | ------------------------ | ----------------------------------------
|Options
        Available For Grant   | Number
        of Shares | Weighted
        Average Price Per share
|
|Balance
      at December 31, 1999    | 1,020,879                | 1,879,916                               
|Increase
        in shares authorized | 1,200,000                | --                                      
|Granted                               | (1,793,976)              | 1,793,976                               
|Canceled                              | 52,762                   | (52,762)                                
|Exercised                             | --                       | (695,669)                               
|Balance
      at December 31, 2000    | 479,665                  | 2,925,461                               
|Increase
      in shares authorized   | 900,000                  | --                                      
|Granted                               | (1,495,700)              | 1,495,700                               
|Canceled                              | 483,030                  | (483,030)                               
|Exercised                             | --                       | (757,019)                               
|Balance
      at December 31, 2001    | 366,995                  | 3,181,112                               
|Increase
        in shares authorized | 944,180                  | --                                      
|Granted                               | (1,242,500)              | 1,242,500                               
|Canceled                              | 603,667                  | (603,667)                               
|Exercised                             | --                       | (46,862)                                
|Balance
      at December 31, 2002    | 672,342                  | 3,773,083                               





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The weighted average fair
  value of options granted during 2002, 2001, and 2000 was $0.95, $1.45, and $4.69
  per share, respectively. As of December 31, 2002, 2001 and 2000, options to
  purchase 1,457,486, 906,688, and 827,330 shares were exercisable at a weighted
  average exercise price of $2.26, $2.57, and $1.00, respectively.

The outstanding and exercisable
  options at December 31, 2002 presented by price range are as follows:

|                                 | Options
        Outstanding           | Options
        Exercisable                    
|-------------------------------- | ------------------------------------- | -----------------------------------------------
|Range
        of Exercise Prices | Number
        of Options Outstanding | Weighted
        Average Remaining Life (Years)
|$
        0.44 - 0.69            | 319,600                               | 5.92                                           
|0.76                             | 570,083                               | 9.92                                           
|0.97
        - 1.29              | 1,473,554                             | 9.00                                           
|1.50                             | 17,708                                | 6.92                                           
|2.28                             | 78,000                                | 8.58                                           
|3.38                             | 1,296,805                             | 8.00                                           
|7.75                             | 2,000                                 | 7.00                                           
|14.94                            | 15,333                                | 7.17                                           
|$
        0.44 - 14.94           | 3,773,083                             | 8.50                                           

The 1999 Plan
  The Company's 1999 Stock Plan (the 1999 Plan) provides for the grant of nonstatutory
  stock options to employees, directors, and consultants of the Company. The exercise
  price per share of all nonstatutory stock options shall be not less than 85%
  of the fair market value of the common stock on the date of grant. The vesting
  and exercise provisions are determined by the Board of Directors, with a maximum
  term of ten years.

Information with respect
  to the 1999 Plan is summarized as follows:

|                                      | Outstanding
        Options        
|------------------------------------- | -----------------------------------
|                                      | Options
        Available For Grant
|Balance
      at December 31, 1999    | 560,000                            
|Increase
        in Shares Authorized | 500,000                            
|Granted                               | (833,224)                          
|Exercised                             | --                                 
|Balance
      at December 31, 2000    | 226,776                            
|Granted                               | (250,000)                          
|Canceled                              | 28,021                             
|Exercised                             | --                                 
|Balance
      at December 31, 2001    | 4,797                              
|Canceled                              | 33,125                             
|Exercised                             | --                                 
|Balance
      at December 31, 2002    | 37,922                             



