On March 14, 2003,February 27, 2004, the closing sales price for our common stockCommon Stock as reported on the Nasdaq National Market was $0.74.$3.40. We had approximately 375475 stockholders of record as of March 14, 2003,February 27, 2004, and an additional 10,000 beneficial stockholders. We have not paid dividends on our common stock,Common Stock, and we currrently intend to retain future earnings for use in our business and do not anticipate paying dividends in the foreseeable future.

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

Recent Sales of Unregistered Securities

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

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

Item 6. Selected Consolidated Financial Data

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

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

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

This itemManagement's Discussion and Analysis of Financial Condition and Results of Operations 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. SuchThe forward-looking statements involve risks and uncertainties, including, among other things, the uncertainties associated with forecasting future revenues, costs and expenses. You are basedcautioned not to place undue reliance 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. Thesethe forward-looking statements, are not guaranteeswhich speak only as of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore,the date of this report. Our actual results and outcomes may differ materially from what is expressed or forecastedthe results discussed in any such forward lookingthe forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below and under "Other Factors Affecting Future Operations".Operations." We assume no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to our consolidated financial statements for the year ended December 31, 2002.2003. The application of these policies requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on a combination of historical experience and reasonable judgment applied to other facts. Actual results may differ from these estimates and such differences may be material to the financial statements. In addition, the use of different assumptions or judgments may result in different estimates. We believe our critical accounting policies that are subject to these estimates are: Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation, and Valuation of Goodwill and Other Intangible Assets.

Revenue Recognition and Accounts Receivable Reserves

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

We generally recognize revenues on sales to customers other than distributors at the time delivery has occurred,upon shipment provided that persuasive evidence of ana sales arrangement exists, the price is fixed and determinable, and collectibilitytitle has transferred, collection of resulting receivables is reasonably assured.assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Most of our customers other than distributors do not have rights of return except under warranty.

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We also earn revenues from services performed in connection with consulting arrangements. For those contracts that include contract milestones or acceptance criteria the we recognizes revenues 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.

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

Inventory Valuation

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

Goodwill and Other Intangible Assets

Our acquisition of the CompactFlash Bluetooth card business, including a product line and technology license, from Nokia Corporation in March 2002 and our acquisition of 3rd Rail Engineering in October 2000 added goodwill and intangible assets to our balance sheet. We allocated the purchase price based on an analysis of the fair market value of the assets we acquired. Beginning with the first quarter of 2002, in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," we ceased amortizing goodwill, and willbegan to periodically evaluate whether the value of the goodwill has beenwas impaired, at which time any impaired balances willwould be written down. We periodically evaluate intangible and other long lived assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. In addition, we also review the market capitalization of the Company in conjunction with our analysis of goodwill impairment. As of December 31, 2002,2003, in our judgment, there is no impairment of goodwill or intangible assets. Future events could cause us to conclude that impairment indicators exist and that goodwill and intangible assets associated with our acquired businesses isare impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Revenue

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

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Revenue

We design, manufacture and sell products for connecting handheld and notebook computers to computer networks and peripherals. Total revenue in 2003 was $21.6 million, an increase of 32% over 2002 revenue of $16.3 million. Revenue in 2002 increased 32% over revenue in 2001 of $12.3 million.

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. Theycomputers or connect to handheld and notebook computers over wireless connections. These products allow users to connect their computersdevices to the Internet via mobile or wired phone services, or to private networks, or to communicate with other electronic devices such as desktop computers and printers. Our products offer both wireless and cable connections to external devices such as cellmobile phones and printers.printers and Global Positioning System receivers. 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 802.11b (or WiFi) standard. Cable connection products include modems for telephone connections, Ethernet cards for local area network connections and digital phone cards for wide area network connections through mobile phones.
• Our bar code scanning products plug into or connect wirelessly to handheld computers or notebooksnotebook computers and turn handheld or notebook computers into portable bar code scanners that can be used in various retail and industrial workplaces.
• Our peripheral connectionserial products add connection ports to a notebook or handheld computer that allow users to connect these portable computers to standard peripherals designed primarily for desktop PCs.
• Our embedded products and services consist of Bluetooth modules, interface chips, and engineering design services to install these products. Our Bluetooth modules allow manufacturers of cell phones, handheld computers and other devices to build wireless connection functions into their products. Our interface chips allow manufacturers of wide area network cards and other devices to transfer information to and from handheld or notebook computers.

