UNITED
    STATES
    SECURITIES AND EXCHANGE COMMISSION
    WASHINGTON, DC 20549**FORM 10-K** **[X]**
      **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF 1934** For
    the fiscal year ended December 31, 2004 **[   ]**
      **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,
    $0.001 Par Value Check whether
    the registrant (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.
    [X] Indicate
    by check mark whether the registrant is an accelerated filer (as defined by
    Exchange Act Rule 12b-2). YES [X] NO [ ] Aggregate
    market value of Common Stock ($0.001 par value) held by non-affiliates on
    June 30, 2004 based on the closing price on such date: $80,062,268. 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 11, 2005
    was 30,157,893 shares. Documents Incorporated
    by Reference: Items 10,
    11, 12, 13, and 14 of Part III are incorporated by reference from the Registrant's
    Proxy Statement for the Annual Meeting of Stockholders to be held on April
    21, 2005. Such Proxy Statement will be filed within 120 days after the end
    of the fiscal year covered by this Annual Report on Form 10-K. 
 
  TABLE
          OF CONTENTSPART
        IItem
        1.
      Business
      1Item
        2.
      Properties
      13Item
        3.
      Legal
        Proceedings
      13Item
        4.
      Submission
        of Matters to a Vote of Security Holders
      13PART
        IIItem
        5.
      Market for Registrant's Common Equity, Related Stockholder
        Matters, and Issuer Purchases of Equity Securities
      14Item
        6.
      Selected Consolidated Financial Data
      15Item
        7.
      Management's
        Discussion and Analysis of Financial Condition and Results of Operations
      16Item
        7a.
      Quantitative
        and Qualitative Disclosures about Market Risk
      37Item
        8.
      Financial
        Statements and Supplementary Data
      38Item
        9.
      Changes
        in and Disagreements with Accountants on Accounting and Financial Disclosure
      62Item
        9a.
      Controls
        and Procedures
      62Item
        9b.
      Other
        Information
      63PART
        IIIItem
        10.
      Directors and Executive Officers of the Registrant
      63Item
        11.
      Executive Compensation
      63Item
        12.
      Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters
      63Item
        13.
      Certain
        Relationships and Related Transactions
      64Item
        14.
      Principal
        Accountant Fees and Services
      64PART
        IVItem
        15.
      Exhibits and Financial Statement Schedules
      64SIGNATURES
      65 Index
        to Exhibits
      66


PART
  I

This Annual 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, statements
  forecasting future financial results and operating activities, market acceptance
  of our products, expectations for general market growth of handheld computers
  and other mobile computing devices, growth in demand for our products, expansion
  of the markets that we serve, expansion of the distribution channels for our
  products, adoption of our embedded products by third-party manufacturers of
  electronic devices, and the timing of the introduction and availability of new
  products, as well as those discussed under "Management's Discussion and
  Analysis of Financial Condition and Results of Operations." Such factors
  include but are not limited to, the risk of delays in the availability of new
  products due to technological, market or financial factors including the availability
  of necessary working capital, our ability to successfully introduce and market
  future products, our ability to effectively manage and contain our operating
  costs, the availability of announced handheld computer hardware and software,
  product delays associated with new model introductions and product changeovers,
  continued growth in demand for handheld computers, market acceptance of emerging
  standards such as Bluetooth and Wireless LAN and of our related connection and
  data collection products, the ability of our strategic partnerships to benefit
  our business as expected, our ability to enter into additional distribution
  relationships, or other factors described in this Form 10-K including "Other
  Factors Affecting Future Operations" and recent 10-Q reports filed with
  the Securities and Exchange Commission. 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-lookingstatements.

Item 1. Business

The Company

We design, manufacture
  and sell data collection and connectivity products for mobile electronic devices.
  Our products employ innovative designs that reduce battery power consumption
  and make them easy to install and use. Our data collection products are designed
  to collect data on handheld computers, tablet computers, notebook computers
  and Smartphones using bar code scanning and Radio Frequency Identification (RFID)
  technologies. Our connectivity products are designed to connect handheld computers,
  tablet computers, notebook computers and Smartphones to the Internet, to local
  area computer networks, to wide area computer networks, and to other peripheral
  devices through both wireless and cable connections. We also offer serial products
  that connect electronic devices and embedded products that are designed to be
  installed inside third party mobile electronic devices. Our products are designed
  for use with a broad range of mobile devices that support standard expansion
  mechanisms using Windows Mobile, Windows CE, Windows XP, Palm Source, J2ME (used
  by Research-In-Motion on its Blackberry handheld computers) or Symbian 60 and
  80 operating systems. The standard expansion mechanisms we support include slots
  for plug-in cards in the CompactFlash, PC Card, and Secure Digital Input/Output
  (SDIO) form factors and Bluetooth®, a short range wireless connection technology.
  We believe that growth in the mobile workforce, combined with technical advances
  and cost reductions in mobile devices and networking technologies, is driving
  broader adoption of mobile data communications. Our products are designed to
  address the growing need for mobile workforce connectivity by enabling the use
  of handheld devices to extend data communications capabilities beyond location-dependent
  wired networks or telephone lines, thereby enabling mobile computer users to
  enhance their productivity, exploit time sensitive opportunities and improve
  customer satisfaction. Our products integrate hardware, software and services
  into complete mobile connectivity solutions.

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

Products

Our products may be classified
  into four broad product families:

- Data collection products;
- Connectivity products;
- Embedded products and
    services; and
- Serial products

Our data collection
  products consist of bar code scanning products that plug into or connect
  wirelessly to handheld computers, tablet computers, notebook computers and Smartphones
  and turn these devices into portable bar code scanners that can be used in various
  retail and industrial workplaces. We have developed extensive bar code scanning
  software called SocketScan that supports all of our bar code scanning products,
  and have software developer kits that assist developers in integrating our SocketScan
  software into their applications. Our bar code scanning products include CompactFlash
  and SDIO plug-in bar code scanners for linear and two-dimensional bar code scanning,
  a laser bar code scanning gun connected over a cabled plug-in connection, and
  a stand alone hand bar code scanner that connects using the Bluetooth standard
  for short-range wireless connectivity. We are also developing plug-in products
  to read Radio Frequency Identification (RFID) tags using our SocketScan software
  and have released a software developers kit to assist developers in developing
  applications using our RFID products. Data collection products represented approximately
  40 percent of our revenue for the year ended December 31, 2004.

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Our connectivity products
  are connection devices that can be plugged into standard expansion slots in
  handheld computers, tablet computers, notebook computers and Smartphones or
  connect to these devices over wireless and wired connections. These products
  allow users to connect their devices to the Internet via mobile or wired phone
  services, or to private networks, or to communicate with other electronic devices
  such as desktop computers, other handheld, tablet and notebook computers, Smartphones
  and printers. Wireless connection products include plug-in cards using the Bluetooth
  standard for short-range wireless connectivity, and plug-in cards for connecting
  to local wireless networks using the Wireless LAN 802.11b (or Wi-Fi) standard
  along with extensive communications software enabling the use of these products.
  Cable connection products include modems for telephone connections and Ethernet
  cards for local area network connections. Our Bluetooth technology products
  are of two types, those that add Bluetooth technology to mobile devices, and
  those that work with devices that are Bluetooth-enabled. Those that add Bluetooth
  technology include our CompactFlash and SDIO Bluetooth plug-in cards, our Bluetooth
  embedded modules, and our Bluetooth USB adapter for Windows notebooks and desktops.
  Bluetooth functions are becoming more widely built into mobile devices which
  will reduce demand for this category of product. Connectivity products which
  utilize Bluetooth as a connection mechanism and work with other Bluetooth-enabled
  products consist of our Cordless GPS receiver and our Cordless modem. Our GPS
  receiver collects and sends satellite positioning signals to a PDA or notebook
  for use with GPS maps and routing software. Connectivity products represented
  approximately 32 percent of our revenue for the year ended December 31, 2004.

Our embedded products
  and servicesconsist of Bluetooth modules, interface chips, and engineering
  design services to install these products. Our Bluetooth modules allow manufacturers
  of handheld computers and other devices to build wireless connection functions
  into their products using the Bluetooth standard for short-range wireless connectivity.
  Our interface chips allow manufacturers of wide area network cards and other
  devices to transfer information to and from handheld or notebook computers.
  Embedded products and services represented approximately 14 percent of our revenue
  for the year ended December 31, 2004.

Our serial products
  add connection ports to a notebook, tablet or handheld computer that allow users
  to connect these portable computers to standard peripherals or to other electronic
  devices with serial connections over cables or using the Bluetooth standard
  for short-range wireless connectivity. Serial products represented approximately
  14 percent of our revenue for the year ended December 31, 2004.

We target the enterprise
  markets with our products. Most of our products except our embedded products
  are sold through general distribution channels that service enterprises directly
  and resellers including electronic resellers. Our embedded products are sold
  directly to the manufacturers of products in which our products are embedded.
  The geographic regions we serve include the Americas, Europe, the Middle East,
  Africa and Asia Pacific.

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Market Dynamics

Handheld computers have
  evolved over the past several years from simple devices used mainly to hold
  personal information into small portable units with functionality similar to
  desktop PCs. Many handheld computers such as the Pocket PC, and more recently
  handheld computers using the Palm Source operating system, have built-in expansion
  slots in standard form factors, typically CompactFlash, Secure Digital Input/Output
  or Bluetooth, to allow for transfer of data in and out of the handheld computer.
  Some handheld computer models include an integrated phone to facilitate the
  transfer of data over mobile phone networks. Notebooks and tablet computers
  also have expansion slots to enable their use in mobile environments. Certain
  models of mobile phones called Smartphones have limited physical size and computing
  capabilities designed primarily to process and store personal information and
  facilitate messaging over the mobile phone networks. The addition of Bluetooth
  wireless technology to these Smartphones and to the Blackberry handheld computer
  from Research-In-Motion facilitate the transfer of data between these devices
  and networks or other devices. Advances in mobile network access and transfer
  speeds are enabling mobile computing device users to access the Internet, send
  and receive email, access corporate data files, and exchange instant messages
  anywhere and at any time through wireless local area networks, mobile phone
  networks, phone land lines, and to transfer data directly with other nearby
  mobile devices using Bluetooth wireless technology, cables, or wireless local
  area networks. Our connectivity products and our serial products are designed
  to enable these connections by adding connections to devices that do not have
  them built-in, or by connecting to devices that have one or more of the wireless
  connection technologies built in. In addition, mobile devices with standard
  expansion slots or Bluetooth expansion are effective at collecting data. Our
  data collection products are designed to facilitate the collection of bar code
  and RFID information on these devices.

Growth in the mobile workforce
  and increasing reliance on the Internet, and on access to corporate databases
  and email are increasing the demand for mobile data communications. The capability
  of a mobile workforce to enter data in the field and to transfer it electronically
  generally improves the timeliness and accuracy of information such as order
  entry, logistics management or transaction reporting. Advances in connection
  technologies, local area networking and wide area networking are being commercialized
  to allow handheld computers to interact with nearby computers and with a wide
  array of electronic appliances, including mobile phones, printers, digital cameras,
  local area network access points, Global Positioning System receivers, automobile
  communications systems, bar code scanners, radio frequency identification tags,
  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
  mobile computing devices is extensive and improving. Unlike early models,
  most mobile computing devices now offer bright outdoor color screens and longer
  battery life, have software allowing their use as messaging devices with capacity
  to store personal information, and have standard expansion slots or use Bluetooth
  or wireless local or wide area network connections to transfer data in and out
  of the device. Popular desktop programs such as Word and Excel are available
  for today's handheld, tablet and notebook computers enabling users to send and
  receive emails with full attachments, run popular personal information management
  and business programs, run entertainment and education software for games, music
  or books, view and interact with the Internet with enhanced and feature-rich
  graphics, have direct access to corporate data files (subject to business security
  arrangements), and use instant messaging over mobile networks. Mobile devices
  also can become lightweight mobile bar code and RFID scanning devices when used
  with our bar code scanning or RFID products, enabling the capture and processing
  of bar code or RFID information in a mobile environment.

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Manufacturers are poised
  to actively market mobile devices. Mobile device manufacturers are positioned
  to actively market their mobile devices during 2005, which will assist in educating
  the market on the capabilities of these devices using our connection products.
  Handheld computers using the Microsoft Windows Mobile operating system are called
  "Pocket PCs." The largest Pocket PC manufacturers are Hewlett-Packard
  and Dell. These companies manufacture some models that integrate phones into
  the handheld computer. These manufacturers, along with others such as Siemens,
  Toshiba and Fujitsu, offer tablet or notebook computers with standard expansion
  slots. Manufacturers of industrial versions of Pocket PCs include Symbol Technologies,
  Intermec, HandHeld Products, Casio, Itronix, TopCon and Tripod Data Systems.
  PalmOne is the largest manufacturer of handheld computers using the Palm Source
  operating system. PalmOne's Tungsten series of handheld computer and its Treo,
  a Smartphone, have SDIO expansion slots and Bluetooth connectivity to facilitate
  data transfer. Smartphones are also becoming widely available from mobile phone
  manufacturers using the Symbian 60 and Symbian 80 operating systems, including
  Nokia, Lucky Goldstar, Lenova, Panasonic, Samsung, Sendo and Siemens, or the
  Windows Mobile operating system such as Motorola. These phones use Bluetooth
  and, in some Windows Mobile Smartphones, SDIO slots to facilitate the transfer
  or the collection of data. Increased competition among manufacturers is expected
  to result in increased availability and greater promotion of mobile computing
  devices that can be used with our products during 2005 and beyond.

Mobile phone networks
  continue to be upgraded to provide faster data speeds and 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 has substantially
  increased data transfer speeds over regular digital cellular phone networks.
  Available data rates today can exceed the speeds experienced on a desktop computer
  connected over a phone line with a dial-up modem. These higher speeds are making
  mobile data applications more attractive to users and driving demand for connection
  products to facilitate data transfer over digital cellular mobile phone networks.

The mobile workforce
  is growing and is increasingly reliant on email and the Internet. The mobile
  workforce in the U.S. has been estimated to exceed 26 million persons, and at
  least double that number on a worldwide basis. Before recent advancements in
  handheld computers and wireless networks over mobile phones and through wireless
  local area network access points, the mobile workforce had been unable to effectively
  stay connected with email, the Internet or corporate data except through telephone
  lines. With the growth in the use of the Internet and email for business and
  personal applications, workers and consumers are increasingly dependent on access
  to the Internet and email for managing their business and personal lives. Recent
  improvements in mobile phone and wireless LAN connectivity and deployment of
  mobile computers and Smartphones by corporations to their mobile workforce are
  expected to be major factors driving growth in mobile data applications over
  the next several years.

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Third party applications
  for enterprises are becoming available in increasing numbers. Third party
  software applications are becoming available for the collection, processing
  and transfer of information by a mobile workforce. Mobile computing devices
  are being used for such diverse applications as capturing lot numbers of drug
  samples given to a doctor, managing the stocking of shelves in retail establishments,
  or entering sales orders from the field. Larger enterprise software companies
  such as Siebel Systems have written applications for the Pocket PC that use
  our bar code scanning products. The availability of productivity-enhancing application
  software is a major driver of enterprise deployment of mobile computing devices.

Growth is projected
  in the deployment of mobile computing devices. Mobile devices have been
  growing in popularity driven by improved functionality and reduced costs. Growth
  in third party enterprise applications to collect, process and transfer information
  is enabling enterprises to realize productivity benefits from using mobile computing
  devices for connectivity and data collection. Enterprise productivity benefits,
  combined with an improving economy, are expected to stimulate the deployment
  and use of mobile devices within enterprise mobile workforces.