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No shares were granted
  in 2002. The weighted average fair value of options granted during 2001 and
  2000 was $2.92 and $3.11 per share, respectively. As of December 31, 2002, 2001,
  and 2000, 853,547, 534,153 and 160,760 options were exercisable at a weighted
  average exercise price of $2.46, $2.40, and $1.78, respectively. The outstanding
  and exercisable options at December 31, 2002 presented by price range are as
  follows:

|                                 | Options
        Outstanding           | Options
        Exercisable                    
|-------------------------------- | ------------------------------------- | -----------------------------------------------
|Range
        of Exercise Prices | Number
        of Options Outstanding | Weighted
        Average Remaining Life (Years)
|$ 0.56                           | 318,509                               | 6.50                                           
|2.28                             | 45,000                                | 8.58                                           
|3.38                             | 989,474                               | 8.08                                           
|$
        0.56 - 3.38            | 1,352,983                             | 7.67                                           

The Company did not grant new options to consultants in any of the three years
  ended December 31, 2002. In prior years the Company granted options to consultants
  in exchange for consulting services to be rendered and generally vested over
  a period of four years. The Company recorded charges to operations related to
  these compensatory stock option grants of $0, $33,604, and $143,904, for the
  years ended December 31, 2002, 2001, and 2000. The Company has no remaining
  options outstanding related to consultants.

A significant portion of
  the stock option charges in 2000 resulted from a change in status during the
  first quarter of fiscal 2000 for Charlie Bass, former Chief Executive Officer,
  following the appointment of Kevin Mills as President and Chief Executive Officer
  at the end of March 2000. In August 2000, the Board of Directors approved acceleration
  of vesting of this award. Total compensation charges recorded related to this
  award were $1,532,190 in fiscal 2000. No additional charges relating to this
  grant were incurred in future quarters. The Company also recognized compensation
  expense in the amount of $168,604 related to the accelerated vesting of remaining
  stock options for two terminating directors that occurred in the second quarter
  of 2000.







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NOTE 9 - Warrants

The Company issued warrants
  to purchase common stock in connection with certain financing agreements. The
  Company has the following warrants outstanding to purchase common stock at December
  31, 2002:



|Reason                                                          | Number
        of Shares | Price
        Per Share | Issue
        Date | Expiration
        Date
|--------------------------------------------------------------- | ------------------------ | ----------------------- | ------------------ | -----------------------
|Series
      B financing                                        | 98,500                   | $
        0.40          | Jan
        1998   | Jan
        2003       
|Series
      B-1 financing                                      | 132,750                  | $
        0.565         | Feb
        1998   | Feb
        2003       
|Series
      B-2 financing                                      | 110,725                  | $
        0.57375       | Mar
        1998   | Mar
        2003       
|Common
      stock financing                                    | 118,344                  | $
        1.59          | Mar
        2002   | Mar
        2007       
|Bank
      line financing                                       | 15,000                   | $
        0.82          | Oct
        2002   | Oct
        2007       
|Series
      E redeemable convertible preferred stock financing | 250,000                  | $
        0.957         | Oct
        2002   | Oct
        2007       
|Total
      warrants                                            | 725,319                  |                         |                    |                        



NOTE 10 - Shares Reserved

Common stock reserved for
  future issuance was as follows at December 31, 2002:

|Stock
      option grants outstanding (see Note 8)                               | 5,129,212
|-------------------------------------------------------------------------------- | ---------
|Reserved
      for future stock option grants (see Note 8)                       | 825,166  
|Common
      stock warrants (see Note 9)                                         | 725,319  
|Conversion
      of Series E redeemable convertible preferred stock (see Note 4) | 1,149,425
|Total
      common stock reserved for future issuance                            | 7,829,122



NOTE 11 - Related Party

The Company had outstanding
  accounts payable to the Impact Zone, an engineering design and consulting services
  company, of $71,875, $18,688, and $29,400 at December 31, 2002, 2001,and 2000.
  The Company received services during the years ended December 31, 2002, 2001,
  and 2000 valued at $268,853, $234,838, and $163,500, respectively. The Company
  had no outstanding accounts receivable due from the Impact Zone at December
  31, 2002, 2001, and 2000, and recognized revenues during the year ended December
  31, 2001 of $18,118. The Impact Zone's principal stockholder, Dale Gifford,
  is a sibling of Micheal L. Gifford, Executive Vice President and Director of
  Socket.