Our network connection product revenuerevenues in 2002 was $6.02003 were $8.7 million compared to $6.0 million in 2002 and $3.4 million in each2001. Our growth in 2003 was due to new products and increasing enterprise deployment of the years 2001 and 2000.Pocket PCs. In the third and fourth quartersquarter of 20012002 we introduced our Bluetooth GPS receiver with navigation kit. Revenue growth was $2.0 million in 2003 from this new product combined with $1.3 million of revenue growth from our modem cards and $0.2 million of revenue growth in our Wireless LAN product line from the introduction of our Secure Digital (SDIO) Wireless LAN card in the third quarter of 2003. This growth was partially offset by declines of $0.4 million in our Bluetooth plug-in cards, and $0.2 million in declines in both our Ethernet plug-in and Digital Phone card product lines. Revenue growth of $3.5 million in 2002 compared to 2001 resulted from sales of new products including our Bluetooth CompactFlash plug-in cards, Wireless LAN plug-in cards, and modem cards which contributed $0.5 million to revenuesintroduced in that year. Revenue growththe later half of $3.5 million from sales of these new products in 2002 were2001, offset by declines of $0.9 million primarily in digital phone cards and modest declines in Ethernet plug-in cards. Ethernet revenues declined $0.6 million in 2001 compared to 2000 while revenue from the sale

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(Table of phone connection cards was flat. The growth in network connection product revenue tends to follow the sales volumes for Pocket PC handheld computers, which grew rapidly in 2000 following their introduction in April of that year. Growth of Pocket PCs in 2001 was moderate compared to the year-earlier period because of manufacturing supply shortages during the first half of the year and reduced inventory manufactured in the third quarter of 2001 in anticipation of new model introductions in the fourth quarter. Pocket PC sales approximately doubled in the fourth quarter of 2001 compared to the previous quarter, and growth continued in 2002. Sales of our network connection products tend to lag sales of Pocket PCs by several months as customers often purchase peripheral connection products after they purchase and become familiar with their Pocket PC.Contents)

Our bar code scanning product revenuerevenues in 2002 was $3.92003 were $6.7 million compared to revenue of $3.9 million in 2002 and $3.1 million in 2001 and $2.22001. Revenue growth of $1.4 million in 2000. The revenue growth is primarilyfor 2003 was due to oneincreased sales of our bar code laser scanner system, which is a laser gun attached via a cable to a CompactFlash card with PC card adaptor. Revenue growth of $1.0 million for 2003 was due to our primary scanning product, the In-Hand Scan card, which is a laser scanner attached toincorporated into a CompactFlash card whichthat plugs into a Pocket PC, notebook, or other mobile computer to turn the computer into a portable laser scanner. Additional revenue growth of $0.8 million was due to our newest bar code scanning products, the Imager In-Hand Scan card and the SDIO In-Hand Scan card, which began shipping to customers in the third and fourth quarters of 2003, respectively. The revenue growth in 2002 was primarily due to one product, isthe Compact Flash In-Hand Scan card. Our scanning products are sold both through general distribution and through value added resellers who contract with customers to provide scanning solutions. This solution isOur products are becoming more widely adopted by the value added reseller community for lightweight portable scanning.

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Our peripheral connection cardproduct revenuerevenues in 2002 was $3.82003 were $3.6 million compared to $4.4$3.8 million in 20012002 and $4.4 million in 2000.2001. Standard peripheral connection cards are primarily sold to connect peripheral devices or other electronic equipment to notebook computers. Revenue fromFor 2003, sales volumes for both of our peripheral connectionstandard serial PC Card products has fluctuated within a moderate range over several years.and our newer CompactFlash card products slightly increased, but were offset by declines in custom serial card product sales. For 2002, declines of $0.7 million in our standard PC Card product revenues were partially offset by increases in CompactFlash card revenues.

Our embedded products and services revenuerevenues in both 2003 and 2002 waswere $2.6 million compared to $1.5 million in 2001 and $1.5 million in 2000.2001. Our chip sales included in these totals which we began sellingwere $1.2 million in 2000, were2003 compared to $1.1 million in 2002 compared toand $0.4 million in 2001 and $1.0 million in 2000.2001. Chip sales are highly dependent upon engineering design-wins and the timing of third party design projects. In 2000, almost all of the sales were2003 we continued our effort to a single customer, whereas in 2001, we broadenedbroaden the customer base but were at early design stages with a larger number of customers who in 2002 have adopted our chip. Engineering services revenue included in these totals was $0.5 million in 2002 compared with $0.8 million in 2001 and $0.4 million in 2000.base. We also include embedded Bluetooth modulemodules and plug-in card sales in this category. Bluetooth modules began shippingcategory, both experiencing slight growth in the fourth quarter of 2001 and represented $0.1 million of initial sales during the fourth quarter of 2001 increasing to $1.0 million2003. Increases in 2002. Embedded products and2003 were offset be declines in engineering services, which also included sale of developer kits of $40 thousanddeclined in 2002 $0.2 million in 2001 and $0.1 million in 2000. We have expanded the number of developer kits that we offer and encourage developers to work with our products through programs such as our Empowering Mobility Program.from 2001.

