UNITED
    STATES
    SECURITIES AND EXCHANGE COMMISSION
    WASHINGTON, DC 20549**FORM 10-K/A**Amendment No. 2  **[X]**
      **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF 1934** For
    the fiscal year ended December 31, 2001 **[   ]**
      **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 [   ] Aggregate market value
    of Common Stock ($0.001 par value) held by non-affiliates on March 15, 2002
    based on the closing price on such date: $47,486,693. 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 15, 2002 was 23,637,635 shares. Documents
    Incorporated by Reference: None


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,
  and those discussed under "Risk Factors" 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

Overview

We design, manufacture
  and sell products for connecting handheld and notebook computers to computer
  networks and peripherals . Our products are designed for use with a broad variety
  of handheld and notebook computers , and employ innovative designs that reduce
  battery power consumption and make them easy to install and use.

We classify our products
  into 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
    devices to the Internet or to private networks, or to communicate with 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.
- Our peripheral
    connection products add connection ports to handheld or notebook computers
    that allow users to connect these portable computers with standard peripherals
    designed for desktop PCs.
- Our bar code scanning
    products plug into handheld or notebook computers and or turn them into
    portable bar code scanners that can be used in various retail and industrial
    workplaces.
- Our embedded products
    and services enable manufacturers of cell phones, handheld computers and
    other devices to build wireless connection functions into their products.

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, including Nokia,
  Microsoft and Palm . Our goal is to maintain our position at the forefront of
  our rapidly expanding markets, and to develop new and creative connection solutions
  as the mobile communications market evolves. We further intend to expand the
  markets we serve from handheld computers to connecting the wide range of portable
  electronic appliances, such as digital cameras, that will be interconnected
  over the next several years.

We believe that our focus
  on handheld computers with our expanding family of connection products and our
  relationships with key industry strategic partners position us for revenue growth
  in 2002. However , 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. Whether we are able to achieve profitability will be depend on a variety
  of factors, including :

- increased market acceptance
    of our current and future connection products;
- increased sales of
    handheld computers;
- deployment of higher
    speed wireless networks to improve data transfer speeds over mobile phones;
- our ability to raise
    additional capital to fund our product development and sales and marketing
    efforts;
- increasing our product
    margins and reducing our operating costs; and
- our ability to expand
    the distribution of our products.

As
  of December 31, 2001, we had a cash balance of $4,815,245, stockholders' equity
  of $13,797,151, an accumulated deficit of $28,926,957, and working capital of
  $4,075,403. As of December 31, 2001, our cash balance was  not sufficient
  to fund operations through fiscal 2002, and we anticipated a need to raise  additional
  funding of one to three million dollars  in 2002 to fund operations. Since December
  31, 2001, we have raised equity financing in an aggregate gross amount of $1.6
  million. We anticipate a need to raise further additional capital of one to
  two million dollars in 2003 to fund operations. There are no assurances that
  additional capital will be available on acceptable terms, if at all.

See "Management's Discussion
  and Analysis of Financial Condition and Results of Operations--Liquidity and
  Capital Resources," and "--Risk Factors" for a discussion of our
  need for additional capital and other risks that may affect whether we are able
  to become profitable .

Product Strategy

Comprehensive Product
  Range. Our strategy is to offer users a comprehensive range of connection
  products supporting a broad variety of applications, formats and communication
  standards. Our goal is to offer users all the products they
  need to meet their individual connection requirements under a single brand name.
  We intend to continue to expand our offerings to support other technologies
  that may emerge in the future. Our product strategy includes the following key
  elements:

- Support all Popular
    Formats. Handheld and notebook computers on the market today use a variety
    of formats for add-on products that can be plugged into these devices. We
    provide plug-in connection products that support the most popular formats.
    These formats currently include CompactFlash (CF), PC Card (or PCMCIA) , and
    Secure Digital (SD). We participate in the standards - setting bodies that design
    these formats, in order to influence the standards setting process.
- Support Multiple
    Operating Systems .We support many popular handheld and mobile appliance
    operating systems. The operating systems we support today are Microsoft's
    Windows CE and Pocket PC , and the Palm OS. Some of our partners are developing
    products that will allow our products to operate using the Linux operating
    system , and with the WindRiver VxWorks operating system for products such
    as digital cameras. We work closely with device manufacturers and operating
    system vendors to maintain operating system support and compatibility for
    our products.
- Offer Products
    for New Wireless Systems. We have recently introduced a range of products
    that support Bluetooth technology. Bluetooth is an emerging wireless communication
    standard that allows devices to communicate with each other at close range.
    We also offer products that allow handheld computers to be connected to local
    area wireless networks using the popular Wireless LAN standard (also referred
    to as the WiFi, or 802.11 standard).

Innovative Product
  Designs. Our goal is to distinguish our products by offering compelling
  practical advantages to users. We design our products to be "Mobility Friendly,"
  meaning that they are designed to be low in power consumption (to maximize battery
  life) , small in size (to minimize added weight) , and easy to install and use.
  We recognize that mobile handheld computer users may not have immediate access
  to technical support, and we judge our connection solutions on how well a non-technical
  user can use our products without technical assistance.

Strong Developer Support.We offer developer tools and support to manufacturers of mobile devices
  to enable them to integrate our products into their own product designs . Developer
  tools are available for our Bluetooth cards and embedded modules, for our interface
  chips, and for our bar code scanning products and software. We also provide
  engineering assistance to help customers complete their designs.

Proprietary Technology.
  We develop our own proprietary chips in order to achieve optimal combinations
  of high transfer speed and low power consumption for use with battery-operated
  handheld devices and other mobile appliances. We have been awarded a U.S. patent
  for technology we developed for combination input/output and memory cards, and
  have patents pending for other input/output technologies we developed.

Products

We have created a broad
  family of low-power standards-based connection products for mobile computing
  devices, which has been our focus since our inception. Our product line currently
  consists of four product families:

- Network connection
    products, which connect mobile devices to wide area networks, local area
    networks, and personal networks.
- Peripheral connection
    products, which connect mobile devices to desktop computer peripherals.
- Bar code scanning
    products, which enable operation of handheld computers in conjunction
    with bar code scanning devices.
- Embedded connection
    products, which we sell to device manufacturers to be incorporated directly
    into their mobile devices.

Each of these product
  categories is discussed in more detail below.

Network Connection Products

Our network connection
  products are designed to connect a handheld or notebook computer user or device
  to other electronic devices through a wide area network, local area network,
  or within a personal area network. Our products use either cable or wireless
  technology . The table below reflects the connection products we offer for use
  within each network environment:

|Network                                                                         | Wireless
        Connections                                                                           | Wired
        Connections                                                                                                 
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------
|Wide
        Area Network 
        (Access from anywhere to anywhere)           | Bluetooth to
          mobile phones
        Wireless LAN to
          network server                  | Phone card to mobile phones
        Ethernet
            card to network server
        Modem
            to phone circuit
|Local
        Area Network
        (Access to Corporate networks and hot spots) | Bluetooth
            to network access point
        Wireless
            LAN to network access point | Ethernet card to network access point                                                                                     
|Personal
          Area Network(Device
          to device(s)                   | Bluetooth to Bluetooth wireless connections with a 30 foot radius                                      | Peripheral connection card direct to other devices                                                                        

Wireless Network Connection
  Products. Our wireless network connection products are described in more
  detail as follows:

- Bluetooth Wireless
    Connection Products. Our Bluetooth wireless connection products consist
    of Bluetooth plug-in cards and software for PocketPC handheld devices, and
    modules and software for embedded Bluetooth connections. We are developing
    Bluetooth software to work with our Bluetooth hardware to provide Bluetooth
    connections for notebook computers.
- Wireless LAN Cards.Our Wireless LAN card is a CompactFlash card with software that connects
    to a wireless local area network. The card uses the 802.11b networking standard,
    which is the most widely used wireless local area network standard in use
    today.

Wired Network Connection
  Products. Our wired network connection products are described in more detail
  as follows:

- Ethernet Cards.Our Ethernet Cards connect a mobile computer to a corporate Ethernet network,
    which is the common standard for operating local area networks. Our cards
    allow users to freely roam using their mobile devices throughout the corporate
    network area . These cards are available in CompactFlash format with either
    ruggedized (attached) or detachable cables. Our basic low power Ethernet card
    transfers data at a theoretical maximum rate of 10 megabits per second. We
    recently introduced a 10/100 Ethernet card that will transfer data at a theoretical
    maximum rate of either 10 megabits per second or 100 megabits per second,
    depending upon the network configuration. Handheld devices generally only
    support the 10 megabit per second transfer rate.
- Modems. Our
    modems connect mobile computers to a telephone line, enabling dial-up connections
    to the Internet or to private networks . Whereas modems are usually built into
    today's notebook computers, modems are generally not built into handheld computers
    and modem connections and must be added with plug-in cards .
- Digital Phone Cards.
    Our Digital Phone Cards connect mobile computers to over 100 models of digital
    mobile phones from most of the major mobile phone manufacturers. The cards
    allow mobile computer users to wirelessly access the Internet, email or other
    data from their handheld computer through a mobile phone. The cards work on
    mobile phone networks that use various mobile phone transmission technologies
    and standards, including the CDMA (Code Division Multiple Access) standard ,
    which is prevalent in the U.S., Latin America, and parts of Asia, and the
    GSM (Global System for Mobile communications) standard, which is prevalent
    in Europe, the U.S., and other parts of the world.

Peripheral Connection
  Products .

Our Peripheral Connection
  Cards connect a computer peripheral device or other electronic device to a handheld
  computer. These cards are available in CompactFlash format with either ruggedized
  (attached) or detachable cables. In addition, we provide serial cards in the
  PC Card format, primarily for notebook users. Our desktop PC serial card is
  a stable legacy product that we first began shipping in 1993, with consistent
  quarter over quarter revenue levels, high margin contribution, and modest support
  requirements.

Bar Code Scanning Products.

We have developed a family
  of bar code scanning products to enable handheld computers to be used with bar
  code scanners as lightweight data-collection devices . Our Bar Code Scanning
  Cards connect bar code wands and bar code laser scanners to mobile computers,
  which store the data collected by the scanners . Our Data Collection Cards also
  include our In-Hand Scan Card, which is a laser scanner attached to a CompactFlash -format
  card that plugs into the expansion slot of a mobile computer and is activated
  by the computer's external buttons. The In-Hand Scan Card and our bar code wands
  scan traditional linear bar codes. We also offer an In-Hand Scan Card that scans
  both traditional linear bar codes and also PDF417 bar codes. PDF417 is a new
  bar code format that offer 100 times the data capacity of traditional linear
  bar codes.

Embedded Connection
  Products.

We sell our proprietary
  interface chips to manufacturers of mobile equipment that want to build connection
  functions into their products . We also sell Bluetooth modules that provide built-in
  Bluetooth connections when installed inside of electronic devices. We also offer
  embedded design engineering services to assist third parties in embedding our
  Bluetooth modules into their products and developer kits to assist companies
  in using our embedded products.

Combination Connection
  Products.

We have developed patented
  technology for combination connection products that provide connectivity functions
  and expanded memory in a single connection card. This is especially useful for
  devices that have only a single expansion slot, such as digital cameras, handheld
  computers, mobile phones and other mobile devices. We are assessing the market
  and plan to offer combination products as appropriate.

Our plug-in products are
  standards-based. We serve on the boards of the standards committees that govern
  the standards for PC Cards and CompactFlash cards, and we are a member of the
  Input/Output Committee of the Secure Digital Association that governs and approves
  the standards for the new Secure Digital card format.

Market Dynamics

Handheld computers have
  evolved over the past several years from simple devices used mainly to hold
  personal information into small portable desktops. 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 for personal and business
  use, are increasing the demand for mobile data communications. Advances in wireless
  connection technologies, particularly Bluetooth and Wireless LAN, are in development
  to allow handheld computers by 2003, and on a limited basis during 2002, to
  interact wirelessly and on-the-fly with nearby computers and with a wide array
  of electronic appliances, including mobile phones, printers, digital cameras,
  LAN access points, auto PCs, 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
  of the computer. Popular desktop programs are available on 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 2002, which will assist
  in educating the market on the capabilities of handheld computers using our
  connection products. Pocket PC manufacturers Hewlett-Packard, Compaq and Casio
  are shipping products using the Pocket PC 2002 operating system introduced by
  Microsoft in the fourth quarter of 2001. Toshiba, Panasonic, NEC and Samsung
  have announced their intention to start shipping Pocket PCs during the first
  half of 2002. All of these new models will have bright outdoor screens, which
  was a key feature that helped make the iPAQ Pocket PC handheld computer from
  Compaq the most popular Pocket PC model in 2001. In addition, Palm began offering
  handhelds with SD expansion slots in mid- 2001 , 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 2002 .

Mobile phone networks
   are being upgraded to provide providing 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 is
  expected to substantially increase data transfer speeds over regular digital
  cellular phone networks. Available data rates should be 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.

The mobile workforce
  is growing and is increasingly reliant on email and the Internet.The
  mobile workforce in the U.S. is in excess of 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 while
  away from their desktops. 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.

Projected Growth in
  Palm and Windows CE Handheld Computer Sales. Based on our research and analysis,
  we forecasted 2001 Windows CE computer sales of nearly 4.3 million units compared
  to 1.8 million in 2000, and forecasted over 24 million units being sold in 2005,
  a compounded annual growth rate since 2000 of 68%. Additionally, based on our
  research and analysis, we forecasted sales of 9.7 million Palm OS handheld computers
  in 2001 , increasing from 7.9 million units in 2000 to over 24 million units
  in 2005, a compounded annual growth rate of 25% since 2000. Palm's decision
  this year to add expansion slots to its handheld computers, once these slots
  are upgraded to handle input/output functions, expands our potential market
  to over 80% of the total handheld market.

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 are also building wide area network carrier support
  for our Bluetooth wireless connection products. Carriers that offer our wired
  phone connection products today include Sprint, Nextel, U.S. West, and Verizon's
  online stores in the United States , Bell Mobility in Canada, and Sonera and
  Proximus in Europe. We expect many of these carriers to add our Bluetooth wireless
  connection products as they begin to sell Bluetooth-enabled mobile phones, and
  we expect to add additional carriers as customers during 2002.

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 products
  from us . Our goal is for customers to view the Socket brand as a single source
  for their connection needs instead of have 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, standards-based connection products that are " Mobility
  Friendly" , i.e. 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 have approximately
  45 distributors covering our principal markets in North America, Europe, Asia
  and the rest of the world. We have approximately 20 online resellers, which
  we supply mainly through our general distributors. Resellers today include Amazon.com,
  Mobile Planet and AOL.com. As the volume and popularity of handheld computers
  grows, we intend to continue to build our retail distribution presence at major
  retail electronic stores worldwide.

Provide OEM Product
  Development Support. To capture embedded connection business, we have built
  relationships with mobile device manufacturers and provide them with designs
  to integrate our products, particularly our Bluetooth products, into their own
  product designs. We also provide engineering services to our customers to assist
  them as needed to integrate our embedded products into their electronic devices.

Advanced Connection
  Technologies Overview - Bluetooth, Wireless LAN, and 2.5G

Our wireless connection
  products capitalize on several emerging technologies that are gaining widespread
  use:

- Bluetooth, which
    is a wireless standard for short-range data links. Bluetooth phones began
    shipping in Europe during the second half of 2001 and are expected to appear
    in the U.S. markets during 2002.
- Wireless LAN,
    which is a technology for wireless computer networking that is beginning widespread
    deployment.
- "2.5G" digital
    phone technologies that mobile phone carriers are deploying to increase data
    transfer speeds over mobile phone networks , which are expected to encourage
    growing use of mobile connection products.

Bluetooth Wireless Technologies.
  Bluetooth is the first global standard for short-range wireless communication
  for voice and data. Over 2,500 companies are members of the Bluetooth Special
  Interest Group formed in 1998 to develop standards for Bluetooth technology
  and encourage adoption of that technology. Bluetooth is a royalty-free, open
  industry specification designed to be low-cost, draw little power, and offer
  relatively high performance (up to 721 kilobits of data per second). Bluetooth
  operates within a radius of ten meters (30 feet), which is adequate for common
  applications such as cordless headsets, computer-to-phone connections , cable
  replacement and personal networking within a room. Devices expected to be Bluetooth-enabled
  through either plug-in cards or embedded modules include handheld, notebook
  and desktop computers, mobile phones, printers, local area network access points,
  digital cameras, digital TVs , bar code scanners, electronic measuring and control
  equipment and automobile PCs. We have developed evaluation kits for our CompactFlash
  Bluetooth Personal Network Plug-in Cards and for our Bluetooth modules, including
  a complete set of supporting software modules and applications that we make
  available to software developers and OEMs to help develop applications using
  our Bluetooth products.