NOTE 12 - Retirement
  Plan

The Company has a tax-deferred
  savings plan, the Socket Communications, Inc. 401(k) Plan ("The Plan"),
  for the benefit of qualified employees. The Plan is designed to provide employees
  with an accumulation of funds at retirement. Qualified employees may elect to
  make contributions to The Plan on a quarterly basis. No contributions are made
  by the Company. Administrative expenses relating to the Plan are not significant.



56

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NOTE 13 - Income Taxes

Due to the Company's loss
  position, there was no provision for income taxes for the years ended December
  31, 2002, 2001, and 2000.

As of December 31, 2002,
  the Company had federal and state net operating loss carryforwards of approximately
  $17,000,000 and $5,000,000, respectively. The Company also has federal and state
  tax credit carryforwards of approximately $300,000 and $300,000, respectively.
  The net operating loss and credit carryforwards will expire at various dates
  beginning in 2004 through 2022, if not utilized.

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

The tax benefits associated
  with employee stock options provide a deferred benefit of approximately $436,000
  which has been offset by the valuation allowance. The deferred tax benefit associated
  with the employee stock options will be credited to additional paid-in capital
  when realized.

Deferred income taxes reflect
  the net tax effects of temporary differences between the carrying amount of
  assets and liabilities for financial reporting purposes and the amount used
  for income tax purposes. Significant components of deferred tax assets are as
  follows:

|                                                  | December
        31,
|------------------------------------------------- | --------------------
|Deferred tax assets:                              | 2002                
|Net
      operating loss carryforwards            | $
        6,154,000 
|Credits                                           | 487,000             
|Capitalized
      research and development costs  | 2,474,000           
|Reserves                                          | 718,000             
|Total
      deferred tax assets                   | 9,833,000           
|Valuation
      allowance for deferred tax assets | (9,639,000)         
|Net
      deferred tax assets                     | (194,000)           
|Deferred
      tax liability:                     |                     
|Acquired
      intangibles                        | 194,000             
|Net
      deferred taxes                          | $ --                



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NOTE 14 - Subsequent
  Events

Series F Convertible
  Preferred Stock

On March 20, 2003 the Company
  sold 276,269 shares of its Series F Convertible Preferred Stock, $0.001 par
  value, at $7.22 per share (total of $2,000,000 cash proceeds) pursuant to Section
  4(2) of the Securities Act of 1933, as amended. Proceeds will be used for general
  working capital purposes. Each share of Series F Convertible Preferred Stock
  is convertible into 10 shares of common stock at the option of the holder, in
  whole or in part, at any time for a period of three years following the date
  of sale with a mandatory conversion date three years from date of issue. The
  Series F stock will convert into a total of 2,762,690 shares of common stock
  at a conversion price of $0.722 per share. In addition, the Company issued three-year
  warrants to the same investors to acquire 827,807 shares of common stock at
  $0.722 per share, and the Company issued five-year warrants to the placement
  agent, Spencer Trask Ventures, Inc., to acquire up to 718,300 shares of common
  stock at $0.722 per share.

Series F Preferred Stock
  is convertible into common stock anytime at the option of the Holder prior to
  the mandatory conversion date of three years after issue and automatically converts
  earlier in the event of a merger or consolidation of the Company if, as a result
  of such transaction, the holders of common stock immediately prior to such merger
  or consolidation would hold less than 50% of the voting securities of the surviving
  entity immediately following such merger or consolidation. The holders of Series
  F Preferred Stock have voting rights equal to the number of common shares issuable
  upon conversion. In the event of liquidation, holders of Series F Preferred
  Stock are entitled to liquidation preferences over common stockholders equal
  to their initial investment plus all accrued but unpaid dividends. Dividends
  accrue at the rate of 8% per annum and are payable quarterly in cash or in common
  stock, at the option of the Company.