Gross ProfitMargins

Gross profit for both 2003 and 2002 was 50% of revenuerevenues compared to gross profit of 53% of revenue in 2001, and 55% of revenue in 2000.2001. We generally price our products as a markup from our cost, and we offer discount pricing for higher volume purchases. Cost reductions on several of our products including our Bluetooth modules, our modems, and the introduction of our lower cost third generation proprietary ASIC chip in the third quarter of 2003, were offset by rebate programs on selected products and reduced overall margins on our barcode products due to large volume purchases. The moderate declines in gross margin percentages in 2002 andcompared to 2001 reflect the introduction of newernew products that tend to have a higher initial cost and a lower initial gross margin until volumes increase, higher fixed manufacturing costs as we staffstaffed for management of growth, and higher volume discount pricing.

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Research and Development Expense

Research and development expense in 2003 was $3.4 million, a decrease of 2% from expenses in 2002 of $3.5 million. Research and development expense in 2002 was $3.5 million, a decrease of 6% over expenses in 2001 of $3.7 million. ResearchDecreases in 2003 were primarily from lower consulting and professional fees resulting from the completion of the development expense in 2001 increased 35% over research and development expense in 2000 of $2.8 million.a new proprietary ASIC chip at the end of the first quarter of 2003, partially offset by higher personnel expenses resulting from reduced allocation of costs to projects generating engineering service revenues. Decreases in 2002 of $0.3 million fromwere due to reduced expenditures on developed software and outside services, and $0.2 million in lower personnel costs and travel, were partially offset by increases of $0.2 million in engineering consulting services and $0.1 million from patent development and miscellaneousother expenses. The increase in 2001 was due primarily to an increase of $0.9 million in staffing expenses resulting from the acquisition of 3rd Rail Engineering in October 2000. To date, we have not capitalized any software development costs.

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Sales and Marketing Expense

Sales and marketing expense in 2003 was $5.2 million, an increase of 6% compared to sales and marketing expense in 2002 of $4.9 million. Sales and marketing expense in 2002 was $4.9 million, a decrease of 5% compared to sales and marketing expense in 2001 of $5.1 million. Sales and marketing expenseIncreases in 20012003 of $0.4 million were due primarily to increased 36% compared tostaffing of sales and marketing expensepersonal as we staffed for growth, and increases in 2000 of $3.8 million.outside sales and marketing services, partially offset by reductions in advertising and promotional activities. Decreases in 2002 of $0.2 million in advertising and promotionpromotional activities and $0.2 million in reduced travel were partially offset by increases in occupancy costs. The increase in 2001 reflects $1.1 million in higher staffing expenses due to staff added late in 2000 that were present in 2001 for the entire year. We also experienced increases of $0.2 million in advertising, promotion and travel expenses. $0.5 million of these cost increases related to the costs of foreign offices that were established in 2001. We also expanded our advertising and increased our attendance at trade shows to reach new markets for our newer products such as our bar code scanning cards.

General and Administrative Expense

General and administrative expense in 2003 was $2.9 million, an increase of 35% compared to general and administrative expense in 2002 of $2.1 million. General administrative expense in 2002 was $2.1flat compared to 2001. Increases in 2003 included $0.4 million flat with 2001. Increasesfrom increased legal and professional fees due primarily to our response to the complaint filed by Khyber Technologies Corporation (see Item 3 - Legal Proceedings), and $0.3 million from increased investor relations activities. In 2002, increases totaling $0.2 million in business insurance, occupancy costs, and payroll expense were offset by reductions in stock exchange listing fees, equipment, supplies, and shareholderstockholder communications. General administrative expense for 2001 increased 30% compared to general and administrative expense in 2000 of $1.6 million. Approximately half of the increase in 2001 reflects increased personnel costs resulting, in part, from the appointment of Kevin Mills as CEO in late March 2000, replacing Charlie Bass who served from April 1997 to March 2000 without cash remuneration, and from increases in the administrative support staff. 39% of the increase in 2001 over 2000 was due to higher costs of business insurance and higher professional fees associated with our growth. In July 2000, our Common Stock was listed on the Nasdaq National Market System, and our expenses in 2001 reflect the higher fees associated with that listing. We also experienced significant growth in our shareholder base during 1999 and early 2000, increasing the costs of our shareholder printing and mailing costs.