Marketing Strategy

We intend to capitalize
  on our strategic partner relationships, expand and improve our product offerings
  to differentiate our products, build a stronger brand name, support the development
  of third party software applications and integrator solutions, introduce our
  products into new markets by increasing the number of mobile device platforms
  that our products support, 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, third party software developers, strategic
  vertical integrators, distribution partners, and end-user customers. We have
  a team of employees that manage each strategic partner relationship. During
  2004, we introduced a Strategic Vertical Integrator program and increased the
  resources in our Embedded Systems Group, now called Development Services, to
  increase the support that we give to our software and hardware development partners.
  We have built close working relationships with a number of companies that help
  us expand and market our products as new standards, technologies and markets
  emerge. Of particular importance are close working relationships with Microsoft,
  the general purpose Pocket PC device manufacturers (Dell and Hewlett-Packard)
  and Symbol Technologies. 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 spend extensive engineering time and resources to ensure compatibility with
  as many Pocket PCs as possible. Dell is a direct reseller of our products. We
  work closely with the sales teams of Dell and Hewlett-Packard to assist them
  in offering mobile device solutions that include our products. Symbol Technologies
  supplies our bar code laser scanning modules that are utilized in our In-Hand
  Scan Bar Code Scanning Card and our Cordless Hand Scanner. Symbol also has designed
  our Bluetooth connection products into some of their products.

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Expand and improve our
  product offerings to differentiate our products. We offer a wide range of
  connectivity products that are used with mobile devices, and we encourage our
  distributors to carry a complete range of our products. The goal is for customers
  to view Socket as a single source for their connection needs, instead of having
  to rely on individual product offerings of our competitors. During 2004 and
  early 2005, we introduced a number of new hardware products including a Cordless
  Hand Scanner using Bluetooth wireless technology, a 56K modem in Secure Digital
  Input/Output form factor, a USB Bluetooth adapter, a new GPS Bluetooth receiver,
  an RFID reader as part of a software developers kit, and a mobile power pack.
  During 2004, we released new Bluetooth software for Windows notebooks and tablets,
  and made major upgrades to our GPS and wireless local area network software.
  We introduced in early 2005 a software suite to organize collections of items
  that have bar codes including retrieval of information about the items from
  the Internet. During 2005 we expect to release driver software to enable our
  Bluetooth and bar code scanning products to work with additional operating systems
  including Smartphones using the Symbian 60 and 80 operating systems and with
  Blackberry handheld computers from Research-In-Motion with built-in Bluetooth.
  New products in combination with expanding markets and quality differentiated
  products have been a successful formula that has helped us grow our revenue
  and improve our operating results.

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

Support the development
  of third party software applications and integrator solutions. We have created
  software developer kits for many of our products, including bar code scanning,
  RFID, Bluetooth and Wireless LAN, and we expect to add a software developers
  kit for GPS in 2005. In addition, we have several employees dedicated to assisting
  developers and integrators with integrating our products into their solutions,
  including a Strategic Vertical Integrator program begun in 2004.

Introduce our products
  into new markets by increasing the number of mobile device platforms that our
  products support. Our focus during the past several years has been to develop
  connectivity and data collection products for handheld computers with an emphasis
  on the Pocket PC. We support mobile devices that have the following characteristics:
  truly portable devices that are easily carried and used while mobile; supporting
  an open software architecture such as Windows, Palm and Symbian; and supporting
  a standard expansion mechanism such as CompactFlash, Secure Digital Input/Output,
  or Bluetooth. During 2004, we introduced new Bluetooth software for Windows
  notebooks and tablet computers and enabled our SDIO bar code scanning products
  and some of our Bluetooth stand alone products to work with handheld devices
  using the Palm Source operating system. During 2005, we expect to enable additional
  mobile computing devices to work with our bar code scanning and Bluetooth stand
  alone products. These devices include Smartphones that use the Symbian 60 and
  Symbian 80 operating systems and Blackberry handheld computers with Bluetooth
  from Research-In-Motion.

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Encourage device manufacturers
  to build our technology directly into their products. To capture embedded
  connection business, we have built relationships with certain mobile device
  manufacturers and work with them to integrate our products, particularly our
  Bluetooth products, into their own product designs. The majority of these manufacturers
  are building vertical application devices for special purpose markets. During
  2005, we expect to expand our offerings of embedded products to add Wireless
  LAN and GPS technologies. We have an internal team of employees that manages
  our embedded products business. We also provide engineering services to our
  mobile device manufacturer customers to assist them as needed to integrate our
  embedded products into their mobile devices.

Competition and Competitive
  Risks

The overall market for
  data collection and connectivity products is both complex and competitive, and
  we expect competition in our market areas to intensify, particularly for our
  connectivity products, which compete with similar products that are manufactured
  and offered to the market at lower costs by Asian companies. However, our longtime
  focus on creating data collection and connectivity products for mobile devices
  has resulted in good brand name recognition and reputation. In addition, we
  continue to innovate and intend to be early to market in a number of product
  categories. We also believe that our brand name identifying our products as
  compact, low power, and easy to use, and the breadth of our product offerings
  including the extensive features of our software, will continue to differentiate
  us relative to our competitors. The competition in each of our product families
  is discussed in more detail below.

Data Collection Products.
  Our laser and CMOS imager bar code scanning products face competition from alternative
  scanning technologies, specifically charge-coupled device (CCD) scanning technology,
  which is less expensive than our technologies, and from ruggedized integrated
  bar code scanning devices from Symbol Technologies, Intermec, Handheld Products,
  Casio, Itronix and others. We purchase laser engines from Symbol Technologies
  and imagers from Handheld Products, and are licensed by these companies to use
  these engines in our bar code scanning products. These companies have limited
  our competition in the US market by not licensing others to use their engines
  in similar products. We face competition outside of the United States from a
  product similar to our In-Hand Scan Card from BeInteractive, and from a product
  similar to our Cordless Hand Scanner from Baracoda. Our laser scanning products
  are targeted to address specific market segments, such as field sales and service,
  retail store shelf management and pharmaceutical distribution management. We
  produce our laser bar code scanning products under technology licenses from
  Symbol Technologies and our CMOS imager under technology licenses from Symbol
  Technologies and Handheld Products, which, to date, have not licensed these
  technologies to potential competitors. Symbol and Handheld Products have historically
  been selective in licensing their technologies to third parties, and we have
  no reason to anticipate that their practices will change. Nonetheless, the continued
  availability of our licenses from Symbol and from Handheld Products and the
  continued absence of other licensees are dependent upon future licensing decisions
  by both companies.

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Connectivity Products
  - Wireless Connections. Our Wireless LAN cards face competition in the market
  today principally from other manufacturers of low power Wireless LAN cards including
  D-Link, Linksys, Netgear and SanDisk. We expect competition to remain intense
  in the future. We compete based on our brand name, distribution and customer
  support infrastructure, as well as software enhancements that provide ease-of-use,
  security features, as well as monitoring and troubleshooting tools. Our Wireless
  LAN cards also support Wi-Fi Protected Access (WPA) on Windows Mobile 2003.
  WPA is an industry standard method for securing wireless LANs for corporate
  and small office/home office environments established by the Wi-Fi Alliance,
  an industry trade association and standards setting body. 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
  Bluetooth cards are being offered by plug-in card manufacturers such as Ambicom,
  Anycom, Belkin, Brainbox, IOGear and Quatech. SDIO Bluetooth cards are being
  offered by Palm and Toshiba. Our Bluetooth CompactFlash plug-in card is the
  only card in the market that fits within a Type 1 CompactFlash slot (all competitive
  products and our SDIO product protrude from the slot), and our Bluetooth software,
  which continues to be improved, provides a functional, easy-to-use Bluetooth
  solution. GPS products are manufactured by ALK, Belkin, EMTAC, Hewlett-Packard,
  Leadtek, Mapopolis, NavMan, Pharos, Space Machine, Teletype, and Tom Tom. The
  primary differences among these GPS products are the software features in the
  routing software, including ease of use. Our GPS software has been recognized
  for its excellence by a major trade publication, and we will strive to continue
  to differentiate our product with software features. There are also a number
  of competitors that offer Bluetooth modems. These companies include Ace, Billionton,
  ENR Tech, SitCom, Typhoon, Trust, X Micro and Zoom.

Connectivity Products
  - Cable Connections. The market for our Ethernet cards has been declining
  in favor of wireless LAN connections. The other principal manufacturer of low
  power Ethernet cards is Billionton. Our modem cards face competition from a
  number of manufacturers. Companies offering CompactFlash modem cards include
  Ambicom, Billionton, Hewlett-Packard, New Media, Pharos, Pretec and Trendware.

Serial Products.
  We compete from time to time with similar products from small manufacturers
  such as Quatech, Silicom, SeaLevel, BlackBox, Advanteck and Brainbox. We also
  offer a cordless serial adapter with Bluetooth wireless technology. Companies
  that offer competing Bluetooth serial products include Adamya, AIRcable, Canon
  i-Tech, connectBlue, Digi International, Ezurio, Free 2 Move, and Initium.

Embedded Products and
  Services. Competition for our embedded products and services is primarily
  the same competition we face for the applicable plug-in product in one or more
  of our other product families, as plug-in connection cards are an alternative
  to embedded connections. For example, we sell our serial interface chips for
  embedding in third party devices. Interface chips with similar functions and
  features are available from other chip manufacturers. In addition, our Bluetooth
  software works well with our Bluetooth modules, providing us a complete solution
  for embedding Bluetooth wireless connections into third party devices. However,
  Asian manufacturers selling primarily hardware, such as Alps, Murata, and TaiyoYuden,
  along with integrators such as Bluesoft and Stonestreet One, are able to produce
  all or part of embedded Bluetooth solutions which may compete with our products
  and services.

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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 our proprietary mobility integrated circuit, 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 mobility
  integrated circuit into a broad range of 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 Mobile operating systems and
  in notebooks running various Windows and third party operating systems. We have
  been awarded four US Patents, 6,353,870, 6,559,147, 6,691,196 and 6,863,557,
  and one UK patent 2,365,182 covering our design for cards combining connectivity
  and removable memory. We also acquired from Khyber Technologies in July 2004
  US patent 5,902,991 entitled Card Shaped Computer Peripheral Device. The patent
  is a basic patent covering the design and functioning of plug-in bar code scanners,
  bar code imagers and RFID products. We have additional patents covering our
  proprietary technology pending with the US Patent Office.

We have also developed
  a number of software programs that provide unique functions and features for
  our connection and data collection products. For example, our SocketScan software
  enables all of our bar code scanning products to scan a variety of bar codes
  and to route the scanned data to many different types of data files. Our Bluetooth
  software used in conjunction with our Bluetooth hardware provides a completely
  functional Bluetooth solution enabling connections and data transfers between
  Bluetooth-enabled devices.

We have registered trademarks
  with the US Patent and Trademark Office for our name, our logo, and the term
  "Battery Friendly".

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. From time to time we receive communications from
  third parties asserting that our products infringe, or may infringe, their proprietary
  rights. 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.

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Personnel

Our future success will
  depend in significant part upon the continued service of certain of our key
  technical and senior management personnel, and our continuing ability to attract,
  assimilate and retain highly qualified technical, managerial and sales and marketing
  personnel. Our total employee headcount as of December 31, 2004 was 70 people.
  Our employees are not represented by a union, and we consider our employee relationships
  to be good.

Sales and Marketing

During the year ended December
  31, 2004, 63 percent of our sales were in North America, 24 percent in Europe,
  and 13 percent in Asia and Pacific Rim countries. During the year ended December
  31, 2003, 61 percent of our sales were in North America, 22 percent in Europe
  and 17 percent in Asia. Export sales are subject to the complications of complying
  with laws of various countries and the risk of import/export restrictions and
  tariff regulations.

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 the
  US and in Europe. As of December 31, 2004, we had 30 people in sales, marketing
  and technical support. Our United States distributor Tech Data Corp. accounted
  for 28 percent, 29 percent and 8 percent of our revenue for 2004, 2003, and
  2002, respectively. Our United States distributor Ingram Micro, Inc. accounted
  for 15 percent, 14 percent and 22 percent of our revenue in 2004, 2003 and 2002,
  respectively. We intend to increase our sales and marketing effort during 2005
  by adding personnel and increasing promotional activities, particularly in support
  of our distributors.

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 the distributors if we lower the price of those products. The immediate
  effect of returns and adjustments on our quarterly operating results is limited
  since we recognize revenues on products shipped to distributors only 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, including those of our competitors. If any OEMs, distributors,
  and resellers reduce or discontinue efforts to sell our products, our revenues
  and operating results could be materially adversely affected.

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Manufacturing

We subcontract the manufacturing
  of substantially all of our products to independent third party contract manufacturers
  who are located in the US, China, and Taiwan and who have the equipment, know-how
  and capacity to manufacture products to our specifications. 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, for which we
  perform final product testing and package our products at the third party contract
  manufacturers' locations. As of December 31, 2004, we had sixteen people employed
  in manufacturing operations including planning, buying, manufacturing engineering,
  quality control, product assembly, and shipping and receiving. We augment this
  workforce with temporary employees on an as needed basis.

Sole source components
  include our proprietary interface chip that controls the signal transmission
  between many of our products (all plug-in CompactFlash products except our Ethernet,
  Modem, and Wireless LAN cards) and the card slot on the mobile or handheld computer,
  our Ethernet chip, our laser scanning engines, our SDIO plug-in cards 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 ranging between
  $3.4 million and $3.7 million dollars over each of the past four years. 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.

As of December 31, 2004,
  we had fifteen people on our product development staff, and we hire engineering
  consultants to perform additional engineering services as required. We anticipate
  that we will continue to commit substantial resources to research and development
  in the future.

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General and Administration

As of December 31, 2004,
  we had nine people responsible for our financial and administrative activities
  including accounting and finance, personnel, reception, and administrative support.



Item 2. Properties

We lease a 26,000 square
  foot office facility in Newark, California under a lease expiring in December
  2006. This facility houses our headquarters and manufacturing operations. 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

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.
  On July 15, 2004, Khyber Technologies withdrew its patent infringement lawsuit
  as part of a settlement agreement in which we acquired from Khyber Technologies
  US patent 5,902,991 entitled Card Shaped Computer Peripheral Device. The patent
  is a basic patent covering the design and functioning of plug-in bar code scanners,
  bar code imagers and RFID products.

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 2004.

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PART
  II

Item 5. Market for Registrant's
  Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Common Stock

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

The quarterly high and
  low sales prices of our Common Stock, as reported on the NASDAQ National Market
  through March 11, 2005 and for the last two fiscal years are as shown below:



|                                                | Common
        Stock
|--------------------------------------------------- | --------------------
|Quarter
        Ended                               | High                
|2003                                               
|March
        31, 2003                              | $
        0.92      
| June
        30, 2003                          | $
        1.92      
| September
        30, 2003                     | $3.39               
| December
        31, 2003                      | $
        4.80      
|2004                                               
|March
        31, 2004                              | $
        4.40      
| June
        30, 2004                          | $
        3.67      
| September
        30, 2004                     | $
        3.00      
| December
        31, 2004                      | $
        2.54      
|2005                                               
| March
        31, 2005(through March 11, 2005) | $
        2.04      



On March 11, 2005, the
  closing sales price for our Common Stock as reported on the NASDAQ National
  Market was $1.54. We had approximately 458 stockholders of record as of March
  11, 2005, and we believe an additional 9,600 beneficial stockholders. We have
  not paid dividends on our Common Stock, and we currently 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.