Bank Line Renewal and Extension

On March 28, 2003, the
  Company renewed and extended its Credit Agreement (see Note 5 - Bank Financing
  Arrangements) to April 15, 2004 provided no material adverse change occurs in
  the Company's financial condition or ability to perform under the Credit Agreement
  as determined by the lender. Under the new Credit Agreement, the Company must
  maintain cash and available credit under the line in excess of two times the
  net loss, adjusted for non-cash charges including depreciation and amortization,
  for the preceding four quarters. The remaining terms of the Credit Agreement
  remain unchanged from the existing Credit Agreement (See Note 5).





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Item 9. Changes in and
  Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable.

PART III

Item 10. Directors and
  Executive Officers of the Registrant

The information required
  hereunder is incorporated by reference from our Proxy Statement to be filed
  in connection with our annual meeting of stockholders to be held on June 19,
  2003.

Item 11. Executive Compensation

The information required
  hereunder is incorporated by reference from our Proxy Statement to be filed
  in connection with our annual meeting of stockholders to be held on June 19,
  2003.

Item 12: Security Ownership of Certain Beneficial Owners and Management and
  Related Stockholder Matters

The following table provides
  information as of December 31, 2002 about our common stock that may be issued
  under the Company's existing equity compensation plans. For additional information
  about the equity compensation plans see Note 9 to the Company's Consolidated
  Financial Statements.



|                                                                       | Number
        ofsecurities to be issued upon exercise of outstanding options | Weighted-average
        exercise price of outstanding options | Number
        of securities remaining available for future issuance under equity compensation
        plans (excluding securities reflected in column (a)
|---------------------------------------------------------------------- | ----------------------------------------------------------------------------- | -------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                       | (a)                                                                           | (b)                                                            | (c)                                                                                                                                                       
|Equity
        compensation plans approved by security holders (1)     | 3,776,229                                                                     | $
        1.89                                                 | 787,244                                                                                                                                                   
|Equity
        compensation plans not approved by security holders (2) | 1,352,983                                                                     | $2.68                                                          | 37,922                                                                                                                                                    
|    Total                                              | 5,129,212                                                                     | $2.09                                                          | 825,166                                                                                                                                                   

> ______________________
>   (1) Includes the 1993
>     Stock Plan (the "1993 Plan") and the 1995 Stock Plan (the "1995
>     Plan"). Pursuant to an affirmative vote by security holders in June 2001,
>     an annual increase is added on the first day of each fiscal year equal to
>     the lesser of (a) 2,000,000 shares, (b) 4% of the outstanding shares on that
>     date, or (c) a lesser amount as determined by the Board of Directors. 
>     (2) Includes the 1999 Stock Plan (the "1999 Plan").





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Item 13. Certain Relationships and Related Transactions

Certain information required
  hereunder is incorporated by reference from our Proxy Statement to be filed
  in connection with our annual meeting of stockholders to be held on June 19,
  2003.

Item 14. Controls and Procedures

(a) Evaluation of disclosure
  controls and procedures

Within the 90-day period
  prior to the date of this report, the Company carried out an evaluation, under
  the supervision and with the participation of the Company's management, including
  the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness
  of the design and operation of the Company's disclosure controls and procedures
  pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the "Exchange
  Act"). Based upon that evaluation, the Chief Executive Officer and Chief
  Financial Officer concluded that the Company's disclosure controls and procedures
  are effective in timely alerting them to material information relating to the
  Company (including its consolidated subsidiaries) required to be included in
  the Company's Exchange Act filings.