Charges Related to Compensatory Stock Option Grants

Our charges related to compensatory stock option grants were zero in 2002 and 2003, and nominal in 2001. We reported stock-based compensation expense of $1.8 million in 2000 relating to the value of stock options vesting during the year held by consultants and others that are not employees or members of the board of directors (limited to grants for services solely in their capacity as a director). $1.5 million of the expense in 2000 is attributed to the change of status of Mr. Charlie Bass in late March 2000 from Chairman and CEO to Chairman, which required us to reclassify a stock option grant he received relating to his services as CEO from an employee grant (while CEO) to a non-employee grant subject to compensatory charges to operations. Mr. Bass' grant was accelerated to fully vest during the third quarter of 2000 and no additional charges relating to this grant will be incurred. The remaining expense of $0.3 million in 2000 related to the accelerated vesting of remaining stock options for two terminating directors that occurred in the second quarter of 2000. This expense is a non-cash expense and the same amount is credited to additional paid-in capital.

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Amortization of Goodwill and Intangibles

In March 2002, the Company acquired from Nokia itsNokia's CompactFlash Bluetooth Card business from Nokia, including a product line and a sole, non-exclusive, non-transferable, worldwide license to use, make and sell the related product line technology fortechnology. The total purchase price was $2.6 million, of which approximately $1.0 million was attributed to intangible technology and licensing agreements and approximately $1.4 million was attributed to goodwill.licensing. The intangible assets are being amortized over their estimated useful lives of 1one to three years. Amortization charges for each of 2003 and 2002 were $0.3 million.

In October 2000, the Company acquired 3rd Rail Engineering, an engineering services firm specializing in engineering design and integration services of embedded systems 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 intellectual property. The intellectual property is being amortized over estimated useful lives of 3 to 8 years. Amortization charges for 2003 were $0.1 million, compared to $0.2 million in 2002, and $0.2 million in 2001.

Amortization of goodwill has beenwas discontinued commencing in the first quarter of 2002 in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Amortization of goodwill (including assembled workforce) in 2001 and 2000 was $1.5 million, and $0.4 million, respectively, relating solely to the acquisition of 3rd Rail Engineering in October 2000. During 20022003 goodwill wasand intangibles were analyzed for impairment of value, and no impairment was found. Amortization of all intangible assets

Interest Income and Other and Interest Expense

Interest income was $0.5 million$23,000 in 2003, $26,000 in 2002, and $0.2 million in 2001.

Interest Income and Interest Expense

Interest income in 2002 was not significant and interest income in 2001 was approximately $0.2 million. Interest income in 2000 of approximately $0.4 million reflects interest earned on higher cash balances duringbalances. Higher cash at year-end 2003 is primarily the year. result of a private placement financing of our Common Stock in the third quarter of 2003. Other income of $12,000 in 2003 was the result of net currency gains on foreign currency contracts partially offset by a loss on the Euro note payable to Nokia.

Interest expense in 2003 and 2002 is due primarily to interest on the note payable to Nokia for thein connection with our acquisition in March 2002 of its CompactFlash Bluetooth Card business and related product line technology. Remaining interest in all three years relates to interest on equipment lease financing obligations.

Income Taxes

There were no provisions for Federalfederal or state income taxes for the years ended December 31, 2003, 2002, 2001, and 2000,2001, as the Company incurred net operating losses in all periods. We have established a valuation allowance for the net deferred tax asset. There can be no assurance that the deferred tax assets subject to the valuation allowance will be realized.

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Preferred Stock Dividend and Accretion of Preferred Stock

Preferred stock dividends in 2003 and 2002 reflect dividends accrued at the rate of 12% per annum on Series E redeemable convertible preferred stock issued in October 2002, and the associated stock accretion of $82,714 arising from the accounting treatment of the Series E issuance. We will accrete the value assigned to the preferred stock up to its redemption value over 18 months. Preferred stock dividends in 2000 reflect dividends accrued at athe rate of 8% per annum on unconverted Series B convertibleF preferred stock onissued in March 2003. Dividends for Series C convertible preferred stock, and on Series D convertible preferred stock. These preferred sharesE were convertible into common stock at the discretionpaid in cash for each of the holder. The preferred sharesthree quarters of 2003 until the Series E was fully converted. Dividends for Series F for the first, third, and fourth quarters were substantially converted into common shares during 1999,paid in cash, and for the balance convertedsecond quarter were paid in 2000.Common Stock. Preferred stock accretion was $565,200 in 2003 and $82,700 in 2002 arising from the accounting for the redemption of the Series E issuance, and a one time accretion charge in the first quarter of 2003 of $296,500 reflecting the discount from market after giving effect to an allocation to the investor warrants of $296,500 of the proceeds of the Series F issuance.