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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."



|                                                                    | Year
      Ended December 31,
|------------------------------------------------------------------- | -----------------------------
|(Amounts
      in thousands except per share)                       | 2000                         
|Revenue                                                             | $11,550                      
|Net income
      (loss)                                             | (3,748)                      
|Net income
      (loss) applicable to common stockholders           | (3,795)                      
|Net income
      (loss) per share applicable to common stockholders | (0.18)                       
|Weighted
      average shares outstanding:                          |                              
|      Basic                                 | 20,534                       
|      Diluted                               | 20,534                       
|Total
      assets                                                  | 23,922                       
|Capital
      lease obligations - long term portion                 | 58                           
|Preferred
      stock                                               | --                           
|Total
      stockholders' equity                                    | 19,267                       
|Dividends
      and preferred stock accretion                       | 47                           

|                                                                                                                                                                                                                                                                                                                                                                                                                       
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)
          Net loss 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 Annual 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, statements
  forecasting future financial results and operating activities, market acceptance
  of our products, expectations for general market growth of handheld computers
  and other mobile computing devices, growth in demand for our products, expansion
  of the markets that we serve, expansion of the distribution channels for our
  products, adoption of our embedded products by third-party manufacturers of
  electronic devices, and the timing of the introduction and availability of new
  products, as well as those discussed under "Management's Discussion and
  Analysis of Financial Condition and Results of Operations." Such factors
  include but are not limited to, the risk of delays in the availability of new
  products due to technological, market or financial factors including the availability
  of necessary working capital, our ability to successfully introduce and market
  future products, our ability to effectively manage and contain our operating
  costs, the availability of announced handheld computer hardware and software,
  product delays associated with new model introductions and product changeovers,
  continued growth in demand for handheld computers, market acceptance of emerging
  standards such as Bluetooth and Wireless LAN and of our related connection and
  data collection products, the ability of our strategic partnerships to benefit
  our business as expected, our ability to enter into additional distribution
  relationships, or other factors described in this Form 10-K including "Other
  Factors Affecting Future Operations" and recent 10-Q reports filed with
  the Securities and Exchange Commission. 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, 2004. 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.

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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 upon shipment provided
  that persuasive evidence of a sales arrangement exists, the price is fixed and
  determinable, title has transferred, collection of resulting receivables is
  reasonably 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.

We also earn revenues from
  services performed in connection with consulting arrangements. For those contracts
  that include contract milestones or acceptance criteria, we recognize revenues
  as such milestones are achieved or as such acceptance occurs. In some instances
  the acceptance criteria in the contract defers acceptance until 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 write-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. Charges
  for the amounts we record as surplus or obsolete inventory are included in cost
  of revenue.

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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 began
  to periodically evaluate whether the value of the goodwill was impaired, at
  which time any impaired balances would 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,
  2004, 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
  are 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 data collection and connection products for use with mobile electronic
  devices, including handheld computers, tablet computers, notebook computers,
  and Smartphones. We also offer serial products that connect electronic devices
  and embedded products that are designed to be installed inside third party mobile
  electronic devices. Total revenue in 2004 was $26.1 million, an increase of
  21% over 2003 revenue of $21.6 million. Revenue in 2003 increased 32% over revenue
  in 2002 of $16.3 million.

Our products may be classified
  into four broad product families:

- Our data collection
    products consist of bar code scanning products that plug into or connect
    wirelessly to handheld computers, tablet computers, notebook computers and
    Smartphones and turn these devices into portable bar code scanners that can
    be used in various retail and industrial workplaces. We have developed extensive
    bar code scanning software called SocketScan that supports all of our bar
    code scanning products, and have software developer kits that assist developers
    in integrating our SocketScan software into their applications. Our bar code
    scanning products include CompactFlash and SDIO plug-in bar code scanners
    for linear and two-dimensional bar code scanning, a laser bar code scanning
    gun connected over a cabled plug-in connection, and a stand alone hand bar
    code scanner that connects using the Bluetooth standard for short-range wireless
    connectivity. We are also developing plug-in products to read Radio Frequency
    Identification (RFID) tags using our SocketScan software and have released
    a software developers kit to assist developers in developing applications
    using our RFID products. Data collection products represented approximately
    40 percent of our revenue for the year ended December 31, 2004.

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- Our connectivity
    products are connection devices that can be plugged into standard expansion
    slots in handheld computers, tablet computers, notebook computers and Smartphones
    or connect to these devices over wireless and wired connections. These products
    allow users to connect their devices to the Internet via mobile or wired phone
    services, or to private networks, or to communicate with other electronic
    devices such as desktop computers, other handheld, tablet and notebook computers,
    Smartphones and printers. Wireless connection products include plug-in cards
    using the Bluetooth standard for short-range wireless connectivity, and plug-in
    cards for connecting to local wireless networks using the Wireless LAN 802.11b
    (or Wi-Fi) standard along with extensive communications software enabling
    the use of these products. Cable connection products include modems for telephone
    connections and Ethernet cards for local area network connections. Our Bluetooth
    technology products are of two types, those that add Bluetooth technology
    to mobile devices, and those that work with devices that are Bluetooth-enabled.
    Those that add Bluetooth technology include our CompactFlash and SDIO Bluetooth
    plug-in cards, our Bluetooth embedded modules, and our Bluetooth USB adapter
    for Windows notebooks and desktops. Bluetooth functions are becoming more
    widely built into mobile devices which will reduce demand for this category
    of product. Connectivity products which utilize Bluetooth as a connection
    mechanism and work with other Bluetooth-enabled products consist of our Cordless
    GPS receiver and our Cordless modem. Our GPS receiver collects and sends satellite
    positioning signals to a PDA or notebook for use with GPS maps and routing
    software. Connectivity products represented approximately 32 percent of our
    revenue for the year ended December 31, 2004.
- 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 handheld computers and other devices to build wireless connection functions
    into their products using the Bluetooth standard for short-range wireless
    connectivity. Our interface chips allow manufacturers of wide area network
    cards and other devices to transfer information to and from handheld or notebook
    computers. Embedded products and services represented approximately 14 percent
    of our revenue for the year ended December 31, 2004.
- Our serial products
    add connection ports to a notebook, tablet or handheld computer that allow
    users to connect these portable computers to standard peripherals or to other
    electronic devices with serial connections over cables or using the Bluetooth
    standard for short-range wireless connectivity. Serial products represented
    approximately 14 percent of our revenue for the year ended December 31, 2004.

Our data collection
  product revenues in 2004 were $10.4 million compared to revenue of $6.7
  million in 2003 and $3.9 million in 2002. Revenue growth in 2004 of $1.1 million
  was due to our primary scanning product, the In-Hand Scan card, growth of $2.9
  million from our SDIO In-Hand Scan card which began shipping to customers in
  the fourth quarter of 2003, and growth of $0.5 million from our stand alone
  hand scanner which began shipping in the second quarter of 2004. Partially offsetting
  this growth were declines of $0.6 million from our bar code laser scanner system
  and slight declines in sales of our In-Hand Scan Imager. Revenue growth in 2003
  of $1.4 million was due to increased sales of our bar code laser scanner system,
  growth of $1.0 million was due to our primary scanning product, the In-Hand
  Scan card, and growth of $0.8 million was due to both the Imager In-Hand Scan
  card and the SDIO In-Hand Scan card, which began shipping to customers in the
  second half of 2003. Our scanning products are sold both through general distribution
  and through value added resellers who contract with customers to provide scanning
  solutions. Our products are becoming more widely adopted by the value added
  reseller community for lightweight portable scanning.

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Our connectivity product
  revenues in 2004 were $8.3 million compared to $8.7 million in 2003 and $6.0
  million in 2002. Revenue declines in 2004 of $1.0 million resulted from reductions
  in Cordless GPS product sales including delays in the third quarter in shipping
  our new Cordless GPS receiver with navigation kit, and additional declines of
  $0.4 million were from our Ethernet plug-in cards and Digital Phone cards. Partially
  offsetting these declines were growth of $0.5 million from our Secure Digital
  IO (SDIO) Wireless LAN card which began shipping in the third quarter of 2003,
  and growth of $0.5 million from our modem cards and our SDIO Bluetooth plug-in
  card which began shipping in only modest quantities in 2003. Network connection
  product revenues in the second half of 2004 were affected by model changeovers
  of Pocket PCs resulting in order delays while new models became available. In
  2003 our growth was due to new products and increasing enterprise deployment
  of Pocket PCs. In the fourth quarter of 2002 we introduced our original Bluetooth
  GPS receiver with navigation kit. Revenue growth was $2.0 million in 2003 from
  this new product combined with $1.3 million of growth from our modem cards and
  $0.2 million of growth in our Wireless LAN product line from the introduction
  of our Secure Digital (SDIO) Wireless LAN card in 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.

Our embedded products
  and services revenues in 2004 were $3.7 million compared to $2.6 million
  in both 2003 and 2002. Revenue growth in 2004 of $1.4 million was primarily
  from our embedded Bluetooth modules combined with modest growth in revenues
  from our embedded Bluetooth plug-in cards as more manufacturers adopted our
  embedded solutions for use in ruggedized industrial PDA's, printers and other
  mobile devices. Partially offsetting this growth were declines of $0.3 million
  in revenues from sales of our proprietary ASIC chip. Chip sales are highly dependent
  upon engineering design-wins and the timing of third party design projects.
  Revenues in 2003 were flat compare to 2002 resulting from slight increases in
  revenues from our embedded Bluetooth solutions and chip sales offset by declines
  in engineering services.

Our serial product
  revenues in 2004 were $3.7 million compared to $3.6 million in 2003 and $3.8
  million in 2002. Standard peripheral connection cards are primarily sold to
  connect peripheral devices or other electronic equipment to notebook computers.
  The revenue increase in 2004 was due primarily to sales of our cordless Bluetooth
  serial adapter which began shipping in the third quarter of 2003, partially
  offset by declines in sales volumes for both our standard serial PC Card products
  and custom serial card sales. For 2003, sales volumes for both of our standard
  serial PC Card products and our newer CompactFlash card products slightly increased,
  but were offset by declines in custom serial card product sales.

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Gross Margins

Gross margins for 2004
  were 51% of revenues compared to gross margins of 50% in both 2003 and 2002.
  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 and Bluetooth cards, our modems, and additional
  cost reductions on our third generation lower cost proprietary ASIC chip which
  we introduced in the third quarter of 2003 resulted in improved margins for
  2004 compared to 2003. In 2003, 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.

Research and Development
  Expense

Research and development
  expense in 2004 was $3.7 million, an increase of 6% from research and development
  expense in 2003 of $3.4 million. Research and development expense in 2003 decreased
  2% from research and development expense in 2002 of $3.5 million. Increases
  in 2004 of $0.4 million, primarily in payroll, outside services, and legal expense
  associated with the development of potential patents, were partially offset
  by lower consulting and professional fees and reduced engineering supplies expense
  from the completion of development of a next generation proprietary ASIC chip
  at the end of the first quarter of 2003. Decreases in 2003 were primarily from
  lower consulting and professional fees resulting from the completion of the
  development of the next generation 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.

Sales and Marketing
  Expense

Sales and marketing expense
  in 2004 was $5.9 million, an increase of 14% compared to sales and marketing
  expense in 2003 of $5.2 million. Sales and marketing expense in 2003 increased
  6% compared to sales and marketing expense in 2002 of $4.9 million. Increases
  in 2004 of $0.8 million in total were due to increased staffing of sales and
  marketing personnel beginning in the second half of 2003, increases in advertising
  and promotional activities, travel, and outside sales and marketing services.
  Partially offsetting these increases were reductions in occupancy and equipment
  costs. Increases in 2003 of $0.4 million were due primarily to increased staffing
  of sales and marketing personal as we staffed for growth, and increases in outside
  sales and marketing services, partially offset by reductions in advertising
  and promotional activities.

General and Administrative
  Expense

General and administrative
  expense in 2004 was $3.1 million, an increase of 7% compared to general and
  administrative expense in 2003 of $2.9 million. General and administrative expense
  in 2003 increased 35% compared to general and administrative expense in 2002
  of $2.1 million. The increase in 2004 is due primarily to increased legal and
  professional fees related to our response to the patent infringement complaint
  filed by Khyber Technologies Corporation in June 2003. In July 2004, we purchased
  the related patent from Khyber Technologies, and they agreed to discontinue
  litigation. Partially offsetting these fees were reductions in legal and professional
  fees related to general corporate matters from a lower level of activity in
  2004 compared to 2003. Increases in 2003 included $0.4 million from increased
  legal and professional fees due primarily to our response during the second
  half of 2003 to the complaint filed by Khyber Technologies Corporation and $0.3
  million from increased investor relations activities compared to 2002.

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Amortization of Intangibles

On July 15, 2004 the Company
  acquired US Patent 5,902,991 entitled Card Shaped Computer Peripheral Device
  from Khyber Technologies, Inc. The patent covers the design and functioning
  of plug-in bar code scanners, bar code imagers and RFID products. The patent
  was purchased for $600,000 and has been capitalized as an intangible asset.
  The patent will be amortized on a straight line basis over a ten year period.
  Amortization charges for year ended 2004 were $30,000.

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 2004 and 2003 were $0.1 million,
  compared to $0.2 million in 2002.

Interest Income and
  Other, and Interest Expense

Interest income reflects
  interest earned on cash balances. Interest income was $37,000 in 2004, $23,000
  in 2003, and $26,000 in 2002. Increased interest income in 2004 reflects higher
  average levels of cash on hand compared to 2003. Higher levels of cash on hand
  in 2004 were primarily from our offering of common stock in August 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 is related
  to interest on equipment lease financing obligations including those assumed
  from 3rd Rail and interest on the outstanding note payable balance due to Nokia
  for acquisition of their Bluetooth CompactFlash Card business and related product
  line technology in March 2002. Lower interest expense in 2004 reflects lower
  note payable balances in 2004 compared 2003 and 2002. The final payment on the
  note payable to Nokia was made in April 2004.

Income Taxes

There were no provisions
  for federal or state income taxes for the years ended December 31, 2004, 2003,
  and 2002. We have incurred net operating losses in all periods prior to 2004,
  earnings for 2004 have not been material, and continued earnings are not assured.
  We have established a valuation allowance for the net deferred tax assets. 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 2004 reflect dividends accrued at the rate of 8% per annum on Series F Preferred
  Stock issued in March 2003. Preferred stock dividends in 2003 and 2002 reflect
  dividends accrued on Series F Preferred Stock and dividends accrued at the rate
  of 12% per annum on Series E redeemable convertible preferred stock issued in
  October 2002. Dividends for Series F were paid in cash subsequent to the end
  of each of the quarters in 2004. In 2003, dividends for Series F for the first,
  third, and fourth quarters were paid in cash, and for the second quarter were
  paid in Common Stock. Dividends for Series E were paid in cash for each of the
  three quarters in 2003 until the Series E was fully converted. Preferred stock
  accretion was $565,300 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 2003 and 2004. 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, except per share                                           | Mar 31,              
|amounts)                                                                                | 2003                 
|Summary
      Quarterly Data:                                                          
|Revenue                                                                                 | $
        4,879      
|Cost of
      revenue                                                                   | 2,477                
|Gross
      profit                                                                      | 2,402                
|Operating
      expenses:                                                              
| 
      Research and development                                                    | 921                  
| 
      Sales and marketing                                                         | 1,284                
| 
      General and administrative                                                  | 674                  
|  Amortization of intangibles                                                       | 116                  
|Total
      operating expenses                                                          | 2,995                
|Interest
      income (expense), net                                                    | (20)                 
|Net income
      (loss)                                                                 | (613)                
|Preferred
      stock dividends                                                         | (32)                 
|Preferred
      stock accretion                                                         | (384)                
|Net income
      (loss) applicable to common stockholders                               | $
        (1,029)    
|Basic and diluted
        net income (loss) per share applicable to common stockholders | $
        (0.04)     

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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 therefore
  quarterly revenue and operating results depend on the volume and timing of orders
  received during the quarter, which are difficult to forecast. Historically,
  we have recognized a substantial portion of our revenue in the last month of
  the 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, 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

Fiscal year 2004 was our
  first profitable year in our history. Historically we have financed our operations
  through the sale of equity securities, equipment financing, and revolving bank
  lines of credit. Since our inception we have raised approximately $51 million
  in equity capital. Prior to the first quarter of 2004, we incurred significant
  quarterly and annual operating losses in every fiscal period, and although the
  four quarters of 2004 have each been profitable, continued ongoing profitability
  is not assured.