Wireless LAN. Wireless
  LAN networks provide wireless connectivity within a fixed location such as a
  building or campus, or within specific high traffic locations ("hot spots"),
  such as a coffee shop, where Wireless LAN access is desirable. Wireless LAN
  uses radio waves to transmit and receive data between an electronic device such
  as a desktop or a mobile handheld computer and a network access point. The connection
  to the mobile device is accomplished through a plug-in card. Network access
  points can be in homes, offices, hotels, airports, gas stations, shopping malls,
  cars, boats, libraries, classrooms and dormitories - anywhere people are likely
  to use portable devices to access data or want to connect numerous computing
  or electronic devices without using cables or wires. Many companies, including
  Compaq Computer, Intel Corporation, and 3Com Corporation, are providing devices
  using the most common Wireless LAN standard (referred to as 802.11b). Microsoft
  is supporting Wireless LAN in the latest version of its Windows XP operating
  system.

2.5G Digital Phone
  Technologies . Major mobile phone network carriers are upgrading their networks
  to speed up the transfer of data. These efforts collectively are sometimes referred
  to as "2.5G" initiatives. While there are various different 2.5G technologies
  being deployed, they all promise data transmission speeds comparable to a desktop
  PC using a dial-up modem to connect to the Internet.

Current Issues.
  A number of issues surround the Bluetooth and Wireless LAN technologies: coexistence
  versus competition between Bluetooth and Wireless LAN technologies; radio frequency
  interference between Wireless LAN and Bluetooth products; high power requirements
  for battery operated mobile devices; electronic security concerns; and competing
  versions of Wireless LAN technology . We believe that Bluetooth and Wireless
  LAN technologies will coexist with each other and both be widely supported.
  Each serves different networking needs. Bluetooth is a movable network structure
  that allows Bluetooth-enabled electronic devices to connect to each other anywhere
  when they are in close proximity. Wireless LAN provides wireless connectivity
  to a fixed network structure - essentially replacing the cables on an Ethernet
  network. Mobile device users operating wirelessly will need to have connections
  to both technologies, as some devices (such as mobile phones and other small
  portable electronic devices) will generally have a Bluetooth connection, while
  local networks must be accessed through a Wireless LAN connection. The technical
  issues surrounding Wireless LAN and Bluetooth continue to be addressed by their
  respective standards bodies, and both technologies are expected to continue
  to evolve.

Strategic Relationships

We have built close working
  relationships with a number of companies that help us rapidly expand and market
  our product range as new standards, technologies and markets emerge .

Microsoft. Our close
  working relationship with Microsoft ensures that our products are supported
  by the Microsoft's Windows CE operating system. 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 in scheduling product innovations and implementing
  new features. For example, we worked with Microsoft and bSquare Corporation
  to develop driver software for the new Secure Digital (SD) format for inclusion
  in the next version of Microsoft's PocketPC operating system, and we are currently
  working with Microsoft to include support for forthcoming Microsoft software
  releases in our Bluetooth products.

Windows CE handheld
  computer manufacturers (Hewlett-Packard, Compaq, Casio, Toshiba, NEC, Samsung
  and Panasonic (2002). We work closely with the major Windows CE handheld
  computer manufacturers to ensure that our products work with the newest Pocket
  PCs and other Windows CE computers as they become available. We exchange information
  about future products so that their newest products and our connection solutions
  are designed to work well together from the outset. Hewlett-Packard has loaded
  our product drivers into their Pocket PCs. Casio and Toshiba have distribution
  agreements with us to allow them to distribute our products. In addition, our
  products are designed to work with Intermec and Symbol Technologies ' ruggedized
  Pocket PCs for vertical bar code scanning applications.

Palm OS handheld computer
  manufacturers. Palm, Inc.'s decision to add expansion slots to new and future
  models of its popular Palm handheld computers was of potential major importance
  to us, as it significantly increased the available market of handheld computers
  supporting expansion connections. However, the extent to which we will be able
  to create products for the Palm market will in part be dependent upon Palm's
  decision to support third party peripherals, and there are no assurances that
  Palm won't decide to develop and sell its own peripheral devices. Our first
  Palm products are phone cards that use the universal connector slot on Palm's
  new M500 series handheld computers. In addition, a major Palm operating system
  licensee, Handera, manufactures handheld computers with standard CompactFlash
  slots that work with our products. We have limited our support of Palm operating
  system manufacturers to those that have adopted standard rather than proprietary
  connection slots.

North American mobile
  phone network carriers and European handset manufacturers. Mobile phone
  network carriers are improving their network data transfer capabilities including
  faster transfer speeds and easier user access. Data transfer is a large growth
  opportunity for network carriers. Network carriers in North America already
  sell mobile phone handsets, and several of the network carriers are now adding
  our phone connection cards to their product lines. Carriers currently offering
  our phone cards include Sprint, Qwest, U.S. West in the United States , and Bell
  Mobility in Canada. Verizon is offering our products for sale online. AT&T Wireless
  has commenced deployment of its U.S. high-speed cellular network and is completing
  network testing of our phone card products. Nextel carries our cards that connect
  to the phones Nextel offers. In Europe and Asia, mobile phones are generally
  sold directly by handset manufacturers. In creating our phone cards, we have
  developed relationships with major handset manufacturers including Nokia, Ericsson
  and Siemens in Europe, Samsung and Denso in Asia, and Motorola in the U.S.

As Bluetooth-enabled phones
  become available in Europe, and with the launch or impending launch of 2.5G
  networks, several network carriers are testing our products and are indicating
  interest in directly reselling our plug-in Bluetooth and phone connection cards.
  One of our major objectives is to add key European carriers as distributors
  during 2002.

Electronic Products
  Distributors, Resellers and Retailers. We have established worldwide distribution
  networks in more than 30 countries serving North and South America, Europe and
  Asia. We have more than 20 online resellers with links to our website including
  customers such as Amazon.com and Mobile Planet who are actively selling our
  products, and we also have our own online store which offers our products at
  suggested manufacturer retail pricing. We do not have a major presence in retail
  stores. One of our major objectives is to add key retailers as distributors
  during 2002.

Bar Code Scanning Companies.We manufacture our bar code laser scanning products using a laser scanner
  engine and decoder from Symbol Technologies. We also purchase bar code scanning
  wands from Welch-Allyn that use older light-emitting diode (LED) bar code scanning
  technology for desktop scanning applications. Symbol's practice has been to
  enable companies such as ourselves, Intermec, and others to manufacture bar
  code scanning products without creating competition in the sectors within which
  these companies operate. For this reason, our bar code scanning products for
  Windows CE handheld computers do not currently face direct competition. In 1997,
  Symbol and we entered into a memorandum of understanding to pursue a three step
  program to bring bar code scanning to handheld computers: first to connect Symbol's
  laser scanning guns to handhelds through a wired data collection card; second
  to develop a plug-in integrated scanner card in a CompactFlash form factor that,
  when plugged into a handheld, turns the handheld into a one-handed portable
  bar code scanner; and third, to create wireless connections for our handheld
  bar code scanner products. We have completed the first two steps and are planning
  Bluetooth-enabled bar code scanner cards to complete the third step. Intermec,
  a major manufacturer of vertical market handheld scanning terminals, is our
  first customer for embedded Bluetooth scanning products , and is building our
  Bluetooth modules into their handhelds.

Bluetooth Embedded
  Systems Software Companies. We have developed cooperative relationships
  with key companies that provide software for designing Bluetooth applications ,
  including bSquare, Accelent, InHand Electronics and Intrinsyc. These companies
  have incorporated our Bluetooth connection solutions into their designs.

Printer Companies.
  O'Neil, a major manufacturer of mobile printers including bar code label printers,
  is our first major customer to offer mobile printers incorporating our Bluetooth
  modules. Their initial products are in production and first significant module
  sales commenced in the fourth quarter of 2001. Hewlett-Packard and Epson are
  also developing Bluetooth-enabled printers for the commercial desktop printing
  market, and we have demonstrated that handheld computers using our Bluetooth
  cards can print directly to these printers.

Wind River. Wind
  River is a leading supplier of operating systems software with for devices such
  as digital cameras. Wind River is upgrading its VxWorks operating system software
  to work with our Bluetooth cards.

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. In 1999 and 2001, we also
  applied for patents covering our proprietary technology relating to integrating
  memory chips and connection functions into a single combination product . On
  March 5, 2002, we were awarded U.S. 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 provided us with embedded design systems
  and know-how, allowing us to add embedded modules to our Bluetooth product family.
  Since that acquisition, Socket has been able to sustain three major development
  programs that are creating new and innovative products for the mobile handheld
  devices market: Bluetooth plug-in cards and modules with a complete Bluetooth
  software solution; combination memory and input/output cards; and smaller format
  Secure Digital products.

On March 29, 2002 we reduced
  our workforce by five persons to a total of 59 persons.

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 15, 2002, we had 29 persons in sales, marketing and technical
  support. United States distributor Ingram Micro accounted for 23% of our revenue
  in 2001, 26% of our revenue in 2000, and 24% of our revenue in 1999. We intend
  to moderately increase our sales and marketing effort during 2002 by adding
  personnel and increasing promotional activities, particularly in support of
  our distribution partners. However, competition for sales and marketing personnel
  is intense, and we may be unable to recruit qualified sales and marketing personnel
  as needed.

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 38%, 21% and 33% of our revenue for the years ended December 31,
  2001, 2000 and 1999, respectively. The lower percentage of export sales in 2000
  resulted from most of the revenue growth in 2000 occurring in the U.S. 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.

Manufacturing

We subcontract the manufacturing
  of substantially all of our products to independent third party contract manufacturers
  who are located in the U.S., 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 29, 2002, we had 12 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 manufactured by Hyundai Electronics 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 manufactured by Tamarack Corporation;
  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 :

- Completing development
    of our Bluetooth wireless connection products
- Expanding our family
    of products for bar code scanning and other data collection applications
- Developing combination
    memory and input/output cards
- Developing Secure Digital
    (SD) format connection products.

As of March 29, 2002, we
  had thirteen persons on our product development staff, and we hire engineering
  consultants to perform additional engineering services as required. Our staff
  includes six engineers who joined us in October 2000 as a result of our acquisition
  of 3rd Rail Engineering, an engineering services and product design company.
  We anticipate that we will continue to commit substantial resources to research
  and development in the future.

General and Administration,
  Personnel Retention and Recruitment

We have nine persons responsible
  for our financial and administrative activities including accounting and finance,
  personnel, reception, and administrative support. Our total employee headcount
  as of March 29, 2002 was 59 persons. Our employees are not represented by a
  union and we consider our employee relationships to be good. 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.

Competition

The overall market for
  communications products is increasingly competitive, and we expect competition
  in each of our market areas to intensify. We anticipate intense competition
  from a number of new and established computer, communications, and network equipment
  companies. Increased competition, direct and indirect, could materially adversely
  affect our revenues and our ability to achieve profitability. Substantially
  all of our present and potential competitors have greater financial, marketing,
  technical and other resources than we do, and may succeed in establishing technology
  standards or strategic alliances in the data communications market, obtain more
  rapid market acceptance for their products, or otherwise gain a competitive
  advantage.

Digital Phone Cards .
  We are not aware of any major vendor that currently offers products that directly
  compete 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. Users may also choose to view data on the
  viewing screen on a mobile phone instead of downloading data to a mobile computer,
  although phones cannot easily display Website content , long email messages or
  email attachments.

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

Ethernet Cards .
  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. Competitors
  also include Kingston, Ambicom, Hawking, and New Media.

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, and from ruggedized bar code scanning devices from Symbol Technologies.
  However, our laser scanning products are targeted to address a specific market
  segment, the white-collar occasional scanning market. We produce our bar code
  scanning products under technology licenses from Symbol Technologies, which,
  to date, has not licensed potential competitors to produce similar products.
  The continued availability of our licenses and the continued absence of other
  licensees is dependent upon future licensing decisions by Symbol Technologies.

Modem Cards . Our
  modem card products 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. We view our modem products as incremental business to
  fill out our product line with a full line of handheld connection products.
  We compete based on our brand name, distribution and customer support infrastructure,
  and software enhancements including power management capabilities to minimize
  the power drain on mobile devices. We do not expect to intensely compete based
  on price in this product area.

Wireless LAN Cards .
  Our CompactFlash Wireless LAN card faces competition in the market today principally
  from Symbol Technologies, who primarily sells its cards to end user customers
  for the Wireless LAN systems it installs. However, 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. The largest suppliers
  of PC Wireless LAN cards are Cisco, Intel, Linksys, Lucent, Proxim and Xircom.
  We do not expect these companies to enter the market with a CompactFlash Wireless
  LAN card until the market becomes large. As with our modem products, 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 also developing security software
  enhancements, which are important to providing secure network access to corporate
  networks, and these security enhancements will further differentiate our Wireless
  LAN driver software for Pocket PCs.

Bluetooth Products . 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 cell phone handset and notebook manufacturers, by traditional
  plug-in card manufacturers such as 3Com, Anycom and Xircom, by smaller companies
  such as AnyCom and by Asian suppliers such as Ambicom. Bluetooth technology
  is currently in a development stage with first commercial products only now
  emerging , including mobile phones, LAN access points, bar code scanners and
  printers. Our competitive strategy consists of the following:

- Reach the market early
    with an extensive range of integrated solutions.
- Maintain our focus
    on supplying Bluetooth connection products to handheld computers and small
    mobile devices where, we believe, our well developed low-power interface technology
    is a competitive advantage.
- Provide an easy-to-use
    experience for the user.
- Develop value-added
    Bluetooth connections such as adding removable memory to a Bluetooth connection
    plug-in card or offering turnkey engineering services for our Bluetooth modules.
- Seek endorsements from
    customers and technology companies. In March 2002, we acquired from Nokia
    Corporation its Bluetooth CompactFlash card technology and product line, and
    its endorsement of our Bluetooth CompactFlash card for use by Nokia customers.

Nevertheless, we cannot
  be certain whether a significant market for Bluetooth-based devices will develop
  or whether our products will prove to be competitive and achieve customer acceptance.



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 2001.



PART
  II

Item 5. Market for Common
  Equity and Related Stockholder Matters

Common Stock

Our common stock has traded
  under the symbol "SCKT" on the Nasdaq National Market system since July 10,
  2000, and previously on the Nasdaq OTC Bulletin Board, and also trades on the
  Pacific Exchange under the symbol "SOK".

The quarterly high and
  low sales prices of our common stock, as reported on Nasdaq through March 15,
  2002 and for the last two fiscal years are as shown below. Over-the-counter
  market quotations (prior to July 10, 2000) may reflect inter-dealer prices,
  without retail mark-up, mark-down or commission and may not represent actual
  transactions.

|                                                 | Common
        Stock
|---------------------------------------------------- | --------------------
|Quarter
        Ended                                | High                
|2000                                                
| March
        31, 2000                          | $
        51.38     
| June
        30, 2000                           | $
        24.63     
| September
        30, 2000                      | $
        17.75     
| December
        31, 2000                       | $
        15.75     
|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 (through March 15, 2002) | $
        2.25      

On March
  15, 2002, the closing sales price for our common stock as reported on the Nasdaq
  National Market was $2.25. We had approximately 300 stockholders of record as
  of March 15, 2002, and an additional 10,500 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.

Recent
  Sales of Unregistered Securities

On March 28,
  2002, we sold 381,760 shares of Common Stock at a price of $1.59 per share,
  resulting in gross proceeds of approximately $0.6 million. We estimate net proceeds
  after placement fees and legal expenses to be approximately $0.4 million. We
  also issued five-year warrants to acquire 118,344 shares of Common Stock at
  $1.59 per share. 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.

A total of
  four investors participated in this financing, including two institutions and
  two individuals. The two individuals are members of our Board of Directors,
  and invested an aggregate of $130,000 in this offering. All purchasers were
  accredited investors, within the meaning of Rule 501 under the Securities Act.
  The recipients of the securities represented their intention to acquire the
  securities for investment only and not with a view for sale in connection with
  any distribution thereof and appropriate legends were affixed to the securities
  issued in the transaction. We did not employ any underwriters or brokers in
  connection with this offering.