Quarterly Results of Operations

The following table sets forth summary quarterly statements of operations data for each of the quarters in 20012002 and 2002.2003. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein, and, in our opinion, includes all adjustments (consisting only of normal recurring entries) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future period.

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We have experienced significant quarterly fluctuations in operating results and we anticipate such fluctuations to continue in the future. We generally ship orders as received and as a result typically have little or no backlog. Quarterlytherefore 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.quarter. 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$50 million in equity capital and preferred stock.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 20032004 and possibly longer. We have historically needed to raise capital to fund our operating losses.

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Cash used in operating activities was $0.7 million in 2003 compared to $1.9 million in 2002 compared toand $4.2 million in 2001 and $1.7 million in 2000.2001. The use of cash resulted from financing our net losslosses of $1.2 million in 2003, $3.0 million in 2002, and $6.1 million in 2001, and $3.7 million in 2000.2001. Adjustments for non cashnon-cash items, including depreciation, amortization, stock option charges, amortization of goodwill and intangibles, and fluctuations on forward currency forward exchange contracts, totaled $0.9 million in both 2003 and 2002, and $2.1 million in 2001, and $2.5 million in 2000.2001. Changes in working capital balances resulted in a use of cash in 2003 of $0.4 million, a source of cash in 2002 of $0.2 million and a use of cash in 2001 and 2000 of $0.3 million and $0.5 million. Changes in working capital balances during 20022003 reflect changes between the end of the year and the beginning of the year including increased accounts receivable balances from higher levels of shipments in the fourth quarter and lower accounts payable balances due to reductions in deferred payments, partially offset by reductions in inventory stock as we transitioned to our next generation proprietary ASIC chip and phased out existing stock, increases in deferred revenue due to higher levels of shipments in the later half of December, and reductions in prepaid expenses. Changes in working capital balances during 2002 included increased accounts receivable balances from higher levels of shipments in the fourth quarter and increases in inventories due primarily to initial stocking of a major retailer, offset by increases in accounts payable resulting from deferred payments. Changes in working capital balances during 2001 include lower accounts receivable balances from increased collections and the timing of shipments earlier in the fourth quarter, a decrease in inventories, lower accounts payable balances reflecting lower inventory purchases in the fourth quarter, lower accrued expense balances reflecting salary reductions and mandatory vacation policies in effect during the fourth quarter, and lower deferred revenue balances that reflected inventory shipped into retail channels at the end of 2000 that had either been sold or returned by the end of 2001. Changes in working capital balances in 2000 are primarily related to growth including increases in accounts receivables as a direct result of increased revenues, and higher inventories to support anticipated increased revenues, partially offset by increases in accounts payable related to increased levels of inventories, higher accrued payroll related to increased headcount, and higher deferred revenue relating to inventory shipped into retail channels for which revenue recognition had been deferred.

Cash used in investing activities was $0.3 million in 2003, $1.3 million in 2002, and $0.2 million in 2001. Investing activities in 2003 reflect the cost of furniture, new computer equipment, purchased software for new employees, and tooling costs for new products. These costs for 2002 and 2001 totaled $0.5 million and $1.2$0.2 million, respectively. Additionally, in 2000. In March 2002 we used $0.9 million to acquire from Nokia Corporation its CompactFlash Bluetooth Card business including a product line and a sole, non-exclusive, worldwide license to make, use and sell the related product line technology (balance(the balance of acquisition securedprice was paid with a note payable). In October 2000 we used $1.0 million ($0.7 million net

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(Table of purchased cash and cash equivalents) as part of the purchase price for the acquisition of 3rd Rail Engineering. The remaining amounts for investing activities reflect the cost of furniture, new computer equipment, purchased software for new employees, and tooling costs for new products totaling $0.5 million, $0.2 million, and $0.5 million for the years 2002, 2001, and 2000.Contents)