Cash used in operating
  activities was $0.6 million in 2004 compared to $0.7 million in 2003 and $1.9
  million in 2002. The use of cash resulted from changes in working capital balances
  in 2004 partially offset by income, and from financing our net losses of $1.2
  million in 2003 and $3.0 million in 2002. Adjustments for non-cash items, including
  depreciation and amortization, amortization of intangibles, fluctuations on
  foreign currency translations, gains on foreign currency forward exchange contracts
  and foreign currency losses on the Euro note payable to Nokia, totaled $0.9
  million in each of 2004, 2003, and 2002. Changes in working capital balances
  resulted in a use of cash of $1.9 million in 2004 and $0.4 million in 2003,
  and a source of cash in 2002 of $0.2 million. Changes in working capital balances
  during 2004 reflect increases in inventory stock and accounts receivable to
  meet higher overall levels of shipping and billing compared to 2003, and reductions
  in accounts payable partially offset by increases in deferred revenue from growth
  in our international distribution channel. Changes in working capital balances
  during 2003 reflect increased accounts receivable balances from higher levels
  of shipments in the fourth quarter of 2003 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 of 2003, 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.

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Cash used in investing
  activities was $1.0 million in 2004, $0.3 million in 2003, and $1.3 million
  in 2002. Investing activities in 2004 primarily reflect the purchase costs of
  a patent of $0.6 million in July 2004. Additional investing activities in 2004
  reflect the costs of new computer hardware and software, and tooling costs.
  These costs for 2003 and 2002 totaled $0.3 million and $0.5 million, respectively.
  Additionally, 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 (the balance of acquisition price was paid with a note payable).

Cash provided by financing
  activities was $1.0 million in 2004, $4.3 million in 2003, and $1.5 million
  in 2002. Financing activities in 2004 consist of $1.4 million from the net increase
  in the amounts drawn on our bank lines of credit and proceeds of $0.1 million
  from the exercise of stock options and warrants, partially offset by payments
  of $0.5 million on the note payable to Nokia. In April 2004 the Company made
  the final payment on the note payable to Nokia. At the end of 2004 we drew $2.9
  million in cash against our bank credit line which we repaid in January 2005.
  During 2003 we completed two private placement financings, our Series F convertible
  preferred stock, which provided $1.5 million net of issuance costs, and a 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 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 from
  using our bank line of credit was $0.4 million used in 2003 and $0.6 million
  provided in 2002. 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 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.

Our cash balances at December
  31, 2004 were $5.9 million, including cash of $2.9 million drawn against our
  bank line of credit. In March 2004, we entered into a new bank line of credit
  agreement which has been extended to expire on March 5, 2007. We have warrants
  outstanding 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, 2005. If we maintain and increase profitability from revenue growth,
  we anticipate requirements for cash will include funding of higher receivable
  and inventory balances, and increasing expenses including more employees to
  support our growth and increases in the cost of salaries, benefits, and related
  support costs for employees. If we cannot maintain 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. 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. Although
  we do not anticipate the need to raise additional capital during this time to
  fund operations, we may raise additional capital if market conditions are appropriate.

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Our contractual obligations
  at December 31, 2004 are outlined in the table below:



|                                                                     | Payments
        Due by Period
|-------------------------------------------------------------------- | ------------------------------
|Contractual
        Obligations                                      | Total                         
|Capital
      leases                                                 | $
        27,200              
|Operating
      leases                                               | 884,400                       
|Unconditional
      purchase obligations with contract manufacturers | 1,531,600                     
|Total
      contractual cash obligations                             | $
        2,443,200           

Off-Balance Sheet Arrangements

As of December 31, 2004,
  we have no off-balance sheet arrangements as defined in Item 303 of Regulation
  S-K.

Recent Accounting Pronouncements

In December 2004, the FASB
  issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS
  123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation"
  ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
  Stock Issued to Employees." SFAS 123R requires all share-based payments
  to employees, including grants of employee stock options, to be recognized in
  the financial statements based on their fair values, beginning with the first
  interim or annual period after June 15, 2005, with early adoption encouraged.
  The pro forma disclosures previously permitted under SFAS 123, no longer will
  be an alternative to financial statement recognition. We are required to adopt
  SFAS 123R in our third quarter of fiscal 2005. Under SFAS 123R, we must determine
  the appropriate fair value model to be used for valuing share-based payments,
  the amortization method for compensation cost and the transition method to be
  used at date of adoption. The transition methods include prospective and retroactive
  adoption options. Under the retroactive options, prior periods may be restated
  either as of the beginning of the year of adoption or for all periods presented.
  The prospective method requires that compensation expense be recorded for all
  unvested stock options and restricted stock at the beginning of the first quarter
  of adoption of SFAS 123R, while the retroactive methods would record compensation
  expense for all unvested stock options and restricted stock beginning with the
  first period restated. We are evaluating the requirements of SFAS 123R, and
  expect that the adoption of SFAS 123R will have a material adverse impact on
  our consolidated results of operations and earnings per share. We have not yet
  determined the method of adoption or the effect of adopting SFAS 123R, and have
  not determined whether the adoption will result in amounts that are similar
  to the current pro forma disclosures under SFAS 123.

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Other Factors Affecting
  Future Operations

We have a history of
  operating losses, and may not achieve ongoing profitability.

For the fiscal year ended
  December 31, 2004, we were profitable but only to the extent of $288,000, and
  for the fiscal year ended December 31, 2003 we incurred net losses of $1,249,900.
  Prior to 2003 we incurred significant operating losses in each financial period
  since our inception. To maintain profitability, we must accomplish numerous
  objectives, including growth in our business and 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 may not generate sufficient
  net revenue to achieve ongoing profitability. If we cannot achieve ongoing 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. If we are unable
  to secure the necessary capital to replace that cash, we may need to suspend
  some or all of our current operations.

We will be required
  beginning in the third quarter of 2005 to expense options granted under our
  employee stock plans as compensation, and as a result we expect our net income
  and earnings per share will be reduced, we may have net losses, and may find
  it necessary to change our business practices to attract and retain employees.

Historically, we have used
  stock options as a key component of our employee compensation packages. We believe
  that stock options provide an incentive to our employees to maximize long-term
  stockholder value and, through the use of vesting, encourage valued employees
  to remain with us. The expensing of employee stock options will adversely affect
  our net income and earnings per share and we may record net losses. In particular,
  we would not have been profitable in any of the quarters in fiscal 2004 or for
  the entire year if we had been required to expense options during that period.
  In addition, we may decide in response to the effects of expensing stock options
  on our operating results to reduce the number of stock options granted to employees
  or to grant options to fewer employees. This could adversely affect our ability
  to retain existing employees and attract qualified candidates, and also could
  increase the cash compensation we would have to pay to them.

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

Although we do not anticipate
  the need to raise additional capital during the next twelve months to fund our
  operations, we may incur operating losses in future quarters and may need to
  raise capital to fund these losses. 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. In addition, the availability of our bank
  line is dependent upon our meeting certain covenants including a tangible net
  worth covenant, and future operating losses could cause us to lose the availability
  of our bank line as a result of becoming non-compliant with these covenants.

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A significant portion
  of our revenue currently comes from two distributors, and any decrease in revenue
  from these distributors could harm our business.

A significant portion of
  our revenue comes from two distributors, Tech Data Corp. and Ingram Micro, Inc.,
  which together represented approximately 43 percent of our worldwide revenue
  in each of fiscal years 2004 and 2003. We expect that a significant portion
  of our revenue will continue to depend on sales to Tech Data Corp. and Ingram
  Micro, Inc. We do not have long-term commitments from Tech Data Corp. or Ingram
  Micro, Inc. to carry our products. Either could choose to stop selling some
  or all of our products at any time, and each of these companies also carry competitive
  products. If we lose our relationship with Tech Data Corp. or Ingram Micro,
  Inc., we could experience disruption and delays in marketing our products.

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

Substantially all of our
  products are designed for use with mobile personal computers, including handhelds,
  notebook computers, tablets and Smartphones. If the mobile personal computer
  industry does not grow or if its growth slows, we would 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, RFID, 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 these 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
  line of handhelds with expansion options offered by PalmOne and the adoption
  of Smartphones for business use. 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.

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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:

- Some of our competitors
    have greater financial, marketing, and technical resources than we do;
- We periodically face
    intense price competition, particularly when our competitors have excess inventories
    and discount their prices to clear their inventories; and
- Certain original equipment
    manufacturers of personal computers, mobile phones and handheld computers
    may make our products less significant by incorporating built-in functions,
    such as Bluetooth wireless technology, WiFi, GPS, or bar code scanners 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 and financial condition.

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

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

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

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

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

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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 is 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. 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 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.

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, Smartphones
  using Windows Mobile and Symbian System 60 and 80 operating systems, and handheld
  computers from Research-in-Motion. 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, Palm, Symbian
  or Research-in-Motion are obligated to continue the collaboration or to support
  the products produced from the collaboration. Consequently, these organizations
  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 offer competitive
  lines of products simultaneously. Sales growth is contingent in part on our
  ability to enter into additional distribution relationships and expand our retail
  sales channels. We cannot predict whether we will be successful in establishing
  new distribution relationships, expanding our retail sales channels or maintaining
  our existing relationships. A failure to enter into new distribution relationships
  or to expand our retail sales channels could adversely impact our ability to
  grow our sales.

We allow our distribution
  channels to return a portion of their inventory to us for full credit against
  other purchases. In addition, in the event we reduce our prices, we credit our
  distributors for the difference between the purchase price of products remaining
  in their inventory and our reduced price for such products. Actual returns and
  price protection may adversely affect future operating results, particularly
  since we seek to continually introduce new and enhanced products and are likely
  to face increasing price competition.

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

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

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

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

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

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

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

In addition to disputes
  relating to the validity or alleged infringement of other parties' rights, we
  may become involved in disputes relating to our assertion of our 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 major 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.

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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 we may have little 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 our introduction of new products and product enhancements;
- the introduction of
    new products and product enhancements by our competitors;
- the timing of the introduction
    of new products that work with our connection products;
- changes in the proportion
    of revenues attributable to royalties and engineering development services;
- product mix;
- timing of software enhancements;
- changes in the level
    of operating expenses;
- competitive conditions
    in the industry including competitive pressures resulting in lower average
    selling prices; and
- timing of distributors'
    shipments to their customers.

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

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

A number of our officers
  and senior managers have been employed for nine to thirteen 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
  Development Services. Our future success will depend upon the continued service
  of key officers and senior managers. Competition for officers and senior managers
  is intense, and there can be no assurance that we will be able to retain our
  existing senior personnel. The loss of key senior personnel could adversely
  affect our ability to compete.

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

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

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

Our accounts receivable
  are derived primarily from distributors and original equipment manufacturers.
  We perform ongoing credit evaluations of our customers' financial conditions
  but generally require no collateral 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 components 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 37% of our
  revenue in fiscal year 2004 and 39% in fiscal year 2003. 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 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
  are 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. Should a disaster be widespread, such as a major earthquake,
  or result in the loss of key personnel, we may not be able to implement our
  disaster recovery plan in a timely manner. 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 11, 2005, we
  had 30,157,893 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 prospectus delivery requirements
  and, in other cases, only to manner of sale, volume, and notice requirements
  of Rule 144 under the Securities Act.

As of March 11, 2005, we
  had 83,823 shares of Series F Preferred Stock outstanding that are convertible
  into 838,230 shares of Common Stock at $0.722 per share.

As of March 11, 2005, we
  had 7,971,817 shares subject to outstanding options under our stock option plans,
  and 863,993 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 11, 2005, we
  had warrants outstanding to purchase a total of 1,717,850 shares of our Common
  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, 2003 through March 11, 2005, our Common Stock price fluctuated between
  a high of $4.80 and a low of $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.

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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 US 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, 2004, a decline of 1% in interest rates
  would reduce our quarterly interest income by approximately $7,300.

Our bank credit line facilities
  of up to $4.0 million have variable interest rates based upon the lender's index
  rate plus 0.5% for both the domestic line (up to $2.5 million) and 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 each quarter in 2004 and 2003, and therefore
  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 US dollars.
  However, we require our European distributors to purchase our products in Euros,
  we pay the expenses of our European subsidiary in Euros, and we expect to enter
  into selected future purchase commitments with foreign suppliers that may be
  paid 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 and
  subsidiary expenses at the beginning, during and at the end of the quarter ended
  December 31, 2004, an adverse change of 10% in exchange rates would result in
  a decrease in our net income for the fourth quarter of approximately $51,300.
  For the fourth quarter 2004 the total adjustment for the effects of changes
  in foreign currency on cash balances, collections, payables, and derivatives
  was a net loss of $14,000. In the third quarter of 2004 we commenced hedging
  of European receivable balances denominated in Euros to reduce the foreign currency
  risk associated with these assets. We will continue to monitor and assess the
  risk associated with these exposures and may at some point in the future take
  additional actions to 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 MOSS ADAMS LLP 
  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying
  consolidated balance sheet of Socket Communications, Inc. as of December 31,
  2004, and the related consolidated statements of operations, redeemable preferred
  stock and stockholders' equity, and cash flows for the year ended December 31,
  2004. We also have audited management's assessment, included in the accompanying
  Management's Report on Internal Control Over Financial Reporting, that Socket
  Communications, Inc. maintained effective internal control over financial reporting
  as of December 31, 2004, based on criteria set forth by the Committee of Sponsoring
  Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
  Framework. Socket Communications, Inc.'s management is responsible for these
  financial statements, for maintaining effective internal control over financial
  reporting, and for its assessment of the effectiveness of internal control over
  financial reporting. Our responsibility is to express an opinion on these financial
  statements, an opinion on management's assessment, and an opinion on the effectiveness
  of the company's internal control over financial reporting based on our audit.

We conducted our audit
  in accordance with the standards of the Public Company Accounting Oversight
  Board (United States). Those standards require that we plan and perform the
  audits to obtain reasonable assurance about whether the financial statements
  are free of material misstatement and whether effective internal control over
  financial reporting was maintained in all material respects. Our audit of financial
  statements included examining, on a test basis, evidence supporting the amounts
  and disclosures in the financial statements, assessing the accounting principles
  used and significant estimates made by management, and evaluating the overall
  financial statement presentation. Our audit of internal control over financial
  reporting included obtaining an understanding of internal control over financial
  reporting, evaluating management's assessment, testing and evaluating the design
  and operating effectiveness of internal control, and performing such other procedures
  as we considered necessary in the circumstances. We believe that our audit provides
  a reasonable basis for our opinions.

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A company's internal control
  over financial reporting is a process designed to provide reasonable assurance
  regarding the reliability of financial reporting and the preparation of financial
  statements for external purposes in accordance with accounting principles generally
  accepted in the United States of America. A company's internal control over
  financial reporting includes those policies and procedures that (1) pertain
  to the maintenance of records that, in reasonable detail, accurately and fairly
  reflect the transactions and dispositions of the assets of the company; (2)
  provide reasonable assurance that transactions are recorded as necessary to
  permit preparation of financial statements in accordance with generally accepted
  accounting principles, and that receipts and expenditures of the company are
  being made only in accordance with authorizations of management and directors
  of the company; and (3) provide reasonable assurance regarding prevention or
  timely detection of unauthorized acquisition, use, or disposition of the company's
  assets that could have a material effect on the financial statements.