(b) Changes in internal
  controls

Our review of our internal
  controls was made within the context of the relevant professional auditing standards
  defining "internal controls," "significant deficiencies,"
  and "material weaknesses." "Internal controls" are processes
  designed to provide reasonable assurance that our transactions are properly
  authorized, our assets are safeguarded against unauthorized or improper use,
  and our transactions are properly recorded and reported, all to permit the preparation
  of our financial statements in conformity with generally accepted accounting
  principles. "Significant deficiencies" are referred to as "reportable
  conditions," or control issues that could have a significant adverse affect
  on the ability to record, process, summarize and report financial data in the
  financial statements. A "material weakness" is a particularly serious
  reportable condition where the internal control does not reduce to a relatively
  low level of risk that misstatements caused by error or fraud may occur in amounts
  that would be material in relation to the financial statements and not be detected
  within a timely period by employees in the normal course of performing their
  assigned functions. As part of our internal controls procedures, we also address
  other, less significant control matters that we or our auditors identify, and
  we determine what revision or improvement to make, if any, in accordance with
  our on-going procedures.

There have been no significant
  changes in the Company's internal controls or in other factors which could significantly
  affect internal controls subsequent to the date the Company carried out the
  evaluation described above.



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PART IV

Item 15. Exhibits, Financial
  Statement Schedules, and Reports on Form 8-K

(a) Documents filed as
  part of this report:

> 1. All financial statements.

|INDEX
      TO FINANCIAL STATEMENTS                                                  | PAGE
|------------------------------------------------------------------------------------ | ----
|                                                                                     |     
|Report
      of Ernst & Young LLP, Independent Auditors                              | 34  
|Consolidated
      Balance Sheets                                                    | 35  
|Consolidated
      Statements of Operations                                          | 36  
|Consolidated
      Statements of Redeemable Preferred Stock and Stockholders' Equity | 37  
|Consolidated
      Statements of Cash Flows                                          | 38  
|Notes
      to Consolidated Financial Statements                                     | 39  

> 2. Financial statement
>     schedules.
>     All financial statement schedules are omitted because they are not applicable
>     or not required or because the required information is included in the financial
>     statements or notes herein.
>   3. Exhibits. 
>     See Index of Exhibits on page 65. The Exhibits listed on the accompanying
>     Index of Exhibits are filed or incorporated by reference as part of this report.

(b) Reports on Form 8-K:

> The Company reported
>     its acquisition of Nokia's CompactFlash Bluetooth Card business including
>     a product line and related technology license on Form 8-K dated March 14,
>     2002, filed March 15, 2002.
>   The Company reported
>     the completion of a private placement of its Common Stock on Form 8-K dated
>     March 28, 2002, filed on April 10, 2002.
>   The Company reported
>     the completion of a private placement of its Series E Redeemable Convertible
>     Preferred stock on Form 8-K dated October 3, 2002, filed October 7, 2002.
>   The Company reported
>     that its Common Stock would commence trading on the Nasdaq SmallCap Market
>     on Form 8-K dated December 13, 2002, filed on December 17, 2002.
>   61

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> SIGNATURES

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

SOCKET
  COMMUNICATIONS, INC.
  Registrant

|Date:
      March 28, 2003 | /s/
      Kevin J. Mills
      Kevin J. Mills
      President and Chief Executive Officer
|-------------------------- | -----------------------------------------------------------------------------------------









Pursuant to the requirements
  of the Securities Exchange Act of 1934, this report has been signed below by
  the following persons on behalf of the Registrant and in the capacities and
  on the dates indicated.