Cash provided by financing activities was $4.3 million in 2003, $1.5 million in 2002, and $1.9 million in 2001,2001. During 2003 we completed two private placement financings, our Series F convertible preferred stock, which provided $1.5 million net of issuance costs, and $6.0a Common Stock financing, which provided $3.7 million net of issuance costs. Additional cash was provided by financing activities in 2003 from the exercise of $0.7 million in 2000.stock options and warrants, and from gains on the sale of foreign exchange contracts of $0.3 million entered into in conjunction with the Euro note payable to Nokia. During 2003 we made payments of $1.3 million on the note payable to Nokia, $0.3 million in net payments against our bank revolving credit line, $0.2 million in redemption payments of our Series E redeemable convertible preferred stock, and $0.1 million in combined dividend payments on our Series E and Series F preferred stock. At the end of 2003 we drew $1.6 million in cash against our bank credit line which we repaid in January 2004. Net cash provided from using our bank line of credit was $0.6 million in 2002 and $1.3 million in 2001. At the end of 2002 we drew $1.9 million in cash against our credit line which we repaid in January 2003. We did not use our credit line in 2000. During 2002 we completed two private placement financings to increase our working capital balances. In March 2002 we issued 0.5 million shares of common stockCommon Stock and warrants, which provided us with $0.4 million in net proceeds after placement fees and legal expenses. In October 2002 we issued convertible redeemable preferred stock and warrants, which provided us with $0.8 million in net proceeds after issuance costs. Additional proceeds in 2002 resulted from the exercise of options and warrants. During 2002 we made payments of $0.4 million on the note payable to Nokia related to the acquisition of its CompactFlash Bluetooth Card business and related product line technology. In 2001 proceeds of $0.6 million resulted from the exercise of options and warrants to acquire 0.9 million shares of common stock. During 2000, holders exercised $4.5 million of our public warrants to acquire 2.3 million shares of common stock, holders exercised $0.4 million of other warrants to acquire 0.4 million shares of common stock, and holders exercised $0.5 million of employee stock options to acquire 0.8 million shares of common stock. During 2000, we also sold $0.5 million in common stock upon exercise of preemptive rights by holders of our Series D preferred stock.

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Our cash balances as ofat December 31, 20022003 were $3.1$6.4 million, including cash of $1.9$1.6 million drawn against our bank line of credit. In March 20032004 we renewed ourentered into a new credit agreement with a bank line of credit which now expires on April 15, 2004. Onin March 20, 2003 we issued Series F redeemable convertible preferred stock and warrants to increase our working capital balances by $1.7 million, net of issuance costs.2006. We have remainingwarrants outstanding warrants from our private placement financings and outstanding employee stock options that, if exercised, would further increase our cash and equity balances. We believe our existing cash, plus our ability to reduce costs, and the new bank line will be sufficient to meet our funding requirements at least through December 31, 2004. Although we do not anticipate the need to raise additional capital in 2003during this time to fund operations, but we may raise additional capital if market conditions are appropriate. If we cannot achieve profitability, we will not be able to support our operations from positive cash flows, and we would use our existing cash to support operating losses and make remaining debt payments to Nokia (final payment due April 2004). Should the need does arise, there are no assuranceswe cannot assure you that additional capital will be available on acceptable terms, if at all. In the event we are unableall, and any such terms may be dilutive to raise sufficient additional needed capital to meet our requirements, we may not be able to continue some or all of our current operations. We believe our existing cash plus funds raised subsequent to year end, our ability to reduce costs, and the renewed bank line will be sufficient to meet our funding requirements through at least December 31, 2003.

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

Recent Accounting Pronouncements

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

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In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees." FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing the guarantee. We will apply FIN 45 to guarantees, if any, issued after December 31, 2002. FIN 45 also requires guarantors to disclose certain information for guarantees, including product warranties, outstanding

The Company's contractual obligations at December 31, 2002. At adoption, FIN 45 did not have a significant impact on our consolidated statements of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123 to provide alternative methods of transition to SFAS 123's fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB No. 28, "Interim Financial Reporting," to require disclosure2003 are outlined in the summarytable below:

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements as defined in Item 303 of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB 25. Since we account for our stock-based compensation under APB 25, and have no current plans on switching to SFAS 123, the impact of SFAS 148 will be limited to the annual and interim reporting of the effects on net income and earnings per share as if we accounted for stock-based compensation under SFAS 123. SFAS 148 is effective for fiscal years ending after December 15, 2002. The adoption of the disclosure provisions of SFAS 148 did not have a material impact on our results of operations and financial position in 2002.Regulation S-K.

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Other Factors Affecting Future Operations

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

We have incurred significant operating losses since our inception. We expectmay continue to incur operating losses through the first quarter of 20032004 and possibly longer. For the fiscal years ended December 31, 20022003 and 2001,2002, we incurred a net losslosses of $2,971,830$1,249,900 and $6,063,239,$2,971,800, respectively. To sustainobtain profitability, we must accomplish numerous objectives, including the development of successful new products. We cannot foresee with any certainty whether we will be able to achieve these objectives in the future. Accordingly, we cannot assure you that we will generate sufficient net revenue to achieve ongoing profitability.