Item 6.
  Selected Financial Data



|                                                           | Year
      Ended December 31,
|---------------------------------------------------------- | -----------------------------
|(Amounts
      in Thousands except per share)              | 1997                         
|Revenue                                                    | $4,779                       
|Net loss                                                   | (3,555)                      
|Net loss
      applicable to common stockholders           | (3,600)                      
|Net loss
      per share applicable to common stockholders | (0.70)                       
|Weighted
      average shares outstanding                  | 5,149                        
|Total
      assets                                         | 1,770                        
|Capital
      lease obligations - long term portion        | 41                           
|Preferred
      stock                                      | --                           
|Total
      stockholders' equity (deficit)                 | (3,225)                      



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 "Risk Factors". 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, 2001. 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, Accounts Receivable Reserves, Inventories,
  Warranties, and Costs of Revenue, and 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 products . The net amount of deferred revenue and related cost of revenue
  are classified as deferred revenue on our balance sheet. We use inventory reports
  we receive directly 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 result in a balance sheet adjustment to our deferred revenue and do
  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. 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. Because our customers are generally
  long term recurring customers, our credit collections history is good .

Inventories,
  Warranties, and Costs of Revenue

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 and due in 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. The Company warrants its products against defects
  in design, materials and workmanship, generally from 90 days to lifetime depending
  on whether the product has been registered or not by the user. We estimate,
  based on historical returns, communications from our customers, and engineering
  estimates, the number of products that are likely to be returned and we estimate
  a warranty reserve to cover the cost of product replacement. These warranty
  estimates are charged to cost of sales. If actual warranty costs are significantly
  different from our estimates, we may need to revise our warranty accrual and
  the impact could be material to our operating results for a given period.

Goodwill
  and Other Intangible Assets

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 will no longer amortize 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. As of December
  31, 2001, in our judgment, there is no impairment in goodwill. Our judgments
  regarding the existence of impairment indicators are based on legal factors,
  market conditions and operational performance of our acquired businesses. Future
  events could cause us to conclude that impairment indicators exist and that
  goodwill 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. In March 2002, we acquired the CompactFlash Bluetooth
  card product line and technology from Nokia Corporation. We will estimate the
  useful lives of the intangible assets and begin amortizing them over that useful
  life, and in each future reporting period we will evaluate for possible impairment.

Revenue

We design,
  manufacture and sell connectivity plug-in card products to the handheld and
  notebook computing markets. Total revenue in 2001 was $12.3 million, an increase
  of 7% over 2000 revenue of $11.6 million. 2000 revenue increased 68% over 1999
  revenue of $6.9 million. Our revenues experienced rapid growth during the 2000
  fiscal year due to the introduction of our range of connection products for
  handheld computers based on the Microsoft Windows CE operating system. Our revenue
  growth rate moderated in the 2001 fiscal year 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 .

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 2001 was $3.4 million, compared to revenue of
  $3.4 million in 2000 and $1.7 million in 1999. In the third and fourth quarters
  of 2001 we introduced Bluetooth CompactFlash plug-in cards, Wireless LAN plug-in
  cards, and modem cards. Revenue growth of $0.5 million from sales of these new
  products in the fourth quarter of 2001 offset a decline of $0.4 million in revenue
  from the sale of Ethernet plug-in cards, which faced competition from lower
  priced Asian cards during 2001. Revenue from the sale of phone connection cards
  was flat during 2001 and 2000. Growth in network connection product revenue
  in 2000 compared to 1999 was attributable to $1.2 million in revenue from the
  introduction of phone connection cards in the second half of 1999 and to an
  increase of $0.4 million in sales of Ethernet products in 2000 compared to the
  previous year. 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. 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 2001 was $3.1 million compared to revenue of $2.2
  million in 2000 and $0.9 million in 1999. 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, and this solution is
  becoming more widely adopted by the value added reseller community for lightweight
  portable scanning.

Our peripheral
  connection card revenue in 2001 was $4.4 million compared to $4.4 million in
  2000 and $4.1 million in 1999. Peripheral connection cards are primarily sold
  to connect peripheral devices or other electronic equipment to notebook computers.
  Overall demand for this product in all years was flat.

Our embedded
  products and services revenue in 2001 was $1.5 million compared to $1.5 million
  in 2000 and $0.2 million in 1999. Our chip sales included in these totals, which
  we began selling in 2000, were $0.4 million in 2001 compared to $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. Engineering services
  revenue included in these totals were $0.8 million in 2001 compared to $0.4
  million in 2000 and $0.1 million in 1999. Almost all of the growth was attributable
  to customers of 3rd Rail Engineering, an engineering design-win services company
  that we acquired in the fourth quarter of 2000. Embedded products and services
  also included sale of developer kits of $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. 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.

Revenue
  outlook for 2002.

Factors that
  we expect will improve our revenue outlook for 2002 include:

- Based on our market
    research and analysis, we believe that up to 8 million Pocket PC and other
    Windows CE handheld computers could be sold in 2002, almost double the number
    of sales in 2001. We expect this growth will continue to expand the market
    for our network connection products.
- Sales of our wireless
    Bluetooth connection plug-in cards introduced in September 2001 are expected
    to grow significantly in 2002 as a result of the sale of Bluetooth-enabled
    mobile phones and other devices for the entire year in Europe and for the
    second half of the year in the U.S., along with faster data transfer speeds
    being introduced by network carriers which are expected to improve performance
    and reduce the cost of remote connections. In addition, our Bluetooth plug-in
    cards recently received the endorsement of Nokia Corporation, one of the leaders
    in the development of Bluetooth phones and technology. We expect our Bluetooth
    plug-in cards to be adopted for resale by an increasing number of network
    carriers which should assist in educating the public on the use of this technology
    and increase the volume of sales of both our Bluetooth plug-in cards and our
    wired phone connection cards for use with non-Bluetooth phones. Bluetooth
    creates a personal area network approximately ten meters around an electronic
    device, and is designed to let disparate electronic devices such as desktops,
    handhelds, mobile phones, printers, digital cameras, bar code scanners and
    network access points communicate with each other wirelessly within that personal
    area network. Over 2,500 companies are members of the Bluetooth Special Interest
    Group, which promotes widespread adoption of Bluetooth technology.
- Installation of Wireless
    LAN networks has been rapidly increasing. Our Wireless LAN cards were introduced
    in November 2001 and are expected to enable the use of Pocket PCs and other
    handheld computers on Wireless LAN networks. We are also developing enhanced
    security features for our Wireless LAN card to be completed during 2002, which
    will increase the number of Wireless LAN networks on which our Wireless LAN
    product may be used.
- We continue to increase
    our worldwide distribution channels and during 2001 we added an office in
    Europe and one in Asia to work closely with our distributors in those regions.
    We are well established in electronic retailing, including our own e-commerce
    website introduced during 2001 on which all of our products are sold. Pocket
    PCs were introduced into retail stores during the second half of 2001, and
    we anticipate that our connection products will be added by many retailers
    during 2002. Increased exposure to our products from larger numbers of quality
    distributors and from new retailers should increase customer awareness of
    our products and enhance our sales.
- Bar code scanning with
    portable lightweight handheld computers is gaining increased acceptance by
    resellers and customers for highly mobile occasional scanning applications
    that benefit from scanning with an intelligent computing device, including
    field sales and service, retail shelf management, manufacturing, financial,
    medical transactions, management of logistics operations, insurance and government,
    and we expect these trends to continue. We have added additional scanning
    products including a 2D scanner, and are working on other products to be introduced
    in 2002 that we anticipate will broaden the capabilities and uses of portable
    lightweight scanning.
- We are also developing
    a smaller format for our products, Secure Digital (SD) , for use with newer
    handheld computers that are expected to have an SD -format slot. Our first
    SD products are expected to be introduced in 2002, and we expect that they
    will maintain our leadership position in providing connection solutions for
    handheld computers.
- Our embedded products
    and services revenues are expected to grow significantly during 2002 as a
    result of increased design-wins for our interface chips in third party devices,
    new chips being introduced in 2002 including an interface chip that supports
    combination memory and connectivity applications and devices, and additional
    design-wins for third-party Bluetooth products expected to begin production
    during 2002 .

We anticipate
  that our peripheral connection products revenue will be flat or will moderately
  decline during 2002 due to the increasing use of USB connections in notebook
  computers.

Although we
  believe that the anticipated growth in sales of Pocket PC computing devices,
  our new Wireless plug-in connection products, our capabilities to embed Bluetooth
  modules in a number of electronic devices, and our expanding distribution channels
  position us for continued revenue growth, 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. As of December 31, 2001 , our cash balance was
  not sufficient to fund operations through fiscal 2002, and we anticipated a
  need to raise additional funding of one to three million dollars in 2002 to
  fund operations. Since December 31, 2001, we raised equity financing in an aggregate
  gross amount of $1.6 million. We anticipate a need to raise additional capital
  of one to two million dollars in 2003 to fund operations, and there are no assurances
  that additional capital will be available on acceptable terms, if at all. Any
  inability to obtain such funding could require us to significantly reduce or
  suspend operations, or sell additional securities on terms that are highly dilutive
  to investors, or could otherwise have a material adverse effect on our financial
  condition or operating results. See "--Liquidity and Capital Resources" and
  " --Risk Factors " for a discussion of our need for additional capital.

The foregoing
  discussion reflects our current expectations regarding our revenue outlook for
  2002 and includes forward-looking statements within the meaning of securities
  laws. Our actual results may not meet our current expectations for the various
  reasons discussed above and under "--Risk Factors" below.

Gross Profit

Gross profit
  for 2001 was 53% of revenue compared to gross profit of 55% of revenue in 2000,
  and 59% of revenue in 1999. 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 2001 and 2000 reflect higher volume
  discount pricing, higher fixed manufacturing costs as we staff for management
  of growth, the introduction of newer products that tend to have a higher initial
  cost and a lower initial gross margin until volumes increase, and larger inventory
  charges for write-downs and write- offs to cover higher surplus and obsolescence
  risks.

Gross Profit
  outlook for 2002. Our target margins for 2002 are 50%. As our sales mix
  shifts toward higher volume sales, our margins may continue to decline by a
  few percentage points. We also expect to achieve further cost reductions on
  our products from volume manufacturing efficiencies and engineering improvements
  and expect to use these cost reductions to support our margins and to maintain
  competitiveness with reduced customer pricing. Future unanticipated inventory
  write offs and writedowns and other factors could adversely impact our margin
  results.

Research
  and Development Expense

Research and
  development expense in 2001 was $3.7 million, an increase in of 35% over research
  and development expense in 2000 of $2.8 million. The increase was due primarily
  to an increase of $0.9 million in staffing expenses in the first three quarters
  resulting from the acquisition of 3rd Rail Engineering in October 2000 . Research
  and development expense in 2000 increased 125% over research and development
  expense of $1.2 million in 1999. The increase was due primarily to increases
  in engineering resources beginning with the fourth quarter of 2000 from our
  acquisition of 3rd Rail Engineering, Inc. in October 2000.

Prior to the
  addition of the 3rd Rail engineers, we augmented our engineering staff with
  outside engineering consultants. 33% of the increase in 2000 research and development
  expense over 1999 related to costs of additional personnel and increased usage
  of consulting engineers. 41% of the increase in 2000 was due to higher levels
  of outside services and to the cost of software components that we purchased.
  The balance of the increase related to higher occupancy and administrative support
  costs. The increase in research and development expense in the fourth quarter
  of 2000 was primarily due to the addition of 3rd Rail Engineering and to the
  costs of software components used in development that were acquired and expensed
  during the quarter. To date, we have not capitalized any software development
  costs.

The additional
  engineering resources have enabled us to under take and sustain three major
  engineering development programs. These programs are:

- wireless plug-in Bluetooth
    CompactFlash cards, embedded modules and Bluetooth software;
- combination CompactFlash
    memory and input/output cards with removable memory including development
    of a new interface chip; and
- preliminary work on
    a smaller Secure Digital form factor for all of our CompactFlash connection
    products.

Outlook
  for 2002 Research and Development Costs: We believe that we have the resources
  we need to maintain our research and development programs during 2002. Research
  and development expenses are expected to continue at levels similar to 2001.

Sales and
  Marketing Expense

Sales and
  marketing expense in 2001 was $5.1 million, an increase of 36% compared to sales
  and marketing expense in 2000 of $3.8 million. Sales and marketing expense in
  2000 was $3.8 million, an increase of 59% compared to sales and marketing expense
  in 1999 of $2.4 million. During 2000, we nearly doubled the number of sales
  and marketing personnel primarily in the fourth quarter of the year, allowing
  us to commit personnel to each product family, and we added a Vice President
  of Sales early in the year. 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 modest 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. 46% of
  the increase in 2000 expense related to higher personnel costs. 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.

Sales and
  Marketing expense outlook for 2002:Sales and marketing expense is expected
  to moderately increase in 2002 to support our growth, reflecting further expansion
  of our international sales and marketing presence in Europe and Asia. We also
  expect to continue to expand our participation at trade shows and to continue
  to moderately increase our sales, marketing and customer support staffs to support
  revenue growth and to respond to new product and market opportunities created
  by our new wireless Bluetooth and Wireless LAN products and our embedded products.

General
  and Administrative Expense

General and
  administrative expense in 2001 was approximately $2.1 million, an increase of
  30% compared to general and administrative expense in 2000 of $1.6 million.
  General and administrative expense in 2000 was 32% higher than general and administrative
  expense in 1999 of $1.2 million. Approximately half of the increase in 2001
  and 24% of the increase in 2000 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. 14% 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.

General
  and administrative expense outlook for 2002. We expect our general and administrative
  expense to grow moderately in 2002 due to higher expenses associated with growth
  including higher professional fees and increased insurance costs and higher
  occupancy costs resulting from renewal of our facilities lease at the end of
  December 2001.

Charges
  Related to Compensatory Stock Option Grants

Our charges
  related to compensatory stock option grants were 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.

Outlook
  for 2002: We did not issue any new grants to consultants during 2000 or
  2001 and charges relating to compensatory stock option grants during 2002 are
  not expected to be significant.

Amortization
  of Goodwill and Intangibles

On October
  5, 2000, the Company acquired 3rd Rail Engineering, an engineering services
  firm specializing in embedded systems engineering design and integration services
  for Windows CE and other operating system environments. The acquisition was
  valued at $11.3 million, of which approximately $1.1 million was attributed
  to intangible intellectual property and approximately $10.0 million was attributed
  to goodwill. During the fourth quarter of 2000 and all of 2001, this goodwill
  was being amortized ratably over 7 years. Other intangible assets are being
  amortized over their estimated useful lives of 3 to 8 years. Amortization charges
  of $1.7 million in 2001 and $0.4 million in 2000 represented full-year amortization
  of intangibles in 2001 and amortization of intangibles from the date of acquisition
  to the end of the year in 2000, respectively.

Outlook
  for 2002: 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". During 2002, goodwill will
  be analyzed for impairment of value and we do not anticipate that any amortization
  of goodwill will be charged to operations during 2002. The amortization of intangibles
  associated with the acquisition of 3rd Rail Engineering during 2002 is approximately
  $250,000. In addition, the Company acquired in the first quarter of 2002 the
  CompactFlash Bluetooth Card product line and technology from Nokia Corporation
  for approximately $2.6 million. Allocation of the purchase price has not yet
  been determined. To the extent the purchase price is allocated to intangibles,
  the amortization of intangibles during 2002 will increase.

Interest
  Income, Interest Expense, Net

Interest income
  in 2001 of approximately $0.2 million reflects interest earned on cash balances.
  Interest income in 2000 of approximately $0.4 million reflects interest on higher
  cash balances during the year from an equity financing of $4.7 million completed
  in December 1999, of which $4.3 million was on hand at December 31, 1999, from
  the exercise of $4.6 million of public warrants during 2000, from the exercise
  of $0.9 million of other options and warrants throughout the year, and from
  the issuance of $0.5 million in common stock upon the exercise of preemptive
  rights by the Company's Series D convertible preferred stockholders. Interest
  income in 1999 was not significant. Interest expense in all three years relates
  to interest on equipment lease financing obligations, and in 1999 to interest
  on outstanding bank line balances, which were not used during 2000.

Income
  Taxes

There were
  no provisions for Federal or state income taxes for the years ended December
  31, 2001, 2000, and 1999 as the Company incurred net operating losses in all
  periods.

Preferred
  Stock Dividend; Accretion of Preferred Stock

Preferred
  stock dividends reflect dividends accrued at a rate of 8% per annum on unconverted
  Series B convertible preferred stock issued during the first quarter of 1998,
  on Series C convertible preferred stock issued during the first and second quarters
  of 1998, and on Series D convertible preferred stock issued during the fourth
  quarter of 1998. 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,
  and no further dividends accrued in 2001 or will accrue in 2002.