Because of its inherent
  limitations, internal control over financial reporting may not prevent or detect
  misstatements. Also, projections of any evaluation of effectiveness to future
  periods are subject to the risk that controls may become inadequate because
  of changes in conditions, or that the degree of compliance with the policies
  or procedures may deteriorate.

In our opinion, the consolidated
  financial statements referred to above present fairly, in all material respects,
  the financial position of Socket Communications, Inc. as of December 31, 2004
  and the consolidated results of its operations and its cash flows for the year
  ended December 31, 2004 in conformity with accounting principles generally accepted
  in the United States of America. Also in our opinion, management's assessment
  that Socket Communications, Inc. maintained effective internal control over
  financial reporting as of December 31, 2004, is fairly stated, in all material
  respects, based on criteria set forth by the Committee of Sponsoring Organizations
  of the Treadway Commission (COSO) in Internal Control - Integrated Framework.
  Furthermore, in our opinion, Socket Communications, Inc. maintained, in all
  material respects, effective internal control over financial reporting as of
  December 31, 2004, based on criteria set forth by the Committee of Sponsoring
  Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
  Framework.



/s/ Moss Adams LLP

San Francisco, California
  February 11, 2005



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REPORT OF
  ERNST & YOUNG LLP 
  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying
  consolidated balance sheet of Socket Communications, Inc. as of December 31,
  2003, and the related consolidated statements of operations, redeemable preferred
  stock and stockholders' equity, and cash flows for each of the two years in
  the period ended December 31, 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 the standards of the Public Company Accounting Oversight
  Board (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 consideration of internal
  control over financial reporting as a basis for designing audit procedures that
  are appropriate in the circumstances, but not for the purpose or expressing
  an opinion on the effectiveness of the Company's internal control over financial
  reporting. Accordingly, we express no such opinion. An audit also includes examining,
  on a test basis, evidence supporting the amounts and disclosures in the financial
  statements, assessing the accounting principles used and significant estimates
  made by management, and 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, 2003 and
  the consolidated results of its operations and its cash flows for each of the
  two years in the period ended December 31, 2003, in conformity with US generally
  accepted accounting principles.



/s/ Ernst & Young LLP

San Jose, California
  February 11, 2004

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|SOCKET
        COMMUNICATIONS, INC. 
        CONSOLIDATED BALANCE SHEETS                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                   
|                                                                                                                                                                                                                   
|ASSETS                                                                                                                                                                                                                 
|Current assets:                                                                                                                                                                                                        
|Cash
        and cash equivalents                                                                                                                                                                                      
|Accounts
        receivable, net of allowance for doubtful accounts of 
          $127,300 at December 31, 2004 and $113,244 at December 31,
        2003                                                              
|Inventories                                                                                                                                                                                                            
|Prepaid
        expenses and
        other current assets                                                                                                                                                              
|Total
        current assets                                                                                                                                                                                           
|                                                                                                                                                                                                                   
|Property and equipment:                                                                                                                                                                                                
|Machinery
        and office equipment                                                                                                                                                                                 
|Computer
        equipment                                                                                                                                                                                             
|                                                                                                                                                                                                                       
|Accumulated
        depreciation                                                                                                                                                                                       
|Property
        and equipment, net                                                                                                                                                                                    
|                                                                                                                                                                                                                       
|Intangible
      technology, net                                                                                                                                                                                       
|Goodwill                                                                                                                                                                                                               
|Other
        assets                                                                                                                                                                                                   
|Total
        assets                                                                                                                                                                                                   
|                                                                                                                                                                                                                   
|LIABILITIES
        AND STOCKHOLDERS' EQUITY                                                                                                                                                                           
|Current liabilities:                                                                                                                                                                                                   
|Accounts
      payable                                                                                                                                                                                                 
|Accrued
      expenses                                                                                                                                                                                                 
|Accrued
        payroll and related expenses                                                                                                                                                                           
|Bank
        line of credit                                                                                                                                                                                            
|Deferred
        income on shipments to distributors                                                                                                                                                                   
|Current
      portion of deferred rent and capital leases                                                                                                                                                              
|Note
        payable                                                                                                                                                                                                   
|Total
        current liabilities                                                                                                                                                                                      
|                                                                                                                                                                                                                   
|Long
      term portion of deferred rent and capital leases                                                                                                                                                            
|Commitments and contingencies                                                                                                                                                                                          
|Stockholders' equity:                                                                                                                                                                                                  
|Series
        F Convertible Preferred Stock, $0.001 par value: 
          Authorized Shares - 276,269, Issued and outstanding shares
        - 
          83,823 at December 31, 2004, and 92,906 at December 31, 2003
|Common
        stock, $0.001 par value: Authorized shares - 100,000,000
          Issued and outstanding shares - 30,141,444 at December 31, 2004
          and 29,827,029 at December 31, 2003                    
|Additional
        paid-in capital                                                                                                                                                                                     
|Accumulated
        deficit                                                                                                                                                                                            
|Total
        stockholders' equity                                                                                                                                                                                     
|Total
        liabilities and stockholders' equity                                                                                                                                                                     

See accompanying
  notes.

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|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 intangible
        technology                            
|Total
        operating expenses                                         
|Operating income (loss)                                                  
|Interest income
      and other                                          
|Interest expense                                                         
|Net income (loss)                                                        
|Preferred stock dividends                                                
|Preferred stock accretion                                                
|Net income (loss) applicable to
      common stockholders                
|Net income (loss) per share applicable
      to common stockholders      
|      Basic                                      
|      Diluted                                    
|Weighted average shares outstanding:                                     
|      Basic                                      
|      Diluted                                    

See accompanying notes.





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|SOCKET COMMUNICATIONS, INC.
        CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK 
        AND STOCKHOLDERS' EQUITY                        
|--------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                  
|                                                                                                                                                  
|Balance at December 31, 2001                                                                                                                      
|Exercise of warrants                                                                                                                              
|Exercise of stock options                                                                                                                         
|Issuance of common stock                                                                                                                          
|Issuance of common stock warrants                                                                                                                 
|Issuance
      of series E redeemable convertible preferred stock                                                                                 
|Series E dividends/stock accretion to redemption
        value                                                                                    
|Net loss and comprehensive net loss                                                                                                               
|Balance at December 31, 2002                                                                                                                      
|Exercise of warrants                                                                                                                              
|Exercise of stock options                                                                                                                         
|Issuance of common stock                                                                                                                          
|Issuance of common stock warrants                                                                                                                 
|Issuance
      of Series F convertible preferred stock including 
      stock accretion                                                           
|Issuance
      of common stock in conjuction with Series F
      financing                                                                        
|Series E stock accretion to redemption
        value                                                                                              
|Conversion of Series E redeemable convertible
        preferred
        stock to common stock                                                     
|Redemption of Series E redeemable convertible
        preferred
        stock for cash                                                            
|Conversion of Series F convertible preferred
        stock to common stock                                                                        
|Dividends paid/payable in cash on Series
        E redeemable
        convertible preferred stock and Series F convertible
        preferred stock
|Dividends paid in common stock on Series
        F convertible
        preferred stock                                                            
|Net loss and comprehensive net loss                                                                                                               
|Balance at December 31, 2003                                                                                                                      
|Exercise of warrants                                                                                                                              
|Exercise of stock options                                                                                                                         
|Conversion of Series F convertible preferred
        stock to common stock                                                                        
|Dividends paid in cash on Series F convertible
        preferred stock                                                                            
|Net income and comprehensive net income                                                                                                           
|Balance at December 31, 2004                                                                                                                      



See accompanying
  notes.
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|SOCKET COMMUNICATIONS, INC.
        CONSOLIDATED STATEMENTS OF CASH FLOWS                                                               
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        
|                                                                                                                                        
|Operating activities                                                                                                                    
|Net income (loss)                                                                                                                       
|Adjustments to reconcile net income
      (loss) to net cash used in operating activities:                                              
|Depreciation                                                                                                                            
|Amortization                                                                                                                            
|Gain on forward exchange
        contract                                                                                               
|Currency exchange loss on
        note payable                                                                                          
|Net (gain) loss on foreign
        currency translations                                                                                
|Amortization of intangible
        technology                                                                                           
|Change in deferred rent                                                                                                                 
|                                                                                                                                        
|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 income on shipments
        to distributors                                                                                    
|Net
        cash used in operating activities                                                                                           
|Investing activities                                                                                                                    
|Purchase of equipment                                                                                                                   
|Acquisition of Khyber patent                                                                                                            
|Acquisition of Nokia CompactFlash
        Bluetooth business                                                                            
|Net
        cash used in investing activities                                                                                           
|Financing activities                                                                                                                    
|Payments on capital leases
        and equipment financing notes                                                                        
|Payments on note payable                                                                                                                
|Gross proceeds from borrowings
        under bank line of 
             credit agreement                                                
|Gross repayments of borrowings
        under bank line of 
             credit agreement                                                
|Gross proceeds from sale
        of foreign currency forward 
             exchange contract                                            
|Stock options exercised                                                                                                                 
|Net proceeds from sale of
        common stock and warrants 
             to purchase common stock                                      
|Net proceeds from sale of
        preferred stock and warrants 
             to purchase common stock                                   
|Redemption payments of Series
        E redeemable convertible 
             preferred stock                                            
|Dividends paid on Series
        E redeemable convertible 
             preferred stock and Series F convertible
        preferred stock
|Warrants exercised                                                                                                                      
|Net
        cash provided by financing activities                                                                                       
|Effect of exchange rate changes
      on cash and cash equivalents                                                                      
|Net increase (decrease) in cash
      and cash equivalents                                                                              
|Cash and cash equivalents at beginning
      of year                                                                                    
|Cash and cash equivalents at end
      of year                                                                                          
|Supplemental cash flow information                                                                                                      
|Cash paid for interest                                                                                                                  
|Warrants issued in conjuction
        with preferred stock financing                                                                    
|Warrants issued in conjuction
        with common stock financing                                                                       
|Acquisition of Nokia CompactFlash
        Bluetooth business with 
             note payable                                            
|Dividends on Series F preferred
        stock paid in common stock                                                                      
|Conversion of Series E preferred
        stock to common stock                                                                          
|Conversion of Series F preferred
        stock to common stock                                                                          
|Property and equipment acquired
        in exchange for capital 
             lease obligation                                          
|Accrued dividends on preferred
        stock                                                                                            

See accompanying
  notes.

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NOTE 1 - Summary of
  Significant Accounting Policies

Organization and Business

Socket Communications,
  Inc. ("Socket" or the "Company") designs, manufactures and
  sells data collection and connectivity products for mobile electronic devices.
  The Company's data collection products are designed to collect data on handheld
  computers, tablet computers, notebook computers and Smartphones using bar code
  scanning and Radio Frequency Identification (RFID) technologies. The Company's
  connectivity products are designed to connect handheld computers, tablet computers,
  notebook computers and Smartphones to the Internet, to local area computer networks,
  to wide area computer networks, and to other peripheral devices through both
  wireless and cable connections. The Company also offer serial products that
  connect electronic devices and embedded products that are designed to be installed
  inside third party mobile electronic devices. The Company's products are designed
  for use with a broad range of mobile devices that support standard expansion
  mechanisms. The standard expansion mechanisms supported include slots for plug-in
  cards in the CompactFlash, PC Card, and Secure Digital Input/Output (SDIO) form
  factors and Bluetooth, a short range wireless connection technology. The Company's
  products are designed to address mobile workforce connectivity needs by enabling
  the use of handheld devices to extend data communications capabilities beyond
  location-dependent wired networks or telephone lines. The Company's products
  integrate hardware, software and services into complete mobile connectivity
  solutions. The Company is incorporated in the state of Delaware.

Principles of Consolidation
  The consolidated financial statements include all of the accounts of the Company
  and those of its wholly owned subsidiary. All intercompany accounts and transactions
  have been eliminated. The expenses associated with the operations of our foreign
  offices were $969,492, $1,132,563, and $1,018,729, in 2004, 2003, and 2002,
  respectively.

Use of Estimates
  The preparation of financial statements in conformity with US generally accepted
  accounting principles 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.

Cash Equivalents
  The Company considers all highly liquid investments purchased with a maturity
  date of 90 days or less at date of purchase to be cash equivalents. As of December
  31, 2004 and 2003, all of the Company's cash and cash equivalents consisted
  of amounts held in demand and money market deposits in banks.

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

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

Accounts Receivable
  Allowances
  The Company estimates the amount of uncollectible accounts receivable at the
  end of each reporting period based on the aging of the receivable balance, current
  and historical customer trends, and communications with its customers. Amounts
  are written off only after considerable collection efforts have been made and
  the amounts are determined to be uncollectible. The following describes activity
  in the allowance for doubtful accounts for the years ended December 31, 2004,
  2003, and 2002:





|Year | Balance
        at Beginning of Year | Charged
        to Costs and Expenses | Amounts
        Written Off | Balance
        at End of Year
|---- | ------------------------------------ | ------------------------------------- | --------------------------- | ------------------------------
|2004 | $113,244                             | $
        47,953                      | $
        33,897            | $127,300                      
|2003 | $100,761                             | $
        28,731                      | $
        16,248            | $113,244                      
|2002 | $
        83,606                     | $
        21,002                      | $3,847                      | $100,761                      



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

|                                | December 31,
|------------------------------- | ------------
|                                | 2004        
|Raw materials and subassemblies | $ 2,613,384 
|Finished goods                  | 327,827     
|                                | $ 2,941,211 

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

Goodwill and Other Intangible
  Assets Review
  Goodwill and intangible assets are accounted for in accordance with Statement
  of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
  Assets" (FAS 142). The Company assesses the impairment of long-lived assets,
  including goodwill and intangibles on an annual basis or whenever events or
  changes in circumstances indicate that the fair value is less than its carrying
  value. Factors that the Company considers important which could trigger an impairment
  review include, poor economic performance relative to historical or projected
  future operating results, significant negative industry, economic or company
  specific trends, changes in the manner of our use of the assets or the plans
  for our business, market price of our common stock, and loss of key personnel.

Goodwill represents the
  excess of cost over the estimated fair value of net assets acquired from the
  acquisitions of Nokia's CompactFlash Bluetooth Card business in 2002 and 3rd
  Rail Engineering in 2000, which in accordance with FAS 142, is no longer being
  amortized. Also in accordance with FAS 142, the Company tests goodwill for impairment
  at the reporting unit level on an annual basis or as determined necessary. The
  Company has determined to report as a single unit. SFAS No. 142 requires a two-step
  goodwill impairment test whereby the first step, used to identify potential
  impairment, compares the fair value of a reporting unit with its carrying amount
  including goodwill. If the fair value of a reporting unit exceeds its carrying
  amount, goodwill of the reporting unit is considered not impaired and the second
  test is not performed. The second step of the impairment test is performed when
  required and compares the implied fair value of the reporting unit goodwill
  with the carrying amount of that goodwill. If the carrying amount of the reporting
  unit goodwill exceeds the implied fair value of that goodwill, an impairment
  loss shall be recognized in an amount equal to that excess. Based on the annual
  goodwill test for impairment performed during the quarter ended December 31,
  2004, management determined that there is no impairment of goodwill.

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 demand and money market deposit accounts in
  banks. The Company limits the credit exposure to any one financial institution
  or instrument and is exposed to credit risk in the event of default by these
  institutions, to the extent of the amounts recorded on the balance sheet. To
  date, the Company has not experienced losses on these investments. The Company's
  trade accounts receivables are primarily with distributors and original equipment
  manufacturers. The Company performs ongoing credit evaluations of its customers'
  financial conditions but the Company 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.