|By | /s/
      Kevin J. Mills     | President
      and Chief Executive Officer (Principal Executive Officer)                                                         |  | March
      28, 2003
|-- | ---------------------------- | --------------------------------------------------------------------------------------------------------------------------------- |  | --------------------
|   | Kevin
      J. Mills        
|   |                              |                                                                                                                                   |  |                     
|By | /s/
      Charlie Bass       | Chairman
      of the Board                                                                                                       |  | March
      28, 2003
|   | Charlie
      Bass          
|   |                              |                                                                                                                                   |  |                     
|By | /s/
      David W. Dunlap    | Vice
      President of Finance and Administration and Chief Financial Officer (Principal
      Financial and Accounting Officer) |  | March
      28, 2003
|   | David
      W. Dunlap       
|   |                              |                                                                                                                                   |  |                     
|By | /s/
      Micheal L. Gifford | Executive
      Vice President and Director                                                                                       |  | March
      28, 2003
|   | Micheal
      L. Gifford    
|   |                              |                                                                                                                                   |  |                     
|By | /s/
      Enzo Torresi       | Director                                                                                                                          |  | March
      28, 2003
|   | Enzo
      Torresi          
|   |                              |                                                                                                                                   |  |                     
|By | /s/
      Gianluca Rattazzi  | Director                                                                                                                          |  | March
      28, 2003
|   | Gianluca
      Rattazzi     
|   |                              |                                                                                                                                   |  |                     
|By | /s/
      Peter Sealey       | Director                                                                                                                          |  | March
      28, 2003
|   | Peter Sealey                
|   |                              |                                                                                                                                   |  |                     
|By | /s/
      Leon Malmed        | Director                                                                                                                          |  | March
      28, 2003
|   | Leon
      Malmed           

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CERTIFICATIONS

I, Kevin J. Mills, certify
  that:

1. I have reviewed this
  annual report on Form 10-K of Socket Communications, Inc.;

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

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

(c) Presented in this annual
  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 functions):

(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; and

6. The registrant's other
  certifying officers and I have indicated in this annual 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:
      March 28, 2003 | /s/
      Kevin J. Mills
      Name: Kevin J. Mills
      Title:   President and Chief Executive Officer        
                  (Principal Executive
      Officer)
|-------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------









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CERTIFICATIONS

I, David W. Dunlap, certify
  that:

1. I have reviewed this
  annual report on Form 10-K of Socket Communications, Inc.;

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

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

(c) Presented in this annual
  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 functions):

(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; and

6. The registrant's other
  certifying officers and I have indicated in this annual 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:
      March 28, 2003 | /s/
      David W. Dunlap
      Name: David W. Dunlap 
      Title:  Vice
      President of Finance and Administration and            Chief
      Financial Officer (Principal Financial Officer)
|-------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------











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Index to Exhibits

|Exhibit
        Number | Description                                                                                                                                                     
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                                                 
|2.1
        (1)        | Agreement
      and Plan of Reorganization.                                                                                                                     
|                       |                                                                                                                                                                 
|3.1                    | Amended
      and Restated Certificate of Incorporation.                                                                                                        
|                       |                                                                                                                                                                 
|3.2                    | Certificate of Designation of Series E Convertible Preferred
      Stock.                                                                                       
|                       |                                                                                                                                                                 
|3.3                    | Certificate of Designation of Series F Convertible Preferred
      Stock.                                                                                       
|                       |                                                                                                                                                                 
|3.4                    | Bylaws                                                                                                                                                          
|                       |                                                                                                                                                                 
|3.5                    | Certificate of Amendment of Bylaws dated March 14, 2001.                                                                                                        
|                       |                                                                                                                                                                 
|10.1
        (2)*      | Form of
      Indemnification Agreement entered into between the Company and its directors
      and officers.                                                  
|                       |                                                                                                                                                                 
|10.2
        (2)*      | 1993 Stock
      Option/Stock Issuance Plan and forms of agreement thereunder.                                                                                  
|                       |                                                                                                                                                                 
|10.3
        (2)*      | 1995 Stock
      Plan and forms of agreement thereunder.                                                                                                        
|                       |                                                                                                                                                                 
|10.4
        (3)       | Standard
      Lease Agreement by and between Central Court, LLC and the Company dated
      September 15, 1996.                                                
|                       |                                                                                                                                                                 
|10.6
        (4)*      | Form of
      Amendment No.1 to Stock Option Agreement between the Company and certain
      Option Holders under the 1995 Stock Option Plan.                   
|                       |                                                                                                                                                                 
|10.9
        (5)*      | 1999 Nonstatutory
      Stock Option Plan.                                                                                                                      
|                       |                                                                                                                                                                 
|10.10(6)*              | Bonus Plan dated
        February 18, 1998 between the Company and certain eligible participants.                                                               
|                       |                                                                                                                                                                 
|10.11(7)               | Business Transfer Agreement For Nokia Proprietary Bluetooth
      Technology dated 11 March 2002 between Nokia Corporation and Socket Communications,
      Inc.
|                       |                                                                                                                                                                 
|10.12
        (7)      | Second Amendment to Lease by and between Central Court, LLC
      and the Company dated December 14, 2001.                                                      
|                       |                                                                                                                                                                 
|10.13*                 | Form of Executive Management Bonus Plan dated January 1, 2003
      between the Company and certain eligible participants.                                      