Quarterly
  Results of Operations

The following
  table sets forth summary quarterly statements of operations data for each of
  the quarters in 2000 and 2001. 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.



|                                                             | Quarter
        Ended
|------------------------------------------------------------ | ---------------------
|(amounts
      in thousands)                                 | Mar 31,              
|                                                             | 2000                 
|Summary
      Quarterly Data:                               
|Revenue                                                      | $
        2,004      
|Cost of
      Revenue                                        | 833                  
|Gross
      Profit                                           | 1,171                
|Operating
      expenses:                                   
| 
      Research and development                         | 479                  
| 
      Sales and marketing                              | 737                  
| 
      General and administrative                       | 343                  
|Amortization of
        compensatory stock option grants     | 88                   
|Amortization
      of goodwill and intangibles               | --                   
|Total
      operation expense                                | 1,648                
|Interest
      income (expense), net                         | 63                   
|Net loss                                                     | (414)                
|Preferred
      stock dividends                              | (13)                 
|Net loss
      applicable to common stockholders             | $
        (427)      
|Net loss per share
        applicable to common stockholders | $
        (0.03)     

We have experienced significant
  quarterly fluctuations in operating results and anticipates such fluctuations
  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. 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.

Cash used in operating
  activities was $4.2 million compared to $1.7 million in 2000 and $1.4 million
  in 1999. The use of cash resulted from financing our net loss of $6.1 million
  in 2001, $3.7 million in 2000, and $0.8 million in 1999, adjustments for non
  cash items including depreciation, amortization, stock option charges, and amortization
  of goodwill and intangibles totaling $2.1 million in 2001, $2.5 million in 2000,
  and $0.2 million in 1999, and changes in working capital balances resulting
  in a use of cash for the years presented of $0.3 million in 2001, $0.5 million
  in 2000, and $0.7 million in 1999. Changes in working capital balances during
  2001 reflect changes between the end of the year and the beginning of the year,
  including lower accounts receivable balances from increased collections and
  the timing of shipments earlier in the fourth quarter, a moderate 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 and in 1999 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 $0.2 million in 2001, and $1.2 million in 2000 compared to $0.2
  million in 1999. 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. Investing activities reflect the cost of furniture,
  new computer equipment, purchased software for new employees, and tooling costs
  for new products totaling $0.2 million, $0.5 million, and $0.2 million for the
  years 2001, 2000 and 1999 respectively. The increased amounts in 2000 reflect
  more furniture and equipment needed to support higher growth in personnel and
  higher expenses associated with new tooling for new products.

Cash provided by financing
  activities was $1.9 million in 2001, $6.0 million in 2000, and $4.9 million
  in 1999. At the end of 2001, we drew $1.3 million in cash against our revolving
  credit line which we repaid in January 2002. We did not use our credit line
  at the end of 2000 or 1999. During 2001, $0.6 million in stock options and warrants
  were exercised. 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. In 1999, we issued common shares in an equity financing
  completed in December 1999 of $4.7 million and issued additional common shares
  through the exercise of warrants and options in the amount of $0.8 million.
  We also paid off our equipment lease lines of approximately $41,000, upon
  maturity, and paid off our revolving bank credit line balance of
  $0.5 million.

In March 2002 we completed
  a private placement of 381,760 shares of our common stock to increase our working
  capital and cash balances. The offering was sold at a price of $1.59 per share
  of common stock and resulted in gross proceeds of approximately $607,000. We
  estimate net proceeds after placement fees and legal expenses to be approximately
  $419,000. In connection with the offering, we issued to investors warrants to
  purchase an additional 95,439 shares of our common stock and issued to our placement
  agent a warrant to purchase 22,905 shares of our common stock, which could result
  in additional proceeds if exercised. Two members of our Board of Directors invested
  an aggregate of $130,000 in this offering.

In March 2002, we entered
  into an agreement with Nokia to acquire Nokia ' s CompactFlash Bluetooth Card
  technology and product line. The agreement further provides for an aggregate
  purchase price of Euro 3,000,000, ($2,630,000) which will be paid using funds
  from Socket's working capital. Of that amount, Euro 1,000,000 ($881,000) was
  paid at time of contract signing. The balance is payable in installments through
  September 2003. We are using forward purchase contracts for Euros in order to
  fix the future payments to Nokia in U.S. dollars. In addition to the Nokia agreements,
  we have binding agreements for an aggregate of $637 thousand in ordinary course
  inventory purchases over the next 12 months and aggregate annual minimum lease
  payments under all operating leases of approximately $0.6 in 2002 and approximately
  $0.5 million in 2003 through 2006.

Our cash balances as of
  December 31, 2001 were $4.8 million including cash of $1.3 million drawn against
  our bank line of credit. The bank line of credit will expire in June 2002 and
  is expected to be renewed. In March we issued common stock and warrants to increase
  our working capital balances by $0.9 million and we disbursed approximately
  the same amount in March 2002 as the first installment payment for the purchase
  of technology from Nokia. 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. Our independent auditors
  included an explanatory paragraph in their report expressing substantial doubt
  about our ability to continue as a going concern.

As of December 31, 2001,
  our cash balance was not sufficient to fund operations through fiscal 2002,
  and we anticipated a need to raise additional funding of one to three million
  dollars in 2002 to fund operations. Since December 31, 2001, we raised equity
  financing in an aggregate gross amount of $1.6 million. We anticipate a need
  to raise additional capital of one to two million dollars in 2003 to fund operations,
  and 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
  capital to meet our requirements, we may not be able to continue some or all
  of our current operations.

Our contractual obligations
  are outlined in the table below:

|                                                                     | Payments
        Due by Period
|-------------------------------------------------------------------- | ------------------------------
|Contractual
        Obligations                                      | Total                         
|Long Term
      Debt                                                 | $
        89,000              
|Purchase
      of Nokia Technology                                   | 2,630,000                     
|Operating
      Leases                                               | 2,547,000                     
|Unconditional
      Purchase Obligations with Contract Manufacturers | 637,000                       
|Total
      Contractual Cash Obligations                             | $
        5,903,000           



Recent Accounting Pronouncements

In June 2001, the Financial
  Accounting Standards Board issued Statements of Financial Accounting Standards
  No. 141, "Business Combinations", and No. 142, "Goodwill and Other
  Intangible Assets". Statement 141 requires that the purchase method of accounting
  be used for all business combinations initiated after June 30, 2001. Statement
  141 also includes guidance on the initial recognition and measurement of goodwill
  and other intangible assets arising from business combinations completed after
  June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangible
  assets with indefinite useful lives. Statement 142 requires that these assets
  be reviewed for impairment at least annually. Intangible assets with finite
  lives will continue to be amortized over their estimated useful lives. Additionally,
  Statement 142 requires that goodwill included in the carrying value of equity
  method investments no longer be amortized.

We will apply Statement
  142 beginning in the first quarter of 2002. Application of the non-amortization
  provisions of Statement 142 is expected to result in an increase in net income
  of $1.4 million in 2002. We will test goodwill for impairment using the two-step
  process prescribed in Statement 142. The first step is a screen for potential
  impairment, while the second step measures the amount of the impairment, if
  any. We expect to perform the first of the required impairment tests of goodwill
  as of January 1, 2002 in the first quarter of 2002. Any impairment charge resulting
  from these transitional impairment tests will be reflected as the cumulative
  effect of a change in accounting principle in the first quarter of 2002. We
  have not yet determined what the effect of these tests will be on the earnings
  and financial position of the Company.

In June 2001, the Financial
  Accounting Standards Board issued Statement of Financial Accounting Standards
  No. 143, (FAS 143), " Accounting for Asset Retirement Obligations, " which addresses
  financial accounting and reporting for obligations associated with the retirement
  of tangible long-lived assets and the associated asset retirement costs. It
  also applies to legal obligations associated with the retirement of long-lived
  assets that result from the acquisition, construction, development, and (or)
  the normal operation of a long-lived asset, except for certain obligations of
  lessees. We are required to adopt FAS 143 in fiscal 2002 and we do not believe
  that the adoption of FAS 143 will have a material effect on our financial position
  or results of operations.

In August 2001, the Financial
  Accounting Standards Board issued Statement of Financial Accounting Standards
  No. 144, (FAS 144), " Accounting for the Impairment or Disposal of Long-Lived
  Assets, " which addresses the financial accounting and reporting for the impairment
  of long-lived assets. This statement supersedes Statement of Financial Accounting
  Standards No. 121, " Accounting for the Impairment of Long-Lived Assets and for
  Long-Lived Assets to Be Disposed Of " and the accounting and reporting provisions
  for the disposal of a segment of a business of APB Opinion No. 30, " Reporting
  the Results of Operations -- Reporting the Effects of Disposal of a Segment
  of a Business, and Extraordinary, Unusual and Infrequently Occurring Events
  and Transactions. " We are required to adopt FAS 144 in fiscal 2002 and we have
  not yet determined what effect, if any, the adoption of FAS 144 will have on
  our financial position or results of operations.



Risk Factors

If we fail to
  raise additional capital to fund our operations, we may not be able to continue
  as a going concern .

Our independent auditors
  included an explanatory paragraph in their audit report included in this
  amended Annual Report on Form 10-K/A describing conditions that raise substantial
  doubt about our ability to continue as a going concern. We have incurred
  losses and negative cash flows from operations since our inception. As
  of December 31, 2001, we had working capital of $ 4.1 million,
  and an accumulated deficit of $ 28.9 million. For the year ended December
  31, 2001, we used cash for operating activities of $ 4.2 million
  and had a net loss of $ 6.1 million. In March 2002, we acquired from
  Nokia Corporation their CompactFlash Bluetooth Card technology and product line
  for approximately $2.6 million. We paid $881,000 at time of contract
  signing, and will pay the balance in installments through the
  end of 2003.

We expect our losses
  and negative cash flows to continue, which will require us to obtain
  one to three million dollars of additional financing during 2002
  through selling additional equity or debt securities or obtaining
  additional credit facilities from lenders. We cannot assure you that
  additional financing 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 financing, we will need to suspend some or all of our current
  operations.

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

We have incurred significant
  operating losses since our inception . We expect to incur quarterly operating
  losses through the first quarter of 2003 and possibly longer.
  For the fiscal year ended December 31, 2001, we incurred a net loss of $6.1
  million. To achieve profitability , we must accomplish numerous objectives,
  including developing successful new products, expanding our distribution channels,
  responding to competitive threats, improving our profit margins and keeping
  our operating expenses low. 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. If we cannot achieve profitability, we may not be able
  to remain in business or may be compelled to substantially curtail our operations.

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

Substantially all of our
  products are designed for use in 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 expectations.

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

Many of our products
  use new technology, 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 innovative products that are compatible with our products, we
  might not achieve our sales expectations.

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 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 , our base
  of potential customers would be reduced and we would not be able to meet
  our sales expectations .

We operate in a volatile
  market and 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 volatile. Our future financial performance
  is dependent on a number of unpredictable factors, including:

- the lifespan for our
    products is unpredictable because new technologies develop and mature rapidly;
- consolidation among
    our competitors is resulting in companies with greater financial, marketing,
    and technical resources;
- we periodically face
    intense price competition particularly when our competitors have excess inventories;
    and
- new devices, such as
    new handheld computers, may emerge that have connectivity functions built-in,
    making our products obsolete.

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 impacted .

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

The development of
  new products 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.
  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 will be unable to introduce
  new products and services into the market on a timely basis or compete successfully.
  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 will be difficult to forecast demand as we introduce and support
  more products, and as competition in the market for our products intensifies.

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. In accordance with this strategy, we have entered into
  alliances or relationships with Cambridge Silicon Radio, HandHeld Products,
  Hewlett-Packard, Hitachi, Intermec, Microsoft, Nokia Corporation, Palm, Sprint
  PCS, Symbol Technologies, and Toshiba Corporation. 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 products to work
  with 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.

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 23% of our worldwide revenue in fiscal 2001.
  We expect that a significant portion our revenue will continue to depend
  on sales to Ingram Micro. We do not have long-term commitments from this
  distributor to carry our products, and they could choose to stop selling some
  or all our products at any time. If we lose our relationship with this distributor,
  we could experience disruption and delays in marketing our products.

We rely on distributors,
  resellers, 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, 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 distributors
  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 of our major
  distributors or original equipment manufacturers could result in excess inventories
  and adversely affect our operating results.

Our agreements with
  distributors, resellers, and original equipment manufacturers are generally
  nonexclusive and may be terminated on short notice by them without cause. Our
  distributors, resellers, 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 large 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 distributors to return a portion of our inventory to us for full credit
  against other purchases. 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.

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 plug-in products are established by standards committees.
  Separate committees establish standards for our PC Card products, our CompactFlash
  card products, and our Secure Digital plug-in card products. These standards
  evolve and change over time. Our plug-in products must comply with the industry
  standards that apply to the connection slots that they plug into. We must
  continue to identify and ensure compliance with evolving industry standards
  to 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.

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 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 distributor's
    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.

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

A number of our officers,
  senior managers and product development engineers have been employed for seven
  to ten years. The officers with this longevity of service include our President,
  Chief Financial Officer, Chief Technical Officer, and Senior Vice President
  for Business Development/General Manager Embedded and Industrial Systems Unit.
  This experience is invaluable in understanding the markets we serve, our history,
  our products and the key relationships important to our success. Our future
  success will depend upon the continued service of key officers, senior managers,
  engineers and other personnel. Competition for senior executives and
  skilled technical staff is intense and there can be no assurance that we
  will be able to retain our existing senior personnel. The loss of key
  senior employees 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 we connect to. 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 receivables
  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 our expectations.
  However, many of our customer may be thinly capitalized and may be prone
  to failure in adverse market conditions. To the extent that a large customer
  fails or is unable to pay us , we are exposed to credit risk to the extent
  of the amounts due to us. Although our collection history has been good,
  from time to time a customer may run into financial difficulty resulting in
  bankruptcy or otherwise creating an inability to pay us what is due .

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 engines, 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.

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 38% of our
  revenue in 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.

Should our common
  stock trade below $1 for a period of time, our common stock may be delisted
  from the Nasdaq stock market, which would have a materially adverse effect on
  the liquidity and price of our common stock.

Our common stock traded
  as low as $1.02 during 2001. Our Nasdaq National Market listing is 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 stock fails to trade at above $1.00 per share. If our common stock is
  delisted from the Nasdaq National Market, we could trade on the Nasdaq SmallCap
  Market, but should we fail to trade above $1.00 per share for the grace periods
  allowed by Nasdaq, we could be delisted from Nasdaq and trade on the over-the-counter
  market, where our stockholders' ability to purchase and sell our common stock
  could be less orderly and efficient. Stockholders could be forced to pay higher
  margins to trade our stock. 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.

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 stock could also
  decline if one or more of our significant stockholders decided for any reason
  to sell substantial amounts of our stock in the public market.

As of March 15, 2002,
  we had 23,637,635 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 15, 2002,
  we also had 4,510,223 shares subject to outstanding options under our stock
  option plan and 1,315,972 shares were available for future issuance under these
  plans. We have registered the shares of common stock subject to outstanding
  options and reserved for issuance under our stock option plan. Accordingly,
  shares underlying vested options will be eligible for resale in the public market
  as soon as the options are exercised.

As of March 15, 2002,
  we also had warrants outstanding to purchase a total of 923,029 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, 2001 through March 15, 2002, our stock price fluctuated between
  a high of $7.25 and a low of $1.02. 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.



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, 2001, a decline of 1% in interest rates
  would reduce our quarterly interest income by approximately $8,700.

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 June 30, 2001, September 30, 2001 and December 31, 2001, 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. Based on a sensitivity analysis of our net assets at the beginning,
  during and at the end of the quarter ended December 31, 2001, an adverse change
  of 10% in exchange rates would result in an increase in our net loss for the
  quarter of approximately $18,000. 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.



Item 8. Financial Statements



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,
  2001 and 2000, and the related consolidated statements of operations, stockholders'
  equity and cash flows for each of the three years in the period ended December
  31, 2001. 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, 2001 and
  2000 and the consolidated results of its operations and its cash flows for each
  of the three years in the period ended December 31, 2001, in conformity with
  accounting principles generally accepted in the United States.