We also have debt payment obligations to Nokia Corporation under a Business Transfer Agreement that we entered into with Nokia in March 2002. These payments are in the amount of approximately $87,600,$126,000, plus accrued interest, per month through November 2003, with a final payment of approximately $437,300 plus accrued interest, due in December 2003. In addition, we sold 100,000 shares of Series E Preferred in a private placement financing in October 2002. We are obligated to pay one-fifteenth of the original value of the Series E Preferred ($66,667) in cash or shares of Common Stock, together with accrued dividends, at the end of every month commencing on January 31, 2003.April 2004. If we cannot achieve profitability, we will not be able to support our operations from positive cash flows, and we would use our existing cash to support operating losses and make debt payments to Nokia or make cash amortization payments onNokia. We do not anticipate the Series E Preferred, in which case we would need to raise more capital. Weadditional capital through 2004 to fund our operations, but should the need arise we cannot assure you that additional capital will be available on acceptable terms, if at all, and any such terms may be dilutive to existing stockholders. If we are unable to secure the necessary capital, we willmay need to suspend some or all of our current operations.

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

We recently transferred our Common Stock listing from the Nasdaq National Market to the Nasdaq SmallCap Market, because we were not able to maintain the requirements for listing on the National Market. However, our SmallCap Market listing and our listing on the Pacific Exchange are also contingent on meeting specific quantitative standards, including a minimum bid price of $1.00. We may not be able to meet these requirementsrequire additional capital in the future, particularlyand we cannot assure you that capital will be available on reasonable terms, if at all, or on terms that would not cause substantial dilution to your stock holdings.

We have historically needed to raise capital to fund our Common Stock fails to trade at above $1.00 per share. Our Common Stock last traded above $1.00 on September 10, 2002.operating losses. We expect that our Common Stock willmay continue to be listedincur operating losses through the first quarter of 2004 and possibly longer. Our forecasts are highly dependent on the Nasdaq SmallCap Market until August 15, 2003, after which itfactors beyond our control, including market acceptance of our products and sales of handheld computers. If capital requirements vary materially from those currently planned, we may be delisted. With respect to the Pacific Exchange, we have been advised that our listing status will be reviewed monthly, and while thererequire additional capital sooner than expected. There can be no assurances asassurance that such capital will be available in sufficient amounts or on terms acceptable to us, if at all. Any sale of a substantial number of additional shares will cause dilution to our continued listing, we believe there is a reasonable possibility that our listing on the Pacific Exchange will be continued until August 15, 2003. If our Common Stock is delisted from the SmallCap Marketstockholders' investments and the Pacific Exchange, and is thereafter traded only on the over-the-counter market, our stockholders' ability to purchase and sell our Common Stock could be less orderly and efficient and more costly. Furthermore, a delisting of our Common Stock could have a materially adverse impact on our business operations by damaging our general business reputation and impairing our ability to obtain additional capital. As a result of the negative impact on the liquidity of our Common Stock and on our business, a delisting would also likely decreasecause the market price of our Common Stock and increase the volatility of our stock price.

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

A significant portion of our revenue comes from one distributor,two distributors, Ingram Micro, Inc. and Tech Data Corp., which together represented approximately 2243 percent of our worldwide revenue in fiscal 20022003 and 2330 percent of our worldwide revenue for 2001.in fiscal 2002. We expect that a significant portion of our revenue will continue to depend on sales to Ingram Micro.Micro, Inc. and Tech Data Corp. We do not have long-term commitments from Ingram Micro, Inc. or Tech Data Corp. to carry our products, and iteither could choose to stop selling some or all of our products at any time. If we lose our relationship with Ingram Micro, Inc. or Tech Data Corp., we could experience disruption and delays in marketing our products.

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

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

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

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

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

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

We could face increased competition in the future, which would adversely affect our financial performance.

The market for handheld computers in which we operate is very competitive. Our future financial performance is contingent on a number of unpredictable factors, including that:

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

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

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

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

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

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

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

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

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

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

If demand is lower than forecasted levels, we could have excess production resulting in higher inventories of finished products and components, which could lead to write-downs or 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 in our failure to meet some minimum purchase commitments, each of which may lower our operating results.

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

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

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

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

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

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

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

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

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

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

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

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

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

On June 30, 2003, Khyber Technologies Corporation filed a complaint against us in the United States District Court, Northern District of Ohio, alleging that we had infringed a patent held by Khyber in manufacturing, using and selling our portable bar code scanners. We have filed our answer to the complaint and dispute the Khyber claims. Both parties have filed a motion for summary judgment.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Export sales (sales to customers outside the United States) accounted for approximately 39 percent of our revenue in 2003 and approximately 42 percent of our revenue in 2002 and approximately 38 percent of our revenue for 2001.2002. 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 isare located near an earthquake fault. The potential impact of a major earthquake on our facilities, infrastructure, and overall business is unknown. Additionally, we may experience electrical power blackouts or natural disasters that could interrupt our business. We do not have a detailed disaster recovery plan. We do not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages incurred by us as a result of these events could have a material adverse effect on our business.