65

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> 10.14*
>           Form of Employment Agreement dated March 19, 2003 between
>             the Company and the officers of the Company.21.1
>           Subsidiaries.23.1
>           Consent
>             of Ernst & Young LLP, Independent Auditors.99.1
>           Certification
>             pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
>             906 of the Sarbanes-Oxley Act of 2002._________
>         * Executive compensation plan or arrangement.
>       (1) Incorporated by reference to exhibits filed with Company's Form 8-K
>         filed on October 20, 2000.
>       (2) Incorporated by reference to exhibits filed with Company's Registration
>         Statement on Form SB-2 (File No. 33-91210-LA) filed on June 2, 1995 and
>         declared effective on October 20, 2000.
>       (3) Incorporated by reference to Exhibit 10.5 of the Company's Registration
>         Statement on Form SB-2 (File No. 333-22273) filed on February 24, 1997.
>       (4) Incorporated by reference to exhibits filed with the Company's Form
>         10-KSB for the year ended December 31, 1997 filed on March 30, 1998.
>         (5) Incorporated by reference to exhibits filed with the Company's Form
>         10-QSB filed on August 16, 1999.
>       (6) Incorporated by reference to exhibits filed with the Company's Form
>         10-KSB filed on March 30, 1998.
>       (7) Incorporated by reference to exhibits filed with the Company's Form
>         10-K filed April 1, 2002





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Exhibit 23.1







CONSENT
  OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation
  by reference in the Registration Statements and Related Prospectuses (Forms
  S-3 No. 333-100754, No. 333-87348, No. 333-51236, No. 333-96231, No. 333-82591,
  and No. 333-49001; and Forms S-8 No. 333-87368, No. 333-85721, No. 333-68347,
  No. 333-66060, No. 333-59838, and No. 333-07669) of our report dated February
  10, 2003, (except Note 14, as to which the date is March 28, 2003), with respect
  to the consolidated financial statements of Socket Communications, Inc. included
  in this Annual Report (Form 10-K) for the year ended December 31, 2002.

/s/ ERNST
  & YOUNG LLP

San Jose, California
  March 28, 2003











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(Table
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EXHIBIT 99.1

CERTIFICATION
  OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
  PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Kevin J. Mills, certify,
  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002, that the Annual Report of Socket Communications,
  Inc. on Form 10-K for the year ended December 31, 2002 fully complies with the
  requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
  and that information contained in such Annual Report on Form 10-K fairly presents
  in all material respects the financial condition and results of operations of
  Socket Communications, Inc.

|By: /s/ Kevin
        J. Mills
        Name: Kevin J. Mills
        Title:  President
        and Chief Executive Officer        
                    (Principal Executive
        Officer)
        Date:   March
        28, 2003
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

> 

I, David W. Dunlap, certify,
  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002, that the Annual Report of Socket Communications,
  Inc. on Form 10-K for the year ended December 31, 2002 fully complies with the
  requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
  and that information contained in such Annual Report on Form 10-K fairly presents
  in all material respects the financial condition and results of operations of
  Socket Communications, Inc.

|By: /s/ David
        W. Dunlap
        Name: David W. Dunlap 
        Title:  Vice
        President of Finance and Administration and            Chief
        Financial Officer (Principal Financial Officer)
        Date:   March
        28, 2003
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

> 



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