The accompanying financial
  statements have been prepared assuming that Socket Communications, Inc. will
  continue as a going concern. As discussed in Note 1, the Company has incurred
  recurring operating losses since inception and has an accumulated deficit and
  the Company's current cash balances are not sufficient to fund its planned operating
  activities through fiscal 2002. These matters raise substantial doubt about
  the Company's ability to continue as a going concern. The financial statements
  do not include any adjustments that might result from the outcome of this uncertainty.

Ernst &
  Young LLP

San Jose, California 
  February 12, 2002





> 

---





|SOCKET
        COMMUNICATIONS, INC. 
        CONSOLIDATED BALANCE SHEETS                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                               
|                                                                                                                                                                                               
|ASSETS                                                                                                                                                                                             
|Current assets:                                                                                                                                                                                    
|Cash
        and cash equivalents                                                                                                                                                                  
|Accounts
        receivable, net of allowance for doubtful accounts of $83,606 
          at December 31, 2001 and $46,365 at December 31, 2000                                                    
|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                                                                                                                                           
|Goodwill
      and other intangibles, net of amortization of $2,104,650 at 
        December 31, 2001 and $420,930 at December 31, 2000                                                            
|Other
        assets                                                                                                                                                                               
|Total
        assets                                                                                                                                                                               
|                                                                                                                                                                                               
|LIABILITIES
        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                                                                                                                              
|Total
        current liabilities                                                                                                                                                                  
|                                                                                                                                                                                               
|Long
      term portion of capital leases and equipment financing notes                                                                                                                            
|Commitments and contingencies                                                                                                                                                                      
|Stockholders' equity:                                                                                                                                                                              
|Common
        stock, $0.001 par value: Authorized shares - 100,000,000
          Issued and outstanding shares - 23,604,501 at December 31, 2001
          and 22,746,136 at December 31, 2000
|Additional
        paid-in capital                                                                                                                                                                 
|Accumulated
        deficit                                                                                                                                                                        
|Total
        stockholders' equity                                                                                                                                                                 
|Total
        liabilities and stockholders' equity                                                                                                                                                 



See accompanying
  notes.








---



|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 goodwill
        and intangibles                                                                           
|Total
        operating expenses                                                                                           
|Operating loss                                                                                                             
|Interest income                                                                                                            
|Interest expense                                                                                                           
|Net loss                                                                                                                   
|Preferred stock dividends                                                                                                  
|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, $312,508 and $59,566 in 2001, 2000 and 1999, respectively.

---

|SOCKET COMMUNICATIONS, INC.
        CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
|----------------------------------------------------------------------------------
|                                                                                  
|                                                                                  
|Balance at December 31, 1998                                                      
|Issuance of Common Stock and Warrants                                             
|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        
|Exercise of Warrants                                                              
|Dividends Paid/Payable in Common Stock                                            
|Exercise of Common Stock Options                                                  
|Charge for Compensatory Stock Options                                             
|Net Loss and Comprehensive Net Loss                                               
|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                                                      



See accompanying
  notes.

---

|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                                          
|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                                                             
|Acquisition of 3rd Rail
        Engineering, net of acquired cash                
|Purchase of equipment                                                            
|Net
        cash used in investing activities                                    
|Financing activities                                                             
|Payments on capital leases
        and equipment financing notes                 
|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                      
|Warrants exercised                                                               
|Net
        cash provided by financing activities                                
|Net increase 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                                                           
|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.



NOTE 1 - Summary of Significant
  Accounting Policies

Organization and Business

Socket 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. We 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.

Basis of Presentation

The financial statements have been
  prepared on a going concern basis. The Company has incurred losses and negative
  cash flows from operations since its inception. As of December 31, 2001, the
  Company had working capital of $4,075,403, and an accumulated deficit of $28,926,957.
  For the year ended December 31, 2001 the Company used cash for operating activities
  of $4,219,239 and had a net loss of $6,063,239. In addition, at December 31,
  2001, the Company was in default under a financial covenant of its bank line
  of credit, for which a waiver had been received from the bank to reduce the
  tangible net worth requirement from $5,000,000 to $4,000,000 through June 2002.
  The bank line of credit borrowings of $1,317,000 were repaid in January 2002.
  The Company's ability to meet obligations in the ordinary course of business
  is dependent on its ability to establish profitable operations and raise additional
  financing. Management believes it will be able to secure additional sources
  of financing in 2002 through the issuance of additional equity securities, through
  renewal of the Company's bank line and through increased borrowings on the line
  as the levels of accounts receivable permit, and through development funding
  from development partners. Management also intends to delay or reduce expenditures
  in the event additional financial resources are not available on terms acceptable
  to the Company. The Report of Ernst & Young LLP, Independent Auditors on the
  Company's financial statements for the year ended December 31, 2001 contains
  an explanatory paragraph regarding the insufficiency of the Company's current
  cash balances to fund planned operating activities through fiscal 2002 and indicated
  substantial doubt about the Company's ability to continue as a going concern.
  There can be no assurances that additional financing will be available on acceptable
  terms, if at all, and such terms may be dilutive to existing stockholders. The
  Company's inability to secure the necessary financing would have a material
  adverse affect on the Company's financial condition and results of operations.
  The financial statements do not include any adjustments to reflect the possible
  future effects on the recoverability and classification of assets or the amounts
  and classification of assets and liabilities that may result from the outcome
  of this uncertainty.

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.

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 cash flow to conform to
  the current year presentation. Amounts that were reclassified were not material.

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, 2001 and 2000. All
  of the Company's cash and cash equivalents consisted of monies held in demand
  deposits and money market funds.

Accounts Receivable

The following describes activity
  in the accounts receivable allowance for doubtful accounts for the years ended
  December 31, 2001, 2000, and 1999:

|Description                                                | Balance
        at Beginning of Period | Charged
        to Costs and Expenses | Amounts
        Written Off | Balance
        at End of Period
|---------------------------------------------------------- | -------------------------------------- | ------------------------------------- | --------------------------- | --------------------------------
|Accounts Receivable
      Allowance for Doubtful Accounts: |                                        |                                       |                             |                                 
|2001                                                       | $
        46,365                       | $
        57,113                      | $
        19,872            | $
        83,606                
|2000                                                       | $
        67,417                       | $
        81,770                      | $
        102,822           | $
        46,365                
|1999                                                       | $
        42,265                       | $
        25,582                      | $
        430               | $
        67,417                

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 (estimated
  net realizable value). The valuation of inventories at the lower of cost or
  market requires the use of estimates regarding the amounts of current inventory
  that will be sold. These estimates are dependent on the Company's assessment
  of current and expected orders from its customers, including consideration that
  orders are subject to cancellation with limited advance notice prior to shipment.

|                                 | December 31,
|-------------------------------- | ------------
|                                 | 2001        
|Raw materials and sub-assemblies | $ 1,632,716 
|Finished goods                   | 162,213     
|Total inventory                  | $ 1,794,929 

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 which range from one to
  five years. Assets under capital leases are amortized over the shorter of the
  asset life or the remaining lease term.

Goodwill and Other Intangible
  Assets

Goodwill is amortized on
  a straight-line basis over the estimated useful life, generally 7 years. The
  carrying values of long-term assets and intangibles are reviewed if facts and
  circumstances suggest that they may be impaired. If this review indicates that
  carrying values of long-term assets, other intangibles, and associated goodwill
  will not be recoverable based on projected undiscounted future cash flows, carrying
  values are reduced to estimated fair values by first reducing goodwill and second
  by reducing long-term assets and other intangibles. Amortization of goodwill
  for the years ended 2001 and 2000 was $1,432,976 and $358,244, respectively.
  Amortization of other intangible assets for the years ended 2001 and 2000 was
  $250,744 and $62,686, respectively

In July 2001, the Financial
  Accounting Standards Board issued Statement of Financial Accounting Standards
  (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
  Intangible Assets." These standards become effective for fiscal years beginning
  after December 15, 2001. Beginning in the first quarter of 2002, goodwill will
  no longer be amortized but will be subject to annual impairment tests. All other
  intangible assets will continue to be amortized over their estimated useful
  lives. Based on acquisitions completed as of June 30, 2001, application of the
  non-amortization provisions of these rules is expected to result in an increase
  in net income of approximately $1,433,000 per year as compared to fiscal 2001.

The new rules also require
  business combinations after June 30, 2001 to be accounted for using the purchase
  method of accounting, and goodwill acquired after June 30, 2001 will not be
  amortized. The amount of unamortized goodwill at December 31, 2001 was $8,239,617.
  During fiscal 2002, the Company will test goodwill at each reporting period
  for impairment under the new rules.

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
  invests its cash in cash demand deposits in banks, and invests its cash equivalents
  in money market funds. 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. Accounts
  receivables are derived primarily from 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.

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 delivered 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.

Warranty

The Company warrants its
  products against defects in design, materials and workmanship generally from
  90 days to lifetime depending on whether the product has been registered or
  not by the user. We estimate, based on historical returns, communications from
  our customers, and engineering estimates the number of products that are likely
  to be returned and we estimate a warranty reserve to cover the cost of product
  replacement. The provision for estimated future costs relating to warranty expense
  is recorded when revenue is recorded. The Company has not experienced significant
  warranty claims to date.

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 Expense

The cost of advertising
  is expensed as incurred. The Company incurred $534,213, $550,196, $437,520,
  in advertising costs during 2001, 2000, and 1999 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.

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,
|------------------------------------------------------------------------------------------------------------------------- | ------------------------
|                                                                                                                          | 2001                    
|Numerator:                                                                                                                |                         
|Net
      Loss                                                                                                            | $ (6,063,239)           
|Preferred stock dividends                                                                                                 | --                      
|Net loss applicable to common stockholders                                                                                | $ (6,063,239)           
|                                                                                                                         
|Denominator:                                                                                                              |                         
|Weighted
      average common shares outstanding 
           used in computing basic and diluted net loss
      per share | 23,436,239              
|Basic and diluted net loss per
      share applicable to common stockholders                                              | $ (0.26)                

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, convertible preferred stock or convertible notes have been included
  in the net loss per share calculation. Options and warrants to purchase 5,500,270,
  4,914,083, and 8,468,145, shares of common stock in 2001, 2000, and 1999, respectively,
  have been omitted from the loss per share calculation as their effect is antidilutive.

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 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."

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, 2001, 2000 and 1999 are as follows:





|                         | Years Ended December 31,
|------------------------ | ------------------------
|Revenues: (in thousands) | 2001                    
|United States            | $ 7,688                 
|Europe                   | 2,579                   
|Asia and rest of world   | 2,063                   
|                     | $ 12,330                

Export revenues are attributable
  to countries based on the location of the customers. The Company does not hold
  long lived assets in foreign locations.

Major Customers

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

|             | Years Ended December 31,
|------------ | ------------------------
|             | 2001                    
|Ingram Micro | 23%                     



NOTE 2
  - Bank Financing Arrangements

In October
  1999, the Company entered into a credit agreement ("Credit Agreement") with
  a bank. The related agreement was amended in March 2001 and expired in February
  2002. In March 2002 the Company amended its Credit Agreement with its bank,
  which will now expire on June 15, 2002 (See Note 12). The credit facility under
  the Credit Agreement allows the Company to borrow up to $4,000,000 based on
  the level of qualified domestic and international receivables ($2,500,000 and
  $1,500,000, respectively), at the lenders index rate which is based on prime,
  plus 0.75% and 0.5%, respectively, on domestic and international receivables.
  The rates in effect at December 31, 2001 were 5.5% and 5.25% on the domestic
  and international lines, respectively. At December 31, 2001 outstanding amounts
  on the lines were $779,000 and $538,000, respectively, which were the approximate
  amounts available on the lines. There were no outstanding borrowings on the
  lines at December 31, 2000. The Credit Agreement contains covenants that require
  the Company to maintain certain financial ratios including the Company's tangible
  net worth must exceed $5,000,000. As of December 31, 2001 the Company was not
  in compliance with the tangible net worth covenant and had obtained a waiver
  from the bank to reduce the requirement to $4,000,000. There are limitations
  on the Company's ability to pay dividends and such dividends must be payable
  in common stock under the terms of the credit agreement.



NOTE 3
  - Acquisition of 3rd Rail Engineering, Inc.

On October
  5, 2000, the Company acquired 3rd Rail Engineering, Inc., an engineering services
  and product design company, for $11,319,124, resulting in 3rd Rail becoming
  a wholly owned subsidiary of Socket. The Company issued 796,282 shares of its
  Common Stock, valued at the closing market price of $12.75 on October 5, 2000,
  and paid cash in the amount of $1,003,345 in exchange for all of the outstanding
  shares of 3rd Rail common stock. The transaction expenses were approximately
  $163,000. The acquisition was accounted for under the purchase method of accounting.

The Company
  is primarily responsible for estimating the fair value of the acquired tangible
  and intangible assets in all business combinations accounted for under the purchase
  method. Significant assumptions related to the determination of fair value of
  these assets is described below.

Valuation
  Methodology

In accordance
  with the provisions of APB Opinion 16, all identifiable assets, including identifiable
  intangible assets, were assigned a portion of the cost of the acquired enterprise
  (purchase price) on the basis of their respective fair values.

Valuation
  of acquired intangible assets. Intangible assets were identified through
  (i) analysis of the acquisition agreement, (ii) consideration of the Company's
  intentions for future use of the acquired assets, and (iii) analysis of data
  available concerning 3rd Rail's products, technologies, markets, historical
  financial performance, estimates of future performance and the assumptions underlying
  those estimates. The economic and competitive environment in which the Company
  and 3rd Rail operate was also considered in the valuation analysis.

Developed
  technologies consisted principally of project management and other software
  tools that would be used by the Company's operations and consisted of:

- Flywheel - project
    management tool that includes a component/parts database, time card tracking,
    project management tracking, and management reports
- DMON - software package
    originally developed by Hitachi and for which 3rd Rail was assigned the exclusive
    rights. This software is used in the development of embedded systems to reduce
    development time.
- Schematic library/library
    of previous designs - various schematics and previous designs which can be
    used in future development.

To determine
  the value of the developed technologies the cost method was used, as the Company
  does not intend on selling any of this technology but rather using it in-house.
  All estimates of time to develop were based upon discussions with management
  at 3rd Rail and were based upon the actual time incurred historically.

To determine
  the value of assembled workforces, the Company considered, among other factors,
  the costs to replace existing employees including search costs, interview costs
  and training costs.

Goodwill
  is determined based on the residual difference between the amount paid and the
  values assigned to identified tangible and intangible assets. If the values
  assigned to identified tangible and intangible assets exceed the amounts paid,
  including the effect of deferred taxes, the values assigned to long-term assets
  were reduced proportionately. Goodwill was amortized over an estimated life
  of seven years during 2001 and 2000. Beginning in the first quarter of 2002,
  goodwill will no longer be amortized but will be subject to annual impairment
  tests under the new rules.

The following
  is a summary of the purchase price allocation:



|                                               | Amount               | Estimated
        Useful Life
|---------------------------------------------- | -------------------- | -----------------------------
|Tangible assets less
      liabilities assumed | $
        197,338    | n/a                          
|Developed technology                           | 835,125              | 6.7
        years            
|Assembled workforce                            | 255,824              | 3.0
        years            
|Goodwill                                       | 10,030,837           | 7.0
        years            
|Total
      purchase price                     | $
        11,319,124 |                              



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

|                                           | Est Useful
      Life (Yrs) | Gross
        Assets | Accumulated
        Amortization | Net              
|------------------------------------------ | --------------------------- | -------------------- | -------------------------------- | -----------------
|Flywheel
      Project management tools    | 8.5                         | $
        570,750    | $
        (83,932)               | $
        486,818
|Development
      software                 | 3.0                         | 111,375              | (46,404)                         | 64,971           
|Schematic
      Library                    | 2.5                         | 153,000              | (76,500)                         | 76,500           
|Subtotal
        developed technology      |                             | 835,125              | (206,836)                        | 628,289          
|Assembled
      workforce                  | 3.0                         | 255,824              | (106,595)                        | 149,229          
|Goodwill                                   | 7.0                         | 10,030,837           | (1,791,219)                      | 8,239,618        
|Total
        identified intangible assets |                             | $11,121,786          | $(2,104,650)                     | $9,017,136       

Amortization of developed
  technology was $165,468 in 2001 and $41,368 in 2000. Amortization of goodwill
  (including assembled work force) was $1,518,252 in 2001 and $379,562 in 2000.