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

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

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As of March 14, 2003,February 27, 2004, we had 24,241,25929,959,961 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-3S-8 prospectus delivery requirements and, in someother cases, only to manner of sale, volume, and notice requirements of Rule 144 under the Securities Act of 1933, as amended.Act.

As of March 14, 2003,February 27, 2004, we had 100,00089,443 shares of Series EF Preferred Stock outstanding that are convertible into 996,168894,430 shares of Common Stock at $0.87$0.722 per share. If the share price

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(Table of the Common Stock exceeds $0.87 per share, the holder of Series E Preferred may decide to convert some or all of the Series E Preferred into Common Stock and such Common Stock would be freely tradable in the public market and subject only to S-3 prospectus delivery requirements.Contents)

As of March 14, 2003,February 27, 2004, we also had 5,251,4406,579,706 shares subject to outstanding options under our stock option plans, and 1,511,9011,003,092 shares were available for future issuance under the plans. We have registered the shares of Common Stock subject to outstanding options and reserved for issuance under our stock option plans. Accordingly, shares underlying vested options will be eligible for resale in the public market as soon as the options are exercised.

As of March 14, 2003,February 27, 2004, we also had warrants outstanding to purchase a total of 598,0581,806,896 shares of our Common Stock.
Stock at exercise prices ranging from $0.722 to $2.73. All such warrants may be exercised at any time, and the shares issuable upon exercise may be resold, either without restrictions or subject, in some cases, only to S-3 prospectus delivery requirements, and, in some cases, only to manner of sale, volume, and notice requirements of Rule 144.

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

During the period from January 1, 20022003 through March 14, 2003,February 27, 2004, our Common Stock price fluctuated between a high of $2.55$4.80 and a low of $0.51.$0.65. The trading price of our Common Stock could be subject to wide fluctuations in response to many factors, some of which are beyond our control, including general economic conditions and the outlook of securities analysts and investors on our industry. In addition, the stock markets in general, and the markets for high technology stocks in particular, have experienced high volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Common Stock.

We may require additional capital in the future and we cannot assure you that capital will be available on reasonable terms, if at all, or on terms that would not cause substantial dilution to your stock holdings.32

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

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to invested cash. Our cash is invested in short-term money market investments backed by U.S. Treasury notes and other investments that mature within one year and whose principal is not subject to market rate fluctuations. Accordingly, interest rate declines would adversely affect our interest income but would not affect the carrying value of our cash investments. Based on a sensitivity analysis of our cash investments during the quarter ended December 31, 2002,2003, a decline of 1% in interest rates would reduce our quarterly interest income by approximately $3,000.$12,000.

Our bank credit line facilities of up to $4.0 million have variable interest rates based upon the lenderslender's index rate plus 0.75% for the domestic line (up to $2.5 million) and the index rate plus 0.5% for the international line (up to $1.5 million). Accordingly, interest rate increases would increase our interest expense on outstanding credit line balances. We utilized our credit line facility only at the end of the quarters ended March 30, 2002, June 30, 2002 and December 31, 2002,each quarter in 2003 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 officesubsidiary in Japanese Yen, and we expect to enter into selected future purchase commitments with foreign suppliers that willmay 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. WeAt December 31, 2003, we have payment obligations of approximately 1.6 million400,000 Euros as a result of the recentour purchase of Nokia's CompactFlash Bluetooth Card business and related product line technology.technology in March 2002. We have purchased forward purchase contracts and swapexchange contracts for Euros in order to minimizemitigate our foreign currency exposure. Based on a sensitivity analysis of our net assets denominated in Eurosand subsidiary expenses at the beginning, during and at the end of the quarter ended December 31, 2002,2003, an adverse change of 10% in exchange rates would result in an increase in our net loss for the quarter of approximately $27,000.$91,000. For 20022003 the total adjustment for the effects changes in foreign currency on cash balances, collections, payables, and derivatives, was a net gain of $34,000.$92,000. 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.

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Item 8. Financial Statements and Supplementary Data

The supplementary information required by this item is included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders of
Socket Communications, Inc.

We have audited the accompanying consolidated balance sheets of Socket Communications, Inc. as of December 31, 20022003 and 2001,2002, and the related consolidated statements of operations, redeemable preferred stock and stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002.2003. 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, 20022003 and 20012002 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002,2003, in conformity with accounting principles generally accepted in the United States.

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

/s/ Ernst & Young LLP

San Jose, California
February 10, 2003,
except for Note 14,
as to which the date is March 28, 200311, 2004

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