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Revenue Recognition
  Revenue on sales to customers other than distributors is recognized upon shipment
  provided that persuasive evidence of a sales arrangement exists, the price is
  fixed and determinable, title has transferred, collection of resulting receivables
  is reasonably assured, there are no customer acceptance requirements and there
  are no remaining significant obligations. Estimated product returns are provided
  for in accordance with Statement of Financial Accounting Standards No. 48, "Revenue
  Recognition When Right of Return Exists." Revenues on sales to distributors
  where the right of return exists are recognized upon "sell-through"
  when shipped from the distributor to the distributor's customer.

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

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

Advertising Costs
  Advertising costs are charged to sales and marketing as incurred. The Company
  incurred $790,730, $504,214, and $383,998, in advertising costs during 2004,
  2003, and 2002, 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.

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

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

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

|                                                                                                | Years Ended December 31,
|----------------------------------------------------------------------------------------------- | ------------------------
|                                                                                                | 2004                    
|Numerator:                                                                                      |                         
|Net
      income (loss)                                                                         | $ 337,883               
|Preferred stock dividends
        and accretion                                                 | (50,105)                
|Net income (loss) applicable to
      common stockholders                                       | $ 287,778               
|                                                                                               
|Denominator:                                                                                    |                         
|Weighted average common shares outstanding
      used in computing net income (loss) per share: |                         
|Basic                                                                                           | 30,060,947              
|Dilutive potential common shares                                                                | 3,914,578               
|Diluted                                                                                         | 33,975,525              
|Net income (loss) per share applicable
      to common stockholders:                            |                         
|Basic                                                                                           | $ 0.01                  
|Diluted                                                                                         | $ 0.01                  

For the 2004 period the
  diluted shares outstanding include the dilutive affect of assumed conversion
  of Series F Convertible Preferred Stock and assumed exercise of all in-the-money
  employee stock options and warrants, which is calculated based on the average
  share price for the 2004 fiscal period using the treasury stock method. Under
  the treasury stock method, the hypothetically received proceeds from the exercise
  of in-the-money options and warrants are assumed to be used to repurchase shares.
  For 2004, options and warrants to purchase 3,613,954 shares of the Company's
  Common Stock were excluded from the calculation of diluted earnings per share
  because the exercise prices were greater than or equal to the average price
  of the common shares, and therefore their inclusion would have been anti-dilutive.
  For the 2003 and 2002 periods presented, the diluted net loss per share is equivalent
  to the basic net loss per share because the Company has experienced losses in
  these years and thus no potential common shares from stock options, warrants,
  or convertible preferred stock have been included in the net loss per share
  calculation. Options and warrants to purchase 7,785,220, and 5,854,531, shares
  of Common Stock in 2003 and 2002, respectively, have been omitted from the loss
  per share calculation as their effect is anti-dilutive.

Stock-Based Compensation
  The Company accounts for employee stock options in accordance with Accounting
  Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
  (APB 25), and the Company has adopted the disclosure-only alternative described
  in Statement of Financial Accounting Standards No. 123, "Accounting for
  Stock-Based Compensation" (SFAS 123). The Company has elected to follow
  APB No. 25 and related interpretations in accounting for its employee stock
  options because the alternative fair value accounting provided for under SFAS
  123 requires use of option valuation models that were not developed for use
  in valuing employee stock options. Under APB 25, the Company generally does
  not record compensation expense because the exercise price of the Company's
  employee stock options equals the market price of the underlying stock on the
  date of grant. Pro forma information regarding net loss and loss per share available
  to common shareholders is required by SFAS 123, and such information has been
  determined as if the Company had accounted for its employee stock options under
  the fair value method.

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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 SFAS 123, the Company's per share results would have changed to the pro forma
  net loss amounts indicated below:

|                                                                                         | 2004                  | 2003                  | 2002                 
|---------------------------------------------------------------------------------------- | --------------------- | --------------------- | ---------------------
|Net income (loss)
      applicable to common shareholders, as reported                   | $
        287,778     | $
        (1,951,613) | $
        (3,083,475)
|Stock-based employee
      compensation expense determined under fair value based method | (1,763,002)           | (2,409,731)           | (2,137,054)          
|Pro forma net loss
      applicable to common shareholders                               | $
        (1,475,224) | $
        (4,361,344) | $
        (5,220,529)
|                                                                                         |                       |                       |                      
|Basic
      and diluted net income (loss) per share, as reported                         | $
        0.01        | $
        (0.07)      | $
        (0.13)     
|Pro forma
      basic and diluted net loss per share                                     | $
        (0.05)      | $
        (0.17)      | $
        (0.22)     

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:

|                                   | 2004  | 2003  | 2002 
|---------------------------------- | ----- | ----- | -----
|Risk-free interest
      rate (%)  | 3.13% | 2.85% | 4.38%
|Dividend yield                     | --    | --    | --   
|Volatility factor                  | 1.3   | 1.4   | 1.4  
|Expected option life
      (years) | 4.5   | 4.5   | 6.5  

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Recent Accounting Standards
  In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
  Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting
  for Stock-Based Compensation" ("SFAS 123") and supercedes APB
  Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R
  requires all share-based payments to employees, including grants of employee
  stock options, to be recognized in the financial statements based on their fair
  values, beginning with the first interim or annual period commencing after June
  15, 2005, with early adoption encouraged. The pro forma disclosures previously
  permitted under SFAS 123, no longer will be an alternative to financial statement
  recognition. The Company is required to adopt SFAS 123R in its third quarter
  of fiscal 2005. Under SFAS 123R, the Company must determine the appropriate
  fair value model to be used for valuing share-based payments, the amortization
  method for compensation cost and the transition method to be used at date of
  adoption. The transition methods include prospective and retroactive adoption
  options. Under the retroactive options, prior periods may be restated either
  as of the beginning of the year of adoption or for all periods presented. The
  prospective method requires that compensation expense be recorded for all unvested
  stock options and restricted stock at the beginning of the first quarter of
  adoption of SFAS 123R, while the retroactive methods would record compensation
  expense for all unvested stock options and restricted stock beginning with the
  first period restated. The Company is evaluating the requirements of SFAS 123R
  and expects that the adoption of SFAS 123R will have a material adverse impact
  on its consolidated results of operations and earnings per share. The Company
  has not yet determined the method of adoption or the effect of adopting SFAS
  123R, and has not determined whether the adoption will result in amounts that
  are similar to the current pro forma disclosures under SFAS 123.

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, data collection and connection solutions for mobile electronic devices.
  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, 2004, 2003 and 2002 is as follows:

|                               | Years
        Ended December 31,
|------------------------------ | --------------------------------
|Revenues:
      (in thousands) | 2004                            
|United
      States            | $
        16,392                
|Europe                         | 6,293                           
|Asia and
      rest of world   | 3,445                           
|                           | $
        26,130                

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

Information regarding product
  families for the years ended December 31, 2004, 2003 and 2002 is as follows:

|                                     | Years
        Ended December 31,
|------------------------------------ | --------------------------------
|Revenues:
      (in thousands)       | 2004                            
|Data collection
      products       | $
        10,440                
|Connectivity
      products          | 8,292                           
|Embedded
      products and services | 3,669                           
|Serial
      products                | 3,729                           
|                                 | $
        26,130                

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Major Customers
  Customers who accounted for at least 10% of total revenues in fiscal 2004, 2003,
  and 2002 were as follows:

|                          | Years Ended December 31,
|------------------------- | ------------------------
|                          | 2004                    
|Tech Data Corp.           | 28%                     
|Ingram Micro, Inc.        | 15%                     
|* indicates less than 10%

NOTE 2 - Intangible
  Technology

On July 15, 2004 the Company
  acquired US Patent 5,902,991 entitled Card Shaped Computer Peripheral Device
  from Khyber Technologies, Inc. The patent covers the design and functioning
  of plug-in bar code scanners, bar code imagers and RFID products. The patent
  was purchased for $600,000 and has been capitalized as an intangible asset.
  The patent is being amortized on a straight line basis over its estimated useful
  life of ten years. Khyber Technologies withdrew its patent infringement lawsuit
  as part of the settlement agreement.

During the first quarter
  of 2002, the Company acquired intangible assets in conjunction with the acquisition
  of Nokia's CompactFlash Bluetooth Card business and related product line technology.
  These intangible assets were valued at $980,000, and consist of purchased technology
  and a licensing agreement. Estimated useful lives of the acquired assets at
  the time of acquisition ranged from one to three years. Intangible assets of
  $835,125 from a prior acquisition in 2000 consist of developed software and
  technology with estimated lives at the time of acquisition ranging from 2.5
  to 8.5 years. At December 31, 2004, a licensing agreement with a book value
  of $37, 733 was reclassified as an intangible asset and will be amortized over
  its remaining life of three years.

Intangible technology as
  of December 31, 2004 consisted of the following:

|                                          | Gross
        Assets | Accumulated
        Amortization | Net              
|----------------------------------------- | -------------------- | -------------------------------- | -----------------
|Patent                                    | $ 600,000            | $
        (30,000)               | $
        570,000
|Bluetooth CompactFlash
        technology | 900,000              | (841,129)                        | 58,871           
|Project management
        tools          | 570,750              | (285,375)                        | 285,375          
|Schematic library                         | 153,000              | (153,000)                        | --               
|Licensing agreement                       | 114,342              | (76,609)                         | 37,733           
|Intangible
        technology             | 2,338,092            | (1,386,113)                      | $
        951,979

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Intangible assets as of
  December 31, 2004 consisted of the following:

|                                          | Gross
        Assets | Accumulated
        Amortization | Net              
|----------------------------------------- | -------------------- | -------------------------------- | -----------------
|Bluetooth CompactFlash
        technology | $ 900,000            | $
        (541,128)              | $
        358,872
|Licensing agreement                       | 80,000               | (80,000)                         | --               
|Project management
        tools          | 570,750              | (218,228)                        | 352,522          
|Schematic library                         | 153,000              | (153,000)                        | --               
|Development software                      | 111,375              | (111,375)                        | --               
|Intangible
        technology             | 1,815,125            | (1,103,731)                      | $
        711,934

Based on identified intangible
  assets recorded at December 31, 2004 and assuming no subsequent impairment of
  the underlying assets, the annual amortization expense is expected to be as
  follows:

|Year                    | Amount           
|----------------------- | -----------------
|2005                    | $
        203,042
|2006                    | 140,446          
|2007                    | 134,557          
|2008                    | 127,147          
|2009                    | 76,787           
|2010
        and beyond | 270,000          
|                        | $
        951,979

NOTE 3 -
  Series F Convertible Preferred Stock

On March 20, 2003, the
  Company sold 276,269 units at a price of $7.22 per unit (total of $2,000,000
  gross cash proceeds) in a private equity placement. Each unit consisted of one
  share of the Company's Series F convertible preferred stock (the "Series
  F Preferred Stock") and a three-year warrant to purchase three shares of
  the Company's common stock. Two directors of the Company invested an aggregate
  of $115,000 in the financing. Each share of Series F Preferred Stock is convertible,
  in whole or in part, into 10 shares of common stock at the option of the holder
  at any time for a period of three years following the date of sale, with a mandatory
  conversion date three years from date of sale. The originally issued Series
  F Preferred Stock was convertible into a total of 2,762,690 shares of common
  stock at a conversion price of $0.722 per share, subject to certain adjustments.
  An additional 828,807 shares of common stock were issuable upon exercise of
  the originally issued warrants at an exercise price of $0.722 per share. In
  addition, the Company issued five-year warrants to the placement agent to acquire
  up to 718,300 shares of common stock at $0.722 per share. Using a Black-Scholes
  valuation model with the following assumptions: 0.0% dividend yield rate, risk
  free interest rates of 1.9% and 2.81%, respectively, for the investors and placement
  agent, $0.73 per share fair value of common stock, $0.722 exercise price, a
  life of three years and five years, respectively, for the investors and placement
  agent, and a volatility of 0.911, $296,494 of the proceeds were attributed to
  the warrants issued to investors, and the warrants issued to the placement agent
  were valued at $366,333, which was included in the cost of the financing. The
  Company recorded a one-time accretion charge of $296,494 in the first quarter
  of 2003 reflecting the discount from market resulting from the allocation of
  the proceeds to the investor warrants.

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The Series F Preferred
  Stock automatically converts into common stock three years after sale and automatically
  converts earlier in the event of a merger or consolidation of the Company, subject
  to certain conditions. The holders of Series F Preferred Stock have voting rights
  equal to the number of shares of common stock 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.
  Dividends for 2004 were $50,105 and were paid in cash subsequent to each quarter.
  During the year holders of 9,083 shares of Series F Preferred Stock elected
  to convert their shares into 90,830 shares of common stock leaving 83,823 shares
  of Series F Preferred Stock outstanding at December 31, 2004. Dividends for
  2003 were $89,273 and were paid in cash and common stock resulting in the issuance
  of 26,265 shares. During the third and fourth quarters of 2003, holders of 183,363
  shares of Series F Preferred Stock elected to convert their shares into 1,833,630
  shares of common stock.

NOTE 4 - Series E Redeemable Convertible Preferred Stock

On October 3, 2002, the
  Company sold 100,000 shares of Series E redeemable convertible preferred stock
  in a private placement financing at a price of $10.00 per share, for total proceeds
  of $1.0 million. The sale included issuance to the investor of a five-year warrant
  to acquire 250,000 shares of the Company's common stock at a price of $0.957
  per share. The preferred stock was to be either converted into common stock
  or redeemed for cash in fifteen equal monthly installments commencing January
  31, 2003. Conversion could be accelerated at the option of the holder. Each
  share of preferred stock was convertible into approximately 11.5 shares of common
  stock (a conversion price of $0.87 per common share) if the market price of
  the Company's common stock at the time of conversion was 125% (approximately
  $1.09 per share) or more of the conversion price. The preferred stock carried
  a cumulative dividend preference of 12% per year payable monthly commencing
  December 31, 2002.

Dividends were $47,090
  and $28,931 for 2003 and 2002, respectively, which were paid in cash. Accretion
  to the redemption value of the Series E preferred stock was $268,813 and $82,714
  for 2003 and 2002, respectively. The Company elected to make monthly redemption
  payments on the Series E preferred stock totaling $200,000 during the first
  quarter of 2003. During the second quarter of 2003, the Series E holder elected
  to convert 53,366 shares of preferred stock resulting in the issuance of 613,400
  shares of common stock during the quarter. During the third quarter of 2003,
  the Series E holder elected to convert the remaining 26,634 shares of preferred
  stock resulting in the issuance of 306,140 shares of common stock during the
  quarter.

NOTE 5 - Common Stock
  Financing

On August 5, 2003 and on
  September 12, 2003, the Company sold 1,729,955 and 53,250 shares of Common Stock,
  respectively, in private placement financings at a price of $2.37 per share.
  The second closing was the result of holders of the Company's Series F convertible
  preferred stock exercising their contractual rights to participate in the private
  placement. Total proceeds were $4,226,202 and net proceeds after costs and expenses
  were $3,674,503. In conjunction with the financing, the Company issued five-year
  warrants to the investors to acquire an additional 534,962 shares of common
  stock at $2.73 per share, and issued a five-year warrant to the placement agent
  to acquire 172,996 shares of common stock at $2.73 per share. Using a Black-Scholes
  valuation formula with the following assumptions: 0.0% dividend yield rate,
  3.43% risk free interest rate, $2.90 fair value of common stock, $2.73 exercise
  price, a life of five years, and a volatility of 1.372, $1,036,644 of the proceeds
  were attributed to the warrants issued to investors, and the warrants issued
  to the placement agent were valued at $446,330 which was included in the cost
  of the financing.