Identified intangible assets
  as of December 31, 2000 consisted of the following:

|                                           | Est Useful
      Life (Yrs) | Gross
        Assets | Accumulated
        Amortization | Net              
|------------------------------------------ | --------------------------- | -------------------- | -------------------------------- | -----------------
|Flywheel
      Project management tools    | 8.5                         | $
        570,750    | $
        (16,787)               | $
        553,963
|Development
      software                 | 3.0                         | 111,375              | (9,281)                          | 102,094          
|Schematic
      Library                    | 2.5                         | 153,000              | (15,300)                         | 137,700          
|Subtotal
        developed technology      |                             | 835,125              | (41,368)                         | 793,757          
|Assembled
      workforce                  | 3.0                         | 255,824              | (21,318)                         | 234,506          
|Goodwill                                   | 7.0                         | 10,030,837           | (358,244)                        | 9,672,593        
|Total
        identified intangible assets |                             | $11,121,786          | $(420,930)                       | $10,700,856      

Based on identified intangible
  assets recorded at December 31, 2001, and assuming no subsequent impairment
  of the underlying assets, the annual amortization expense is expected to be
  as follows:

|2002:                      | $165,472        
|-------------------------- | ----------------
|2003:                      | $110,291        
|2004
        through 2006: | $
        67,147

As required by SFAS 142,
  the results for the years ended December 31, 2001, 2000, and 1999 have not been
  restated. The following table discloses the effect on net loss and basic and
  diluted net loss per share as if we accounted for goodwill under SFAS 142 for
  all periods presented:

|                                                                             | Years
        Ended December 31,
|---------------------------------------------------------------------------- | --------------------------------
|                                                                             | 2001                            
|Reported net loss                                                            | $ (6,063,239)                   
|Goodwill and workforce
        amortization                                  | 1,518,252                       
|Adjusted
        net loss                                                    | $ (4,544,987)                   
|Preferred
      stock dividends                                              | --                              
|Adjusted
        net loss applicable to common stockholders                  | $
        (4,544,987)           
|                                                                            
|Reported
      basic and diluted net loss per share                          | $
        (0.26)                
|Goodwill
      and workforce amortization per share                          | 0.07                            
|Adjusted
        basic and diluted net loss per share                        | (0.19)                          
|Preferred
      stock dividends per share                                    | --                              
|Adjusted
        net loss applicable tocommon
        stockholders per share | $ (0.19)                        



NOTE 4 - Capital
  Lease Obligations and Equipment Financings

The Company leases certain
  of its equipment under capital leases. The leases were collateralized by the
  underlying assets. At December 31, 2001 property and equipment with a cost of
  $99,739 were subject to such financing arrangements. Related accumulated amortization
  at December 31, 2001 amounted to $23,458. Future minimum payments under capital
  lease and equipment financing arrangements as of December 31, 2001 are as follows:

|2002                                        | $
        37,644
|------------------------------------------- | ----------------
|2003                                        | 37,644          
|2004                                        | 13,359          
|Total
      minimum payments                | 88,647          
|Less amount
      representing interest     | (17,801)        
|Present
      value of net minimum payments | 70,846          
|Less current
      portion                  | (26,409)        
|Long-term
      portion                     | $
        44,437



NOTE 5 - Commitments

The Company's headquarters
  are operated under a five-year noncancelable operating lease which expires in
  December 2006. The Company also leases facilities through its subsidiary which
  expires in June 2003. Future minimum lease payments under all operating leases
  are:

|2002  | $
        574,103  
|----- | -------------------
|2003  | 509,765            
|2004  | 468,742            
|2005  | 487,492            
|2006  | 506,991            
|Total | $
        2,547,093

Rental expense under all
  operating leases was $284,277, $226,959, $195,905, for each of the years ended
  December 31, 2001, 2000, and 1999, respectively.



NOTE 6 - 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.

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, 1998        | 112,096                  | 71,412                                  
|Canceled                                  | 2,806                    | (2,806)                                 
|Balance
      at December 31, 1999        | 114,902                  | 68,606                                  
|Exercised                                 | --                       | (65,460)                                
|Balance
      at December 31, 2000 & 2001 | 114,902                  | 3,146                                   



As of December
  31, 2001, 2000, and 1999, options to purchase 3,146, 3,146, and 68,606 shares
  were exercisable at a weighted average exercise price of $0.64, $0.64, and $0.63,
  respectively. The exercise price of the options at December 31, 2001 ranged
  from $0.59 to $0.67. The weighted average remaining contractual life for options
  outstanding under the 1993 Plan at December 31, 2001 is approximately 2.25 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, 1998    | 105,190                  | 1,629,810                               
|Increase
        in shares authorized | 1,200,000                | --                                      
|Granted                               | (335,000)                | 335,000                                 
|Canceled                              | 50,689                   | (50,689)                                
|Exercised                             | --                       | (34,205)                                
|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                               



As of December
  31, 2001, 2000 and 1999, options to purchase 906,688, 827,330, and 1,035,431
  shares were exercisable at a weighted average exercise price of $2.57, $1.00,
  and $0.60, respectively. The outstanding and exercisable options at December
  31, 2001 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            | 371,274                               | 6.92                                           
|1.06
        - 2.28              | 1,053,512                             | 9.75                                           
|3.38                             | 1,730,326                             | 9.17                                           
|7.75                             | 8,000                                 | 8.00                                           
|14.94                            | 18,000                                | 8.17                                           
|$
        0.44 - 14.94           | 3,181,112                             | 9.08                                           

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
|Authorized                            | 1,000,000                          
|Granted                               | (440,000)                          
|Exercised                             | --                                 
|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                              

As of December 31, 2001,
  2000, and 1999, 534,153, 160,760 and 40,626 options were exercisable at a weighted
  average exercise price of $2.40, $1.78, and $0.56, respectively. The outstanding
  and exercisable options at December 31, 2001 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                           | 328,509                               | 7.50                                           
|2.28                             | 50,000                                | 9.58                                           
|3.38                             | 1,014,474                             | 9.08                                           
|$
        0.56 - 3.38            | 1,392,983                             | 8.67                                           

The Company did not grant
  any new options to consultants in either 2001 or 2000. The Company in prior
  years granted options to consultants in exchange for consulting services to
  be rendered and generally vested over a period of four years. The Company recorded
  a charge to operations related to these compensatory stock option grants of
  $33,604, $143,904, and $59,566, for the years ended December 31, 2001, 2000,
  and 1999. The Company as of October 2001 had no remaining options outstanding
  related to consultants and did not recognize expense related to such options
  in the last two quarters of 2001.

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.

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.

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:

|                                             | 2001  | 2000  | 1999 
|-------------------------------------------- | ----- | ----- | -----
|Risk-free interest
      rate (%)            | 4.82% | 5.38% | 5.94%
|Dividend yield                               | --    | --    | --   
|Volatility factor                            | 1.3   | 1.3   | 0.993
|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:

|                                                                     | 2001             | 2000             | 1999            
|-------------------------------------------------------------------- | ---------------- | ---------------- | ----------------
|Pro forma net loss
      applicable to common shareholders           | $(7,584,524)     | $(5,543,732)     | $(1,282,236)    
|Pro forma net loss
      per share applicable to common shareholders | $
        (0.32) | $
        (0.27) | $
        (0.13)



NOTE 7 - 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, 2001:

|Reason                       | Number
        of Shares | Price
        Per Share | Issue
        Date | Expiration
        Date
|---------------------------- | ------------------------ | ----------------------- | ------------------ | -----------------------
|Series
      B financing     | 122,500                  | $
        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 | 240,401                  | $
        1.08          | Sep
        1999   | Sep
        2002       
|Common
      stock financing | 316,653                  | $
        4.66          | Dec
        1999   | Dec
        2002       
|Total
      warrants         | 923,029                  |                         |                    |                        



NOTE 8 - Shares
  Reserved

Common stock reserved for
  future issuance was as follows at December 31, 2001:

|Stock
      option grants outstanding (see Note 6)         | 4,577,241
|---------------------------------------------------------- | ---------
|Reserved
      for future stock option grants (see Note 6) | 486,694  
|Common
      stock warrants (see Note 7)                   | 923,029  
|Total
      common stock reserved for future issuance      | 5,986,964



NOTE 9 - Related Party

The Company had outstanding
  accounts payable to the Impact Zone, an engineering design and consulting services
  company, of $18,688, $29,400 and $2,500 at December 31, 2001, 2000 and 1999,
  and received services during the years ended December 31, 2001, 2000 and 1999
  valued at $234,838, $163,500 and $21,300. The Company had no outstanding accounts
  receivable due from the Impact Zone of at December 31, 2001 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 10 - 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.



NOTE 11 - Income Taxes

Due to the Company's loss
  position, there was no provision for income taxes for the years ended December
  31, 2001, 2000, and 1999.

As of December 31, 2001,
  the Company had federal and state net operating loss carryforwards of approximately
  $17,000,000 and $4,000,000, respectively. The Company also has federal and state
  tax credit carryforwards of approximately $200,000 and $200,000, respectively.
  The net operating loss and credit carryforwards will expire at various dates
  beginning in 2002 through 2021, 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.

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,
|------------------------------------------------- | --------------------
|                                                  | 2001                
|Net operating loss
      carryforwards            | $
        6,010,000 
|Credits                                           | 330,000             
|Capitalized research
      and development costs  | 2,260,000           
|Reserves                                          | 770,000             
|Total
      deferred tax assets                   | 9,370,000           
|Valuation allowance
      for deferred tax assets | (9,059,000)         
|Acquired intangibles                              | (311,000)           
|Net
      deferred tax assets                     | $ --                



NOTE 12 - Subsequent
  Events (Unaudited)

Acquisition of Nokia
  Bluetooth Card Technology and CompactFlash Card Business On March 16, 2002,
  the Company acquired from Nokia Corporation its CompactFlash ("CF") Bluetooth
  Card product line and 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 to develop and distribute
  new Bluetooth Card products based on Nokia-developed technology. The purchase
  price was 3 million Euros ($2,630,000), of which 1 million Euros ($881,000)
  was paid at the time the agreement was signed. The balance is payable in installments
  through September 2003. The Company is using forward purchase contracts for
  Euros in order to fix the price of the acquisition in U.S. dollars.

Extension of Bank Line
  of Credit On March 29, 2002 the Company extended its Credit Agreement with
  its bank, which will now expire on June 15, 2002. The terms and conditions of
  the prior agreement (See Note 12) remain in place under the extension, and the
  waiver from the bank to reduce the tangible net worth requirement from $5,000,000
  to $4,000,000 remains in effect.

FinancingOn March
  28, 2002, the Company closed a common stock financing for 381,760 common shares
  at an average market price of $1.59 per share. Total proceeds were $607,000
  and net proceeds after costs and expenses were approximately $420,000. In connection
  with the financing, the Company issued five-year warrants to acquire 118,344
  shares of common stock at the financing price. Two Directors of the Company
  participated as investors in the Financing in the amount of $130,000. The Company
  intends to seek stockholder ratification of this participation at its annual
  meeting of stockholders.



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

Not Applicable.





PART
  III

Item 10. Directors and
  Executive Officers

Our executive officers,
  directors and nominees and their ages and positions as of April 22, 2002 are
  as follows:

|Name                     | Age | Current
      Position with the Company                                                | First
        Appointed
|------------------------ | --- | -------------------------------------------------------------------------------------- | -----------------------
|Charlie
      Bass       | 60  | Chairman
      of the Board                                                            | 1992                   
|Kevin
      J. Mills     | 41  | President,
      Chief Executive Officer and Director                                  | 2000                   
|Micheal
      L. Gifford | 43  | Executive
      Vice President and Director                                            | 1992                   
|Gianluca
      Rattazzi  | 49  | Director                                                                               | 1998                   
|Leon Malmed              | 64  | Director                                                                               | 2000                   
|Enzo Torresi             | 57  | Director                                                                               | 2000                   
|Burnett
      W. Donoho  | 62  | Director                                                                               | 2000                   
|David
      W. Dunlap    | 59  | Vice President
      Finance and Administration, Chief Financial Officer and Secretary | 1995                   
|Leonard
      L. Ott     | 43  | Chief
      Technical Officer                                                          | 1994                   
|Paul T.
      Hughes     | 53  | Vice President
      of Operations                                                     | 2000                   
|Robert
      J. Miller   | 51  | Vice President
      of Engineering                                                    | 2000                   
|Peter
      Sealey       | 51  | None                                                                                   | --                     

Charlie Bass co-founded
  Socket in March 1992, and has been the Chairman of the Board of Directors from
  such time to the present. Dr. Bass also served as our interim Chief Executive
  Officer during January and February 1996 and from April 1997 until February
  1998, at which time Mr. Bass assumed the position of Chief Executive Officer,
  a position he served in until March 2000. Dr. Bass has been Trustee of The Bass
  Trust since September 1989. Dr. Bass holds a Ph.D. in electrical engineering
  from the University of Hawaii.

Kevin J. Mills was appointed
  our President and Chief Executive Officer and a director of Socket in March
  2000. He had served as our Chief Operating Officer since September 1998. Mr.
  Mills joined Socket in September 1993 as Vice President of Operations, and has
  also served as our Vice President of Engineering. Prior to joining Socket, Mr.
  Mills worked from September 1987 to August 1993 at Logitech, Inc., a computer
  peripherals company, serving most recently as its Director of Operations. He
  received a B.E. in Electronic Engineering from the University of Limerick, Ireland.

Micheal L. Gifford has
  been a director of Socket since its inception in March 1992 and has served as
  our Executive Vice President since October 1994. Mr. Gifford served as our President
  from our inception in March 1992 to September 1994, and as our Chief Executive
  Officer from March 1992 to June 1994. From December 1986 to December 1991, Mr.
  Gifford served as a director and as Director of Sales and Marketing for Tidewater
  Associates, a computer consulting and computer product development company.
  Prior to working for Tidewater Associates, Mr. Gifford co-founded and was President
  of Gifford Computer Systems, a computer network integration company. Mr. Gifford
  received a B.S. in Mechanical Engineering from the University of California
  at Berkeley.

Gianluca Rattazzi has been
  a director of Socket since June 1998. Dr. Rattazzi co-founded Meridian Data,
  Inc., a provider of CD ROM networking software and systems, in July 1988. He
  has served as President and a director of Meridian Data since inception and
  was appointed Chief Executive Officer of Meridian Data serving from October
  1992 until its sale to Quantum Corporation in September 1999. From 1985 to 1988,
  Dr. Rattazzi held various executive level positions at Virtual Microsystems,
  Inc., a networking company, most recently as President. Dr. Rattazzi serves
  on the boards of several private companies. Dr. Rattazzi holds an M.S. degree
  in Electrical Engineering and Computer Science from the University of California,
  Berkeley, and a Ph.D. in Physics from the University of Rome, Italy.

Leon Malmed has been a
  director of Socket since June 2000. Mr. Malmed served as Senior Vice President
  of Worldwide Marketing and Sales of SanDisk Corporation, a manufacturer of flash
  memory products, from 1992 to his retirement in March 2000. Prior to his tenure
  with SanDisk Corporation, Mr. Malmed was Executive Vice President of Worldwide
  Marketing and Sales for Syquest Corporation, a disk storage manufacturer, and
  President of Iota, a Syquest subsidiary from 1990 to 1992, and Senior Vice President
  of Worldwide Sales, Marketing and Programs for Maxtor Corporation, a disk drive
  supplier, from 1984 to 1990. Mr. Malmed serves as a director of several corporations
  including Omnivision Technologies, Inc. (image sensors semiconductors), Artisan
  Components, Inc. (licenser of building blocks for complex I.C. designs), and
  Adtron Corporation (storage systems). Mr. Malmed holds a B.S. degree in Mechanical
  Engineering from the University of Paris, and also has completed the AEA/UCLA
  Senior Executive Program at the University of California at Los Angeles, and
  the AEA/Stanford Executive Institute Program for Management of High Technology
  Companies at Stanford Business School.

Enzo Torresi has been a
  director of Socket since June 2000. Dr. Torresi is the Managing Partner of myQube
  Ventures, a venture capital fund based in Milano, Italy. In 1997 and 1998, he
  was Chairman and CEO of ICAST Corporation, a software company specializing in
  broadcasting solutions for the Internet. During 1995 and 1996 he was Entrepreneur-In-Residence
  at Accel Partners, a venture capital fund. From November 1993 to 1994, he was
  Vice-Chairman of Power Computing Corporation, a PC manufacturer he cofounded.
  From 1989 to October 1994, Dr. Torresi was President and Chief Executive Officer
  of NetFRAME Systems, Inc., a computer manufacturer that is now part of Micron
  Electronics, Inc. Dr. Torresi holds a Doctorate in Electronics Engineering from
  the Polytechnic Institute in Turin, Italy.