54

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  of Contents)

On March 28, 2002, the
  Company sold 381,760 shares of common stock in a private placement financing
  at a price of $1.59 per share. Total proceeds were $607,000, and net proceeds
  after costs and expenses were $419,326. In conjunction with the financing, the
  Company issued five-year warrants to investors to acquire an additional 95,439
  shares of common stock at $1.59 per share, and issued a five-year warrant to
  the placement agent to acquire 22,905 shares of common stock at $1.59 per share.
  Using a Black-Scholes valuation formula with the following assumptions: 0.0%
  dividend yield rate, 5.13% risk free interest rate, $1.82 fair value of common
  stock, $1.59 exercise price, a life of 5 years, and a volatility of 1.409, $157,475
  of the proceeds were attributed to the warrants issued to investors, and the
  warrants issued to the placement agent were valued at $37,793. Two directors
  of the Company invested an aggregate of $130,000 in cash in this financing.

NOTE 6- Note Payable to Nokia

On March 16, 2002, the
  Company acquired from Nokia Corporation its CompactFlash ("CF") Bluetooth
  Card business including a product line and a sole, non-exclusive, nontransferable,
  worldwide license to make, use and sell the related product line technology.
  The purchase price was three million Euros, of which two million Euros was in
  the form of a note payable to Nokia. In August 2002 and September 2003, payment
  of the balance was revised to monthly installments of 100,000 Euros due each
  month beginning September 11, 2002 with the final installment due on April 11,
  2004. In April 2004 the remaining balance on the note was paid in full. Outstanding
  balances under the note accrued interest at an annual rate of 6% and the accumulated
  interest was payable at the time of each installment payment. Interest charges
  were $4,556, $66,495, and $102,798 in 2004, 2003, and 2002, respectively.



The Company used foreign
  currency forward exchange contracts for Euros in order to mitigate the impact
  of currency fluctuations between the Euro and the US dollar on the payments
  to Nokia. Due to the change in the payment schedule with Nokia these derivatives
  did not qualify for SFAS 133 hedge accounting treatment. Accordingly, the changes
  in fair value of these derivatives were recorded to earnings. In the 2004 the
  net of the currency exchange loss on the note payable of $54,860 and the gain
  on the forward exchange contracts of $55,430 was included in interest and other
  income. In 2003 the net of the currency exchange loss on the note payable of
  $82,060 and the gain on the forward exchange contracts of $93,950 was included
  in interest and other income. In 2002 the net of the currency exchange loss
  on the note payable of $280,080 and the gain on the forward exchange contracts
  of $271,710 was included in interest expense and other.

At December 31, 2003 the
  Company had forward purchase contracts to buy Euros with a nominal US dollar
  value equivalent to $503,040. The fair value of those forward purchase contracts
  at December 31, 2003 was $54,860 and such value is included in other current
  assets in the accompanying balance sheet.

55

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NOTE 7 - Bank Financing
  Arrangements

On March 5, 2004, the Company
  entered into a new credit agreement with its bank that will expire on March
  5, 2006. This new credit agreement replaced the credit agreement previously
  in effect. The credit facility under the new 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 lender's index
  rate based on prime plus 0.5%. The rates in effect at December 31, 2004 were
  5.75% on both the domestic and international lines. At December 31, 2004, outstanding
  amounts borrowed under the lines were $1,790,218 and $1,159,054, respectively,
  which were the approximate amounts available on the lines. These amounts outstanding
  at December 31, 2004 were repaid in January 2005. Under the new credit agreement,
  the Company must maintain quarterly minimum tangible net worth equal to $5,000,000,
  plus 75% of quarterly net profits beginning March 31, 2004. The Company was
  in compliance with this requirement at the end of 2004.

On March 7, 2005, the Company
  agreed with its bank to extend the term of the credit facility by an additional
  year (see Note 16 for additional information).

NOTE 8-
  Capital Lease Obligations and Equipment Financings

The Company leases certain
  of its equipment under capital leases. The leases are collateralized by the
  underlying assets. At December 31, 2004, property and equipment with a cost
  of $37,333 were subject to such financing arrangements. Related accumulated
  amortization at December 31, 2004 amounted to $10,889. Future minimum payments
  under capital lease and equipment financing arrangements as of December 31,
  2004, are as follows:

|2005                                        | $ 10,266        
|------------------------------------------- | ----------------
|2006                                        | 10,266          
|2007                                        | 8,556           
|Total
      minimum payments                | 29,088          
|Less amount
      representing interest     | (1,923)         
|Present
      value of net minimum payments | 27,165          
|Less current
      portion                  | (9,174)         
|Long-term
      portion                     | $
        17,991

NOTE 9 - Commitments

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

|2005  | $ 442,210        
|----- | -----------------
|2006  | 442,210          
|Total | $
        884,419

56

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Rental expense under all
  operating leases was $470,524, $625,624, and $674,599 for each of the years
  ended December 31, 2004, 2003, and 2002, respectively.

The Company has non-cancelable
  purchase commitments with its vendors for inventory used in the ordinary course
  of business in the aggregate amount of $1.5 million in 2005.

NOTE 10 - Stock Option/Stock
  Issuance Plan

The Company has three Stock
  Option Plans: the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan"),
  the 1999 Stock Plan (the "1999 Plan"), and the 2004 Equity Incentive
  Plan (the "2004 Plan").

The 1995 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 Company
  grants incentive stock options and nonstatutory stock options at an exercise
  price per share equal to the fair market value per share of 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. Upon ratification of the
  2004 Plan by the shareholders in June 2004, shares in the 1995 Plan that had
  been reserved but not issued, as well as any shares issued that would otherwise
  return to the 1995 Plan as a result of termination of options or repurchase
  of shares, were reserved for issuance under the 2004 Plan. No additional grants
  will be made from the 1995 Plan.

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, 2001    | 366,995                  | 3,181,112                                        
|Increase
      in shares authorized   | 944,180                  | --                                               
|Granted                               | (1,242,500)              | 1,242,500                                        
|Cancelled                             | 603,667                  | (603,667)                                        
|Exercised                             | --                       | (46,862)                                         
|Balance
      at December 31, 2002    | 672,342                  | 3,773,083                                        
|Increase
        in shares authorized | 964,559                  | --                                               
|Granted                               | (1,119,200)              | 1,119,200                                        
|Cancelled                             | 72,187                   | (72,187)                                         
|Exercised                             | --                       | (134,831)                                        
|Balance
      at December 31, 2003    | 589,888                  | 4,685,265                                        
|Increase
        in shares authorized | 1,193,421                | --                                               
|Granted                               | (1,022,500)              | 1,022,500                                        
|Cancelled                             | 212,278                  | (212,278)                                        
|Exercised                             | --                       | (105,372)                                        
|Transferred
        to 2004 Plan      | (973,087)                | --                                               
|Balance
      at December 31, 2004    | --                       | 5,390,115                                        

57

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The weighted average fair
  value of options granted during 2004, 2003, and 2002 was $2.76, $0.73, and $0.95
  per share, respectively. As of December 31, 2004, 2003 and 2002, options to
  purchase 3,460,694, 2,291,396, and 1,457,486 shares, respectively, were exercisable
  at a weighted average exercise price of $1.98, $2.05, and $2.26, respectively.

The outstanding and exercisable
  options at December 31, 2004 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                   | 266,437                               | 4.00                                           
|$
        0.70 - $ 0.75                   | 993,812                               | 8.25                                           
|$
        0.76                            | 503,973                               | 7.92                                           
|$
        0.97 - $ 1.29                   | 1,346,954                             | 7.08                                           
|$
        1.50                            | 17,708                                | 4.92                                           
|$
        2.25 - $ 2.98                   | 247,300                               | 8.42                                           
|$
        3.2 - $ 3.38                    | 2,001,931                             | 7.42                                           
|$
        7.75                            | 2,000                                 | 5.00                                           
|$
        14.94                           | 10,000                                | 5.17                                           
|$
        0.44 - $ 14.94                  | 5,390,115                             | 7.42                                           



The 1999 Plan
  The 1999 Plan provides for the grant of nonstatutory stock options to employees,
  directors, and consultants of the Company. The Company grants nonstatutory stock
  options at an exercise price per share equal to the fair market value per share
  of common stock on the date of grant. The vesting and exercise provisions are
  determined by the Board of Directors, with a maximum term of ten years.

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



|                                   | Outstanding
        Options                         
|---------------------------------- | ----------------------------------------------------
|                                   | Options
        
        Available
        For Grant
|Balance
      at December 31, 2001 | 4,797                                               
|Cancelled                          | 33,125                                              
|Exercised                          | --                                                  
|Balance
      at December 31, 2002 | 37,922                                              
|Exercised                          | --                                                  
|Balance
      at December 31, 2003 | 37,922                                              
|Cancelled                          | 142,732                                             
|Balance
      at December 31, 2004 | 180,654                                             

58

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As of December 31, 2004,
  2003, and 2002, 1,094,418, 1,010,712, and 853,547 options were exercisable at
  a weighted average exercise price of $2.79, $2.75, and $2.46, respectively.
  The outstanding and exercisable options at December 31, 2004 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                           | 211,009                               | 4.50                                                                      
|$
        2.28                   | 45,000                                | 6.58                                                                      
|$
        3.38                   | 846,742                               | 6.08                                                                      
|$
        0.56 - $ 3.38          | 1,102,751                             | 5.75                                                                      

The 2004 Plan
  The 2004 Plan provides for the grant of incentive stock options, nonstatutory
  stock options, restricted stock, stock appreciation rights, and performance
  awards, to employees, directors, and consultants of the Company. Upon ratification
  of the 2004 Plan by the shareholders in June 2004, shares in the 1995 Plan that
  had been reserved but not issued, as well as any shares issued that would otherwise
  return to the 1995 Plan as a result of termination of options or repurchase
  of shares, were reserved for issuance under the 2004 Plan. The Company grants
  incentive stock options and non-statutory stock options at an exercise price
  per share equal to the fair market value per share of 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 2004 Plan is summarized as follows:

|                                   | Outstanding
        Options                         
|---------------------------------- | ----------------------------------------------------
|                                   | Options
        
        Available
        For Grant
|Transferred
      from 1995 Plan   | 973,087                                             
|Granted                            | (95,400)                                            
|Balance
      at December 31, 2004 | 877,687                                             

The outstanding and exercisable
  options at December 31, 2004 presented by price range are as follows:

|                                                 | Options Outstanding                                   | Options
        Exercisable                                    
|------------------------------------------------ | ----------------------------------------------------- | ---------------------------------------------------------------
|Range
        of
        Exercise
        Prices | Number
        of
        Options
        Outstanding | Weighted
        Average
        Remaining Life
        (Years)
|$
        1.51                                   | 95,400                                                | 9.92                                                           

59

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NOTE 11 - 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, 2004:





|Reason                                                          | Number
        of Shares | Price
        Per Share | Issue
        Date | Expiration
        Date
|--------------------------------------------------------------- | ------------------------ | ----------------------- | ------------------ | -----------------------
|Common
      stock financing                                    | 56,344                   | $
        1.59          | Mar
        2002   | Mar
        2007       
|Bank
      line financing                                       | 15,000                   | $
        0.80          | Oct
        2002   | Oct
        2007       
|Series
      E redeemable convertible preferred stock financing | 249,000                  | $
        0.957         | Oct
        2002   | Oct
        2007       
|Series
      F preferred stock financing                        | 461,023                  | $
        0.722         | Mar
        2003   | Mar
        2006       
|Series
      F preferred stock financing                        | 307,026                  | $
        0.722         | Mar
        2003   | Mar
        2008       
|Common
      stock financing                                    | 629,281                  | $
        2.73          | Aug
        2003   | Aug
        2008       
|Total
      warrants                                            | 1,717,674                |                         |                    |                        







NOTE 12 - Shares Reserved

Common stock reserved for
  future issuance was as follows at December 31, 2004:

|                                                                      | Number
        of shares
|--------------------------------------------------------------------- | ------------------------
|Stock
      option grants outstanding (see Note 10)                   | 6,588,266               
|Reserved
      for future stock option grants (see Note 10)           | 1,058,336               
|Common
      stock warrants (see Note 11)                             | 1,717,674               
|Conversion
      of Series F convertible preferred stock (see Note 3) | 838,230                 
|Total
        common stock reserved for future issuance               | 10,202,506              

NOTE 13 - Related Party

The Company from time to
  time purchases engineering design and consulting services from Impact Zone.
  Impact Zone's principal stockholder, Dale Gifford, is a sibling of Michael L.
  Gifford, Executive Vice President and Director of Socket. The Company received
  no services during 2004 and had no outstanding accounts payable due to Impact
  Zone at December 31, 2004. At December 31, 2003 the Company had outstanding
  accounts payable due to Impact Zone of $5,000. The Company purchased engineering
  design and consulting services from Impact Zone amounting to $72,500 and $268,853,
  respectively, during the years ended December 31, 2003 and 2002.

NOTE 14 - 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.

60

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NOTE 15 - Income Taxes

There were no provisions
  for income taxes for the years ended December 31, 2004, 2003, and 2002. The
  Company has incurred net operating losses in all periods prior to the first
  quarter of 2004. Earnings in 2004 were not material, and continued earnings
  are not assured. The Company has maintained a full valuation allowance for all
  deferred tax assets.

As of December 31, 2004,
  the Company had federal and state net operating loss carryforwards of approximately
  $21,600,000 and $5,800,000, respectively. The Company also has federal and state
  tax credit carryforwards of approximately $400,000 and $400,000, respectively.
  The net operating loss and credit carryforwards will expire at various dates
  beginning in 2005 through 2024, 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:



|                                                  | Years
        Ended December 31,
|------------------------------------------------- | --------------------------------
|Deferred tax assets:                              | 2004                            
|Net
      operating loss carryforwards            | $
        7,688,000             
|Credits                                           | 657,000                         
|Capitalized
      research and development costs  | 862,000                         
|Other
      acquired intangibles                  | 199,000                         
|Accruals
      not currently deductible           | 1,024,000                       
|Total
      deferred tax assets                   | 10,430,000                      
|Valuation
      allowance for deferred tax assets | (10,256,000)                    
|Net
      deferred tax assets                     | 174,000                         
|Deferred tax liability:                           |                                 
|Acquired
      intangibles                        | (174,000)                       
|Net
      deferred taxes                          | $ --                            

The tax benefits associated
  with employee stock options provide a deferred benefit of approximately $758,000
  which has been offset by the valuation allowance. The deferred tax benefit associated
  with the employee stock options will be credited to additional paid-in capital
  when realized.

NOTE 16 - Subsequent Events (Unaudited)

On March 7, 2005, the Company
  agreed with its bank to extend the term of the credit facility by an additional
  year which will now expire on March 4, 2007. The terms of the credit agreement
  as outlined in Note 7 remain in effect for the term of the agreement.

61

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

Not Applicable.

Item 9a. Controls and
  Procedures

Evaluation of disclosure
  controls and procedures

Our management evaluated,
  with the participation of our Chief Executive Officer and our Chief Financial
  Officer, the effectiveness of our disclosure controls and procedures as of the
  end of the period covered by this Annual Report on Form 10-K. Based on this
  evaluation, our Chief Executive Officer and our Chief Financial Officer have
  concluded that our disclosure controls and procedures are effective to ensure
  that information we are required to disclose in reports that we file or submit
  under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized
  and reported within the time periods specified in Securities and Exchange Commission
  rules and forms, and (ii) accumulated and communicated to our management, including
  our Chief Executive Officer and our Chief Financial Officer, as appropriate
  to allow timely decisions regarding required disclosure.

Management's
  Report on Internal Control Over Financial Reporting

Our management is responsible
  for establishing and maintaining adequate internal control over financial reporting.
  There are inherent limitations in the effectiveness of any internal control,
  including the possibility of human error and the circumvention or overriding
  of controls. Accordingly, even effective internal controls can provide only
  reasonable assurances with respect to financial statement preparation. Further
  because of changes in conditions, the effectiveness of internal controls may
  vary over time.