Burnett W. Donoho has been
  a director of Socket since July 2000. Mr. Donoho is a management consultant.
  He served as President and Chief Executive Officer of Club Sports International,
  a private health club, from November 1998 to September 2000. He has extensive
  retail industry experience and has served in key operating roles with several
  retail organizations including Vice Chairman and Chief Operating Officer of
  Montgomery Ward from January 1997 to December 1997, Consultant and Chief Operating
  officer of Broadway, Inc. from June 1995 to January 1996, and Vice Chairman
  and Chief Operating Officer for Macy's East from July 1992 to December 1994,
  President and Chief Operating Officer of Marshall Field's from March 1984 to
  June 1990, and President and Chief Operating Officer of Gimbel's Midwest from
  1978 to 1984. Mr. Donoho is a director of GTECH Corporation, a lottery systems
  developer and Office Max, an office products retailer. Mr. Donoho holds a B.A.
  degree from Vanderbilt University and an M.A. degree from the University of
  Kentucky.

Peter Sealey has served
  as CEO and founder of Los Altos Group, Inc., a diversified management consulting
  firm offering capabilities in business marketing strategy, brand identity, market
  research, advertising services, business development, legal services management,
  expert witness testimony and software development, since its founding in July
  1997. Dr. Sealey has also served as an Adjunct Professor of Marketing at the
  Haas School of Business, University of California at Berkeley since 1994, and
  serves on the boards of T/R Systems, a developer and manufacturer of digital
  document processing and print systems, and L90, a provider of marketing services
  for marketers and web publishers. From July 1969 to August 1993, Dr. Sealey
  served in various senior marketing positions with the Coca-Cola Company, serving
  as its Senior Vice President, Global Marketing from December 1989. Dr. Sealey
  holds a Doctorate from the Peter F. Drucker Graduate Management Center at Claremont
  Graduate University.

David W. Dunlap has served
  as Socket's Vice President of Finance and Administration, Secretary and Chief
  Financial Officer since February 1995 and was in the same role as a consultant
  from November 1994 to February 1995. Mr. Dunlap previously served as Vice President
  of Finance and Administration and Chief Financial Officer at several public
  and private companies including Appian Technology Inc., a semiconductor company
  from September 1993 to February 1995, and Mountain Network Solutions, Inc.,
  a computer peripherals manufacturing company, from March 1992 to September 1993.
  He is a certified public accountant, and received an M.B.A. and a B.A. in Business
  Administration from the University of California at Berkeley.

Leonard L. Ott has served
  as Socket's Vice President and Chief Technical Officer since October 2000 and
  previously served as Vice President of Engineering since December 1998. Mr.
  Ott joined Socket in March 1994, serving in increasingly responsible engineering
  positions including Director of Software Development and Director of Engineering.
  Mr. Ott also worked as an engineering consultant with the Company from November
  1993 to March 1994. Prior to joining the Company, Mr. Ott served from March
  1988 to November 1993 with Vision Network Systems, a networking systems company,
  serving most recently as its Vice President Research and Development. Mr. Ott
  is a board member of the CompactFlash Association, the body establishing standards
  for CompactFlash products. He received a B.S. in Computer Science from the University
  of California at Berkeley.

Paul T. Hughes was appointed
  Vice President of Operations in October 2000. From April 1996 to October 2000,
  Mr. Hughes was cofounder and President of 3rd Rail Engineering, an engineering
  design and services company that was acquired by the Company in October 2000.
  Mr. Hughes has completed numerous advanced technical courses over his career
  spanning twenty-four years.

Robert J. Miller was appointed
  Vice President of Engineering in October 2000. Mr. Miller was Chief Technical
  Officer of 3rd Rail Engineering, an engineering design and services company
  that was acquired by the Company in October 2000. Prior to his employment with
  3rd Rail Engineering, Mr. Miller was an independent engineering design consultant
  from 1997 to June 1999. Mr. Miller also served in various capacities from 1991
  to 1997 with Synaptics, Inc., a computer components design and manufacturing
  company, including Director of Manufacturing Engineering and Director of Operations.
  At Synaptics, Mr. Miller was co-inventor of the Synaptics touchpad and was issued
  seven patents for his work. Mr. Miller holds a BSEng degree with honors from
  the California Institute of Technology.



Board of Directors

We currently have seven
  (7) directors. Each of our directors holds office until the next annual meeting
  of stockholders at which his term expires and until his successor has been duly
  elected and qualified. There are no family relationships among any of the directors
  or executive officers of Socket.

Section 16(a) Beneficial
  Ownership Reporting ComplianceSection 16(a) of the Exchange Act requires
  our executive officers and directors, and persons who own more than ten percent
  of a registered class of our equity securities to file reports of ownership
  and changes in ownership with the Securities and Exchange Commission and the
  National Association of Securities Dealers, Inc. Executive officers, directors
  and greater than ten percent stockholders are required by SEC regulation to
  furnish us with copies of all Section 16(a) forms they file. Based solely on
  its review of the copies of such forms received by us, or written representations
  from certain reporting persons, we believe that, during fiscal 2001, all filing
  requirements applicable to our executive officers and directors were complied
  with.



Item 11. Executive Compensation

The following table sets
  forth the compensation paid by the Company during the fiscal years ended December
  31, 2001, 2000, and 1999 to the Company's Chief Executive Officer, and the four
  other most highly compensated executive officers whose total 2001 salary and
  bonus exceeded $100,000 (collectively, the "Named Executive Officers"):

|                                                                                                                      |         | Annual
        Compensation | Long-Term
        Compensation Awards
|--------------------------------------------------------------------------------------------------------------------- | ------- | --------------------------- | -------------------------------------
|Name
      and Principal Position                                                                                     | Year    | Salary
        ($)          | Bonus
        ($) (1)                
|Kevin
      J. Mills
      President and Cheif Executive Officer                                                      | 2001    | $
        146,875           | $
        26,975                     
|2000                                                                                                                  | 146,875 | 67,438                      | --                                   
|1999                                                                                                                  | 131,250 | 33,268                      | --                                   
|Micheal
      L. Gifford
      Executive Vice President and Director                                                  | 2001    | 146,875                     | 11,140                               
|2000                                                                                                                  | 146,875 | 32,780                      | --                                   
|1999                                                                                                                  | 131,250 | 32,444                      | --                                   
|Paul
      T. Hughes (3)
      Vice President of Operations                                                           | 2001    | 149,212                     | 13,784                               
|2000                                                                                                                  | 62,500  | --                          | --                                   
|Robert
      J. Miller (3)
      Vice President of Engineering                                                        | 2001    | 146,875                     | 15,097                               
|2000                                                                                                                  | 62,500  | --                          | --                                   
|David
      W. Dunlap
      Vice President of Finance and Administration, Chief Financial Officer and
      Secretary | 2001    | 146,875                     | 11,690                               
|2000                                                                                                                  | 146,875 | 31,510                      | --                                   
|1999                                                                                                                  | 131,250 | 33,209                      | --                                   

(1) Represents cash variable
  compensation earned for work performed during the year under a Management Incentive
  Bonus Plan. Compensation earned during the first three quarters of each year
  were paid in that year whereas compensation earned during the fourth quarter
  of a year were paid in the first quarter of the following year.
  (2) Under applicable SEC rules, perequisites are excluded if the aggregate value
  is less than the lesser of $50,000 or 10% of the Executive Officer's salary
  plus bonus.
  (3) Mr. Hughes and Mr. Miller joined the Company in October 2000.



STOCK OPTION GRANTS
  AND EXERCISES

Stock Option Grants in Fiscal 2001

The following table sets forth certain information for the fiscal year ended
  December 31, 2001 with respect stock options granted during such fiscal year
  to the Named Executive Officers. No stock appreciation rights were granted during
  such year.

|                         | Individual
        Grants                               | Potential
        Realizable Value at Assumed Annual Rates of Stock Price Appreciation for
        Option Terms (3)
|------------------------ | ------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------
|Name                     | Number
        of Securities Underlying Options Granted | %
        of Total Options Granted to Employees in Fiscal 2001 (1)                                                 
|Kevin
      J. Mills     | 90,000                                                  | 5.6%                                                                                                               
|Micheal
      L. Gifford | 75,000                                                  | 4.6                                                                                                                
|Paul T.
      Hughes     | 30,000                                                  | 1.9                                                                                                                
|Robert
      J. Miller   | 50,000                                                  | 3.1                                                                                                                
|David
      W. Dunlap    | 65,000                                                  | 4.0                                                                                                                

(1) Based on options granted
  to employees during fiscal 2001 to purchase 1,620,700 shares of Common Stock.
  
  (2) All options were granted at an exercise price equal to the fair market value
  of the Company's Common Stock, as determined by the Board of Directors, on the
  date of grant. 
  (3) These columns present hypothetical future values that might be realized
  on exercise of the options, less the exercise price. These values assume that
  the market price of our stock appreciates at a five and ten compound annual
  rate over the ten-year term of the options. The five and ten percent rates of
  stock price appreciation are presented as examples pursuant to the SEC's proxy
  rules and do not necessarily reflect management's assessment of our future stock
  price performance.

Aggregated Option Exercises in Fiscal 2001 and Fiscal Year-End
  Option Values

The following table provides information on aggregate option exercises by
  the Named Executive Officers during the year ended December 31, 2001 and on
  the value of such officers' unexercised options at December 31, 2001.

|                         |                                         |                                | Number
        of Securities Unexercised Options at December 31, 2001 (#) | Value
        of Unexercised In-the-Money Options at December 31, 2001 ($) (2)
|------------------------ | --------------------------------------- | ------------------------------ | ------------------------------------------------------------------------- | ------------------------------------------------------------------------------
|Name                     | Shares
        Acquired on Exercise (#) | Value
        Received ($) (1) | Exercisable                                                               | Unexercisable                                                                 
|Kevin
      J. Mills     | 34,582                                  | $
        94,781               | 187,501                                                                   | 349,166                                                                       
|Micheal
      L. Gifford | 130,066                                 | 341,766                        | 98,893                                                                    | 205,624                                                                       
|Paul T.
      Hughes     | --                                      | --                             | 68,959                                                                    | 191,041                                                                       
|Robert
      J. Miller   | --                                      | --                             | 69,167                                                                    | 210,833                                                                       
|David
      W. Dunlap    | 35,000                                  | 96,033                         | 133,855                                                                   | 179,895                                                                       

(1) Based on the difference between the closing market price of our common
  stock on the date of exercise and the exercise price paid.
  (2) Based upon a final closing price, as of December 31, 2001, of $1.68 per
  share.



EMPLOYMENT CONTRACT
  AND CHANGE-IN-CONTROL AGREEMENTS

In February 1998, we adopted
  a bonus plan pursuant to which a bonus pool in the amount of up to 10% of any
  consideration payable by a buyer in any acquisition of Socket is to be allocated
  to the executive officers and such other employees as the Board of Directors
  determines in its discretion.

In December 2000, we renewed
  separate employment agreements with Micheal Gifford, Kevin Mills and David Dunlap
  and entered into employment agreements with Leonard Ott (each an "Executive").
  In October 2000, and in connection with our acquisition of 3rd Rail Engineering,
  we entered into employment agreements with Paul T. Hughes and Robert J. Miller.
  These agreements, which expire on December 31, 2003, set forth the base salaries
  for each Executive, and provide that if we terminate the Executive's employment
  without cause, we will pay the Executive (i) six months' base salary regardless
  of whether he secures other employment during those six months, (ii) health
  insurance until the earlier of the date of the Executive's eligibility for the
  health insurance benefits provided by another employer or the expiration of
  six months, (iii) the full bonus amount to which he would have been entitled
  for the first quarter following termination and one-half of such bonus amount
  for the second quarter following termination, and (iv) certain other benefits
  including the ability to purchase at book value certain items of our property
  purchased by us for the Executive's use, which may include a personal computer,
  a cellular phone, and other similar items.

Additionally, under the
  1995 and 1999 Stock Option Plans, all rights of all optionees (including executive
  officers) to purchase stock shall, upon a change of control of Socket, be immediately
  vested and be fully exercisable if such options are not assumed by the acquiring
  entity.

LIMITATION OF LIABILITY
  AND INDEMNIFICATION MATTERS

Pursuant to the Delaware
  General Corporation Law, we adopted provisions in our Amended and Restated Certificate
  of Incorporation which eliminate the personal liability of our directors, officers
  and stockholders for monetary damages for breach of the directors' fiduciary
  duties in certain circumstances. Our Bylaws require us to indemnify our directors,
  officers, employees and other agents to the fullest extent permitted by law.

We have entered into indemnification
  agreements with each of our current directors and officers which provide for
  indemnification to the fullest extent permitted by Delaware law, including in
  circumstances in which indemnification and the advancement of expenses are discretionary
  under Delaware law. We believe that the limitation of liability provisions in
  our Amended and Restated Certificate of Incorporation and the indemnification
  agreements will enhance our ability to continue to attract and retain qualified
  individuals to serve as directors and officers.

There is no pending litigation
  or proceeding involving a director, officer or employee to which the indemnification
  agreements would apply.

REPORT OF THE COMPENSATION
  COMMITTEE

Notwithstanding anything
  to the contrary set forth in any of the Company's previous filings under the
  Securities Act of 1933, as amended, or the Securities Act of 1934, as amended,
  that might incorporate future filings, including this Proxy Statement, in whole
  or in part, the following report and the Performance Graph (set forth below)
  shall not be incorporated by reference into any such filings.

Introduction

The Compensation Committee
  of the Board of Directors establishes the general compensation policies of the
  Company, and establishes the compensation plans and specific compensation levels
  for executive officers. The Committee strives to ensure that the Company's executive
  compensation programs will enable the Company to attract and retain key people
  and motivate them to achieve or exceed certain key objectives of the Company
  by making individual compensation directly dependent on the Company's achievement
  of certain financial goals, such as profitability and asset management and by
  providing rewards for exceeding those goals.

Compensation Programs

The three major components
  of the Company's executive officer compensation are: (i) base salary, (ii) variable
  incentive awards, and (iii) long-term equity-based incentive awards.

Base Salary.The
  Committee establishes base salaries for executive officers, normally within
  ten percent of the average paid for comparable positions at other similarly
  sized companies as set forth in national and local compensation surveys. Base
  pay increases vary according to individual contributions to the Company's success
  and comparisons to similar positions within the Company and at other comparable
  companies.

Variable Incentive
  Awards. To reinforce the importance of Company goals, the Committee believes
  that a substantial portion of the quarterly compensation of each executive officer
  should be in the form of variable incentive pay. The variable incentive award
  set aside for each executive officer is determined in part on the basis of the
  Company's achievement of the quarterly financial performance targets established
  at the beginning of the fiscal year and also on individual quarterly objective.
  The incentive plan requires a threshold level of Company performance that must
  be attained before any financial performance incentives are awarded. Once the
  threshold is reached, specific formulas are in place to calculate the actual
  incentive payment for each officer. A target is set for each executive officer
  based on targets for similar positions at comparable companies. In fiscal 2001,
  the Company met many of its performance targets. However, the Company, for cost
  control purposes, elected to discontinue the variable incentive pay program
  for the second half of 2001. Consequently the variable incentive awards were
  accrued only in each of the first two quarters in 2001 and were paid out in
  the following quarters.

Long-Term, Equity-Based
  Incentive Awards. The goal of the Company's long-term equity-based incentive
  awards is to align the interests of executive officers with stockholders and
  to provide each executive officer with a significant incentive to manage the
  Company from the perspective of an owner with an equity stake in the business.
  The Committee determines the size of long-term, equity-based incentives according
  to each executive's position within the Company and sets a level it considers
  appropriate to create a meaningful opportunity for stock ownership. In addition,
  the Committee takes into account an individual's recent performance, his or
  her potential for future responsibility and promotion, comparable awards made
  to individuals in similar positions with comparable companies, and the number
  of unvested options held by each individual at the time of the new grant. The
  relative weight given to each of these factors varies among individuals at the
  Committee's discretion.

During fiscal 2001, the
  Board made option grants to Messrs. Mills, Gifford, Dunlap, Ott, Hughes and
  Miller under the Company's 1995 Stock Plan and/or 1999 Stock Plan. Each grant
  allows the officer to acquire shares of the Company's Common Stock at a fixed
  price per share (the market price on the grant date) over a specified period
  of time. Generally, each option granted under the 1995 and 1999 Stock Plan vests
  in periodic installments over a four-year period, contingent upon the executive
  officer's continued employment with the Company. Accordingly, the option will
  provide a return only if the officer remains with the Company and only if the
  market price appreciates over the option term.

Compensation of Chief
  Executive Officer

The factors considered
  by the Compensation Committee in determining the compensation of the Chief Executive
  Officer, in addition to survey data, include the Company's operating and financial
  performance, as well as his leadership and establishment and implementation
  of strategic direction for the Company.

The Compensation Committee
  considers stock options to be an important component of the Chief Executive
  Officer's compensation as a way to reward performance and motivate leadership
  for long term growth and profitability. In 2001, Mr. Mills was granted options
  to purchase 90,000 shares, each with an exercise price equal to the fair market
  value at date of grant. These options vest monthly in forty-eight equal installments.

Compensation Limitations

Under Section 162(m) of
  the Internal Revenue Code, adopted in August 1993, and regulations adopted thereunder
  by the Internal Revenue Service, publicly-held companies may be precluded from
  deducting certain compensation paid to an executive officer in excess of $1.0
  million in a year. The regulations exclude from this limit performance-based
  compensation and stock options provided certain requirements, such as stockholder
  approval, are satisfied. The Company plans to take actions, as necessary, to
  ensure that its stock option plans and executive annual cash bonus plans qualify
  for exclusion.

COMPENSATION COMMITTEEEnzo Torresi
  Gianluca Rattazzi

COMPENSATION OF DIRECTORS

Directors who are not employees
  of the Company receive $1,500 per regular Board meeting attended. These outside
  directors are also entitled to participate in Socket's 1995 and 1999 Stock Option
  Plans. During fiscal 2001, Messrs. Bass, Rattazzi, Malmed, Torresi and Donoho
  were each granted an option to purchase 10,000 shares at an exercise price of
  $2.28 per share and an option to purchase 15,000 shares at an exercise price
  of $1.06 per share, the fair market values of the Company's Common Stock on
  the dates of grant. Each option for 10,000 shares vests in equal monthly installments
  over two years from June 20, 2001, and each option for 15,000 shares was fully
  vested at the date of grant of September 27, 2001.

COMPENSATIONCOMMITTEE
  INTERLOCKS AND INSIDER PARTICIPATION

None of the members of
  the Compensation Committee of the Board has ever been an officer or employee
  of the Company. No executive officer of the Company serves as a member of the
  board of directors or compensation committee of any entity that had one or more
  executive officers serving as a member of the Company's Board of Directors or
  Compensation Committee.

PERFORMANCE GRAPH

The following graph shows
  a five-year comparison of cumulative total stockholder return, calculated on
  a dividend reinvestment basis and based on a $100 investment, from December
  31, 1996 through December 31, 2001 comparing the return on the Company's Common
  Stock with the Russell 2000 Index, the JP Morgan H & Q Technology Index and
  the Nasdaq Computer & Data Processing Index. No dividends have been declared
  or paid on the Company's Common Stock during such period. Historical stock price
  performance is not necessarily indicative of future stock price performance.

COMPARISON
  OF 5 YEAR CUMULATIVE TOTAL RETURN* 
  AMONG SOCKET COMMUNICATIONS, INC., THE RUSSELL 2000 INDEX,
  THE JP MORGAN H & Q TECHNOLOGY INDEX 
  AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX











Item 12: Security Ownership
  of Certain Beneficial Owners and Management

The following table sets
  forth as of the Record Date certain information with respect to the beneficial
  ownership of the Company's Common Stock, on an as-exercised basis for options
  and warrants exercisable within 60 days of the Record Date, as to (i) each person
  known by the Company to own beneficially more than 5% of the outstanding shares
  of Common Stock, (ii) each director and nominee for director of the Company,
  (iii) each executive officer of the Company, and (iv) all directors and executive
  officers of the Company as a group. Except as otherwise noted, each named beneficial
  owner has sole voting and investment power with respect to the shares shown.
  The address of record for each of the individuals listed in this table is: c/o
  Socket Communications, Inc., 37400 Central Court, Newark, California, 94560.

|Name
      of Beneficial Owner                                     | Number
        of Shares Beneficially Owned (1) | Percentage
        of Shares Beneficially Owned (%) (2)
|------------------------------------------------------------------ | ----------------------------------------------- | -------------------------------------------------------
|Charlie
      Bass                                                 | 1,463,939
        (3)                           | 6.1%                                                   
|Micheal
      L. Gifford                                           | 406,381
        (4)                             | 1.7                                                    
|Robert
      J. Miller                                             | 386,212
        (5)                             | 1.6                                                    
|Kevin
      J. Mills                                               | 369,273
        (6)                             | 1.5                                                    
|Paul T.
      Hughes                                               | 351,004
        (7)                             | 1.5                                                    
|David
      W. Dunlap                                              | 334,102
        (8)                             | 1.4                                                    
|Leonard
      L. Ott                                               | 172,430
        (9)                             | *                                                      
|Burnett
      W. Donoho                                            | 95,000
        (10)                             | *                                                      
|Enzo Torresi                                                       | 68,583
        (11)                             | *                                                      
|Gianluca
      Rattazzi                                            | 53,750
        (12)                             | *                                                      
|Leon Malmed                                                        | 45,000
        (12)                             | *                                                      
|Peter
      Sealey                                                 | --                                              | *                                                      
|All Directors
      and Executive Officers as a group (11 persons) | 3,745,674
        (13)                          | 14.9                                                   

*Less than 1%

(1) To the Company's knowledge,
  the persons named in the table have sole voting and investment power with respect
  to all shares of Common Stock shown as beneficially owned by them, subject to
  community property laws where applicable and the information contained in the
  footnotes to this table.(2) Percentage ownership
  is based on 24,019,977 shares of Common Stock outstanding on the Record Date
  and any shares issuable pursuant to securities exercisable for shares of Common
  Stock by the person or group in question as of the Record Date or within 60
  days thereafter. 
  (3) Includes 15,723 shares of common stock subject to warrants exercisable within
  60 days of the Record Date, and 55,000 shares of common stock subject to options
  exercisable within 60 days of the Record Date.
  (4) Includes 118,092 shares of common stock subject to options exercisable within
  60 days of the Record Date. 
  (5) Includes 104,167 shares of common stock subject to options exercisable within
  60 days of the Record Date. 
  (6) Includes 264,792 shares of common stock subject to options exercisable within
  60 days of the Record Date. 
  (7) Includes 68,959 shares of common stock subject to options exercisable within
  60 days of the Record Date. 
  (8) Includes 179,896 shares of common stock subject to options exercisable within
  60 days of the Record Date. 
  (9) Includes 139,020 shares of common stock subject to options exercisable within
  60 days of the Record Date. 
  (10) Includes 50,000 shares subject to warrants exercisable within 60 days of
  the Record Date and 45,000 shares of common stock subject to options exercisable
  within 60 days of the Record Date. 
  (11) Includes 4,716 shares subject to warrants exercisable within 60 days of
  the Record Date and 45,000 shares of common stock subject to options exercisable
  within 60 days of the Record Date.
  (12) Consists of shares of common stock subject to options exercisable within
  60 days of the Record Date.
  (13) See notes (3) through (12) above.

Item 13. Certain Relationships
  and Related Transactions

The following is a description
  of transactions during the past three fiscal years to which we have been a party,
  in which the amount involved exceeded $60,000 and in which any director, executive
  officer or beneficial holder of more than 5% of our outstanding capital stock
  had or will have a direct or indirect material interest.

We had outstanding accounts
  payable to the Impact Zone, an engineering design and consulting services company,
  of $18,688, $29,400 and $2,500 at December 31, 2001, 2000 and 1999, and received
  services from Impact Zone during the years ended December 31, 2001, 2000 and
  1999 valued at $234,838, $163,500 and $21,300. The Company had no outstanding
  accounts receivable due from the Impact Zone at December 31, 2001 and recognized
  revenues from sales to Impact Zone 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 the Company.

On October 5, 2000, we
  acquired 3rd Rail Engineering. Paul Hughes, formerly President of 3rd Rail Engineering,
  became our Vice President of Operations, and Robert Miller, former Chief Technical
  Officer of 3rd Rail Engineering, became our Vice President of Engineering. Neither
  individual had any relationship with us prior to the acquisition. Paul Hughes
  and Robert Miller each received 282,045 common shares of Socket and cash of
  $432,785 in payment for their equity interests in 3rd Rail Engineering. We also
  executed employment agreements with each individual. These agreements are described
  more fully above under "Executive Compensation - Employment Contracts and Change-in
  Control Arrangements."

In March 2002 we completed
  a private placement of 381,760 shares of our common stock to increase our working
  capital and cash balances. The offering was sold at a price of $1.59 per share
  of common stock and resulted in gross proceeds of approximately $607,000, and
  net proceeds after costs and expenses of approximately $420,000. In connection
  with the offering, we issued warrants to investors in the offering and Socket's
  placement agent in the offering to purchase an aggregate of 118,344 shares of
  common stock at a price of $1.59 per share (subject to adjustment in the event
  of dilutive issuances). The warrants have a term of five years, and could result
  in additional proceeds if exercised. Pursuant to a Registration Rights Agreement,
  we agreed to file no later than 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 in this offering. Two
  members of Socket's Board of Directors, Charlie Bass and Enzo Torresi, invested
  $100,000 and $30,000, respectively, in this offering. Mr. Bass acquired 62,893
  shares of our common stock and warrants to purchase an additional 15,723 shares
  of our common stock, and Dr. Torresi acquired 18,867 shares of our common stock
  and warrants to purchase an additional 4,716 shares of our common stock.

See also "Item 11-Executive
  Compensation - Employment Contracts and Change-in Control Arrangements."



PART
  IV

Item 14. Exhibits and
  Reports on Form 8-K

(a) Documents filed as
  part of this report:

1. All financial statements.

INDEX TO FINANCIAL STATEMENTS

Report of Ernst & Young
  LLP, Independent AuditorsConsolidated Balance SheetsConsolidated Statements
  of OperationsConsolidated Statements
  of Stockholders' EquityConsolidated Statements
  of Cash FlowsNotes to Consolidated Financial
  Statements

2. Financial statement
  schedules.

> None.

3. Exhibits. See Index
  of Exhibits. 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:

> None

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:
      February 11, 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)                                                         |  | February
      11, 2003
|--- | ----------------------------- | --------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------
|    | Kevin
      J. Mills         
|    |                               |                                                                                                                                   |  |                        
|By  | /s/
      Charlie Bass*       | Chairman
      of the Board                                                                                                       |  | February
      11, 2003
|    | Charlie
      Bass           
|    |                               |                                                                                                                                   |  |                        
|By  | /s/
      David W. Dunlap     | Vice
      President of Finance and Administration and Chief Financial Officer (Principal
      Financial and Accounting Officer) |  | February
      11, 2003
|    | David
      W. Dunlap        
|    |                               |                                                                                                                                   |  |                        
|By  | /s/
      Micheal L. Gifford* | Executive
      Vice President and Director                                                                                       |  | February
      11, 2003
|    | Micheal
      L. Gifford     
|    |                               |                                                                                                                                   |  |                        
|By  | /s/
      Enzo Torresi*       | Director                                                                                                                          |  | February
      11, 2003
|    | Enzo
      Torresi           
|    |                               |                                                                                                                                   |  |                        
|By  | /s/
      Gianluca Rattazzi*  | Director                                                                                                                          |  | February
      11, 2003
|    | Gianluca
      Rattazzi      
|    |                               |                                                                                                                                   |  |                        
|By  | /s/
      Burnett W. Donoho*  | Director                                                                                                                          |  | February
      11, 2003
|    | Burnett
      W. Donoho      
|    |                               |                                                                                                                                   |  |                        
|By  | /s/
      Leon Malmed*        | Director                                                                                                                          |  | February
      11, 2003
|    | Leon
      Malmed            
|    |                               |                                                                                                                                   |  |                        
|(*) | By
      /s/ Kevin J. Mills   |                                                                                                                                   |  | February
      11, 2003
|    | Attorney-in-Fact              |                                                                                                                                   | 



CERTIFICATIONS

I, Kevin
  J. Mills, certify that:

1. I have
  reviewed this annual report on Form 10-K/A 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.

|Date: February 11, 2003 |                                                                                                                                                                                             
|----------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                        |                                                                                                                                                                                             
|                        | By: /s/ Kevin J. Mills
      Name: Kevin J. Mills 
      Title: President and Chief Executive Officer 
                (Principal Executive Officer)









I, David W.
  Dunlap, certify that:

1. I have
  reviewed this annual report on Form 10-K/A 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;

|Date: February 11, 2003 |                                                                                                                                                                                                                                     
|----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                        |                                                                                                                                                                                                                                     
|                        | By: /s/
      David W. DunlapName: David W.
      Dunlap 
      Title: Vice President of Finance and Administration and          Chief
      Financial Officer (Principal Financial Officer)



> 



Index
  to Exhibits



|Exhibit
        Number | Description                                                                                                                                                     
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                                                 
|2.1
        (1)        | Agreement
      and Plan of Reorganization.                                                                                                                     
|3.1
        (2)        | Certificate
      of Incorporation.                                                                                                                             
|3.2
        (2)        | Bylaws.                                                                                                                                                         
|3.3                    | Certificate
      of Amendment of Bylaws dated March 14, 2001.                                                                                                  
|4.1
        (1)        | Form of
      Registration Rights Agreement between the Company and Messrs. Paul Hughes,
      Robert Miller, and Tom Newman.                                   
|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)*              | Employment
      Agreement dated October 5, 2000 with: Paul Hughes, Vice President of Operations
      and Robert Miller, Vice President of Engineering         
|10.12
        (7)*     | Employment
      Agreement dated December 20, 2000 with Kevin Mills, President and CEO.                                                                         
|10.13(7)*              | Employment
      Agreement dated December 20, 2000 with Micheal Gifford, Executive Vice President
      for Business Development.                               
|10.14(7)*              | Employment
      Agreement dated December 20, 2000 with David Dunlap, Chief Financial Officer
      and Corporate Secretary.                                    
|10.15(7)*              | Employment
      Agreement dated December 20, 2000 with John Adams, Jr., Vice President of
      Worldwide Sales.                                               
|10.16(7)*              | Employment
      Agreement dated December 20, 2000 with Len Ott, Chief Technical Officer.                                                                       
|10.17(7)*              | Form of
      Executive Management Bonus Plan dated December 20, 2000 between the Company
      and certain eligible participants.                              
|10.18
        (8)      | Business
      Transfer Agreement For Nokia Proprietary Bluetooth Technology dated 11 March
      2002 between Nokia Corporation and Socket Communications, Inc.
|10.19
        (8)      | Second
      Amendment to Lease by and between Central Court, LLC and the Company dated
      December 14, 2001.                                                
|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-KSB filed on April 2, 2001.

(8) Incorporated by
  reference to exhibits filed with the Company's Form 10-K filed April 1, 2002 .



---



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. 333-87348, No. 333-96231, No.
  333-51236, and No. 333-49001; and Form 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 12, 2002, with respect to the consolidated financial statements of
  Socket Communications, Inc. included in this amended Annual Report (Form 10-K/A
  Amendment No. 2 ) for the year ended December 31, 2001.



/s/ ERNST & YOUNG LLP

San Jose, California
  February 11, 2003





---

Exhibit
  99.1

CERTIFICATION
  OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
  PURSUANT TO
  18 U.S.C. SECTION 1350, 
  AS ADOPTED PURSUANT TO
  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, 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 fiscal year ended December 31, 2001 as filed with
  the Securities and Exchange Commission on the date hereof (the "Report") fully
  complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
  Act of 1934, and that information contained in the Report fairly presents in
  all material respects the financial condition and results of operations of Socket
  Communications, Inc.

|February 11, 2003 |                                                                                                      
|----------------- | -----------------------------------------------------------------------------------------------------
|                  |                                                                                                      
|                  | By: /s/ Kevin J. Mills
      Name: Kevin J. Mills 
      Title: President and Chief Executive Officer



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 fiscal year ended December 31, 2001 as filed with
  the Securities and Exchange Commission on the date hereof (the "Report") fully
  complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
  Act of 1934, and that information contained in the Report fairly presents in
  all material respects the financial condition and results of operations of Socket
  Communications, Inc.

|February 11, 2003 |                                                                                                                                              
|----------------- | ---------------------------------------------------------------------------------------------------------------------------------------------
|                  |                                                                                                                                              
|                  | By:
      /s/ David W. DunlapName: David W.
      DunlapTitle: Vice President
      of Finance and Administration and Chief Financial Officer