We assessed the effectiveness
  of the company's internal control over financial reporting as of December 31,
  2004. In making this assessment, we used the criteria set forth by the Committee
  of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
  - Integrated Framework.

Based on our assessment
  using those criteria, we believe that, as of December 31, 2004, our internal
  control over financial reporting is effective.

Our management's assessment
  of the effectiveness of our internal control over financial reporting as of
  December 31, 2004 has been audited by Moss Adams LLP, an independent registered
  public accounting firm. Their report appears on page 38 of this Annual Report
  on Form 10-K.

Changes in internal
  control over financial reporting

There was no change in
  our internal control over financial reporting that occurred during the period
  covered by this Annual Report on Form 10-K that has materially affected, or
  is reasonably likely to materially affect, our internal control over financial
  reporting.

62

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Item 9b. Other Information

None.



PART
  III

Item 10. Directors and
  Executive Officers of the Registrant

The information required
  hereunder is incorporated by reference from our Proxy Statement to be filed
  in connection with our annual meeting of stockholders to be held on April 21,
  2005.

Item 11. Executive Compensation

The information required
  hereunder is incorporated by reference from our Proxy Statement to be filed
  in connection with our annual meeting of stockholders to be held on April 21,
  2005.

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

The following table provides
  information as of December 31, 2004 about our common stock that may be issued
  under the Company's existing equity compensation plans. For additional information
  about the equity compensation plans see Note 10 to the Company's Consolidated
  Financial Statements.



|                                                                   | Number
        of securities to be issued upon exercise of outstanding options | Weighted-average
        exercise price of outstanding options | Number
        of securities remaining available for future issuance under equity compensation
        plans (excluding securities reflected in column (a)
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------ | -------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                   | (a)                                                                            | (b)                                                            | (c)                                                                                                                                                       
|Equity
        compensation plans approved by security holders (1)     | 5,485,515                                                                      | $
        1.83                                                 | 877,687                                                                                                                                                   
|Equity
        compensation plans not approved by security holders (2) | 1,102,751                                                                      | $2.79                                                          | --                                                                                                                                                        
|    Total                                              | 6,588,266                                                                      | $2.04                                                          | 877,687                                                                                                                                                   

______________________

(1) Includes the 1995 Stock
  Plan and its successor, the 2004 Equity Incentive Plan. Pursuant to an affirmative
  vote by security holders in June 2004, an annual increase is added on the first
  day of each fiscal year equal to the lesser of (a) 2,000,000 shares, (b) 4%
  of the outstanding shares on that date, or (c) a lesser amount as determined
  by the Board of Directors. 
  (2) Consists of the 1999 Stock Plan.

63

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Item 13. Certain Relationships
  and Related Transactions

Certain information required
  hereunder is incorporated by reference from our Proxy Statement to be filed
  in connection with our annual meeting of stockholders to be held on April 21,
  2005.

Item 14. Principal
  Accountant Fees and Services

Certain information required
  hereunder is incorporated by reference from our Proxy Statement to be filed
  in connection with our annual meeting of stockholders to be held on April 21,
  2005.





PART
  IV

Item 15. Exhibits and
  Financial Statement Schedules

> (a) Documents filed as
>     part of this report:
>   1. All financial statements.
>     INDEX
>           TO FINANCIAL STATEMENTS
>         PAGE 
>           Report
>           of Moss Adams LLP, Independent Registered Public Accounting Firm
>         38Report
>           of Ernst & Young LLP, Independent Registered Public Accounting Firm
>         40Consolidated
>           Balance Sheets
>         41Consolidated
>           Statements of Operations
>         42Consolidated
>           Statements of Redeemable Preferred Stock and Stockholders' Equity
>         43Consolidated
>           Statements of Cash Flows
>         44Notes
>           to Consolidated Financial Statements
>         452. Financial statement
>       schedules.
>       All financial statement schedules are omitted because they are not applicable
>       or not required or because the required information is included in the financial
>       statements or notes herein.

> 3. Exhibits.
>     
>     See Index of Exhibits on page 66. The Exhibits listed on the accompanying
>     Index of Exhibits are filed or incorporated by reference as part of this report.
>   (b) Exhibits:
>   See Index of Exhibits
>     on page 66. The Exhibits listed on the accompanying Index of Exhibits are
>     filed or incorporated by reference as part of this report.
>   64

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(Table
  of Contents)








SIGNATURES

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

|                           | SOCKET
      COMMUNICATIONS, INC.Registrant                                              
|-------------------------- | -----------------------------------------------------------------------------------------
|                           |                                                                                          
|Date:
      March 11, 2005 | /s/
      Kevin J. Mills
      Kevin J. Mills
      President and Chief Executive Officer









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



|By | /s/
      Kevin J. Mills     | President
      and Chief Executive Officer 
      (Principal Executive Officer)                                                   |  | March
      11, 2005
|-- | ---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- |  | --------------------
|   | Kevin
      J. Mills        
|   |                              |                                                                                                                                    |  |                     
|By | /s/
      Charlie Bass       | Chairman
      of the Board                                                                                                        |  | March
      11, 2005
|   | Charlie
      Bass          
|   |                              |                                                                                                                                    |  |                     
|By | /s/
      David W. Dunlap    | Vice
      President of Finance and Administration and Chief Financial Officer 
      (Principal Financial and Accounting Officer) |  | March
      11, 2005
|   | David
      W. Dunlap       
|   |                              |                                                                                                                                    |  |                     
|By | /s/
      Micheal L. Gifford | Executive
      Vice President and Director                                                                                        |  | March
      11, 2005
|   | Micheal
      L. Gifford    
|   |                              |                                                                                                                                    |  |                     
|By | /s/
      Enzo Torresi       | Director                                                                                                                           |  | March
      11, 2005
|   | Enzo
      Torresi          
|   |                              |                                                                                                                                    |  |                     
|By | /s/
      Gianluca Rattazzi  | Director                                                                                                                           |  | March
      11, 2005
|   | Gianluca
      Rattazzi     
|   |                              |                                                                                                                                    |  |                     
|By | /s/
      Peter Sealey       | Director                                                                                                                           |  | March
      11, 2005
|   | Peter Sealey                
|   |                              |                                                                                                                                    |  |                     
|By | /s/
      Leon Malmed        | Director                                                                                                                           |  | March
      11, 2005
|   | Leon
      Malmed           

65

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  of Contents)








Index
  to Exhibits

|Exhibit
        Number | Description                                                                                                                            
|---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                        
|2.1
        (1)        | Agreement
      and Plan of Reorganization.                                                                                            
|                       |                                                                                                                                        
|3.1
        (2)        | Amended
      and Restated Certificate of Incorporation.                                                                               
|                       |                                                                                                                                        
|3.2
        (2)        | Certificate of Designation of Series E Convertible Preferred
      Stock.                                                              
|                       |                                                                                                                                        
|3.3
        (2)        | Certificate of Designation of Series F Convertible Preferred
      Stock.                                                              
|                       |                                                                                                                                        
|3.4
        (3)        | Bylaws                                                                                                                                 
|                       |                                                                                                                                        
|3.5
        (3)        | Certificate of Amendment of Bylaws dated March 14, 2001.                                                                               
|                       |                                                                                                                                        
|10.1 (4)*              | Form of Indemnification Agreement entered into between the
      Company and its directors and officers.                               
|                       |                                                                                                                                        
|10.2 (4)*              | 1995 Stock Plan and forms of agreement thereunder.                                                                                     
|                       |                                                                                                                                        
|10.3 (5)*              | Form of Amendment No.1 to Stock Option Agreement between the
      Company and certain Option Holders under the 1995 Stock Option Plan.
|                       |                                                                                                                                        
|10.4 (6)*              | 1999 Nonstatutory Stock Option Plan.                                                                                                   
|                       |                                                                                                                                        
|10.5 (7)*              | 2004 Equity Incentive Plan and forms of agreement
      thereunder.                                                                    
|                       |                                                                                                                                        
|10.6 (8)               | Standard Lease Agreement by and between Central Court, LLC
      and the Company dated September 15, 1996.                             
|                       |                                                                                                                                        
|10.7 (9)               | Second Amendment to Lease by and between Central Court, LLC
      and the Company dated December 14, 2001.                             
|                       |                                                                                                                                        
|10.8 (10)*             | Form of Executive Management Bonus Plan dated January 1, 2003
      between the Company and certain eligible participants.             
|                       |                                                                                                                                        
|10.9 (10)*             | Form of Employment Agreement dated March 19, 2003 between
      the Company and the officers of the Company.                           

|          |                                                                                
|--------- | -------------------------------------------------------------------------------
|21.1 (10) | Subsidiaries.                                                                  
|          |                                                                                
|23.1      | Consent of Moss Adams LLP, Independent Registered Public Accounting
      Firm.

66

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|23.2 | Consent of Ernst & Young LLP, Independent Registered Public
      Accounting Firm.                                                   
|---- | -------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                      
|31.1 | Certification of Chief Executive Officer and Chief Financial
      Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     |                                                                                                                                      
|32.1 | Certification of Chief Executive Officer and Chief Financial
      Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

|_________
        * Executive compensation plan or arrangement. 
        (1) Incorporated by reference to exhibits filed with the Company's Form
        8-K filed on October 20, 2000.
      (2) Incorporated by reference to exhibits filed with the Company's Form
        10-K filed March 15, 2004
      (3) Incorporated by reference to exhibits filed with the Company's Form
        10-K filed March 31, 2003
      (4) 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.
      (5) 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.
      (6) Incorporated by reference to exhibits filed with the Company's Form
        10-QSB filed on August 16, 1999.
      (7) Incorporated by reference to Appendix C filed with the Company's
        Form DEF 14A filed April 29, 2004.
      (8) 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.
      (9) Incorporated by reference to exhibits filed with the Company's Form
        10-K filed April 1, 2002
      (10) Incorporated by reference to exhibits filed with the Company's Form
        10-K filed March 31, 2003
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

67

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  of Contents)

Exhibit
      23.1    CONSENT
      OF MOSS ADAMS LLP 
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation
      by reference in the Registration Statements (Forms S-3 No. 333-109150, No.
      333-104632, No. 333-100754, No. 333-87348, No. 333-51236, No. 333-96231,
      No. 333-82591, and No. 333-49001; and Forms S-8 No. 333-106502, 333-87368,
      No. 333-85721, No. 333-68347, No. 333-66060, No. 333-59838, No. 333-07669,
      and No. 33-97350) and related Prospectuses of our report dated February
      11, 2005, with respect to the consolidated financial statements of Socket
      Communications, Inc. included in the Annual Report (Form 10-K) for the year
      ended December 31, 2004.  /s/
      Moss Adams LLP San Francisco,
      California 
      March 14, 2005   (Table
      of Contents)






Exhibit 23.2







CONSENT
  OF ERNST & YOUNG LLP 
  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation
  by reference in the Registration Statements (Forms S-3 No. 333-109150, No. 333-104632,
  No. 333-100754, No. 333-87348, No. 333-51236, No. 333-96231, No. 333-82591,
  and No. 333-49001; and Forms S-8 No. 333-106502, 333-87368, No. 333-85721, No.
  333-68347, No. 333-66060, No. 333-59838, No. 333-07669, and No. 33-97350) and
  related Prospectuses of our report dated February 11, 2004, with respect to
  the consolidated financial statements of Socket Communications, Inc. included
  in the Annual Report (Form 10-K) for the year ended December 31, 2004.



/s/ Ernst
  & Young LLP

San Jose, California 
  March 14, 2005

---

(Table
  of Contents)

Exhibit 31.1

CERTIFICATIONS

I, Kevin J. Mills, certify
  that:

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

2. Based on my knowledge,
  this 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 report;

3. Based on my knowledge,
  the financial statements, and other financial information included in this 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 report.

4. The registrant's other
  certifying officer(s) and I are responsible for establishing and maintaining
  disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
  and 15d-15(e)) and internal control over financial reporting (as defined in
  Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

> (a) Designed such disclosure
>     controls and procedures, or caused such disclosure controls and procedures
>     to be designed under our supervision, to ensure that material information
>     relating to the registrant, including its consolidated subsidiaries, is made
>     known to us by others within those entities, particularly during the period
>     in which this report is being prepared;
>   (b) Designed such internal
>     control over financial reporting, or caused such internal control over financial
>     reporting to be designed under our supervision, to provide reasonable assurance
>     regarding the reliability of financial reporting and the preparation of financial
>     statements for external purposes in accordance with generally accepted accounting
>     principles;
>   (c) Evaluated the effectiveness
>     of the registrant's disclosure controls and procedures and presented in this
>     report our conclusions about the effectiveness of the disclosure controls
>     and procedures as of the end of the period covered by this report based on
>     such evaluation; and
>   (d) Disclosed in this
>     report any change in the registrant's internal control over financial reporting
>     that occurred during the registrant's most recent fiscal quarter (the registrant's
>     fourth fiscal quarter in the case of an annual report) that has materially
>     affected, or is reasonably likely to materially affect, the registrant's internal
>     control over financial reporting; and

5. The registrant's other
  certifying officer(s) and I have disclosed, based on our most recent evaluation
  of internal control over financial reporting, to the registrant's auditors and
  the audit committee of the registrant's board of directors (or persons performing
  the equivalent functions):

> (a) All significant deficiencies
>     and material weaknesses in the design or operation of internal control over
>     financial reporting which are reasonably likely to adversely affect the registrant's
>     ability to record, process, summarize and report financial information; and
>   (b) Any fraud, whether
>     or not material, that involves management or other employees who have a significant
>     role in the registrant's internal control over financial reporting.

|Date:
      March 11, 2005 | By:
      /s/ Kevin J. Mills
      Name: Kevin J. Mills
      Title: President and Chief Executive Officer (Principal Executive Officer)
|-------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------







---

(Table
  of Contents)










CERTIFICATIONS

I, David W. Dunlap, certify
  that:

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

2. Based on my knowledge,
  this 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 report;

3. Based on my knowledge,
  the financial statements, and other financial information included in this 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 report.

4. The registrant's other
  certifying officer(s) and I are responsible for establishing and maintaining
  disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
  and 15d-15(e)) and internal control over financial reporting (as defined in
  Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

> (a) Designed such disclosure
>     controls and procedures, or caused such disclosure controls and procedures
>     to be designed under our supervision, to ensure that material information
>     relating to the registrant, including its consolidated subsidiaries, is made
>     known to us by others within those entities, particularly during the period
>     in which this report is being prepared;
>   (b) Designed such internal
>     control over financial reporting, or caused such internal control over financial
>     reporting to be designed under our supervision, to provide reasonable assurance
>     regarding the reliability of financial reporting and the preparation of financial
>     statements for external purposes in accordance with generally accepted accounting
>     principles;
>   (c) Evaluated the effectiveness
>     of the registrant's disclosure controls and procedures and presented in this
>     report our conclusions about the effectiveness of the disclosure controls
>     and procedures as of the end of the period covered by this report based on
>     such evaluation; and
>   (d) Disclosed in this
>     report any change in the registrant's internal control over financial reporting
>     that occurred during the registrant's most recent fiscal quarter (the registrant's
>     fourth fiscal quarter in the case of an annual report) that has materially
>     affected, or is reasonably likely to materially affect, the registrant's internal
>     control over financial reporting; and

5. The registrant's other
  certifying officer(s) and I have disclosed, based on our most recent evaluation
  of internal control over financial reporting, to the registrant's auditors and
  the audit committee of the registrant's board of directors (or persons performing
  the equivalent functions):

> (a) All significant deficiencies
>     and material weaknesses in the design or operation of internal control over
>     financial reporting which are reasonably likely to adversely affect the registrant's
>     ability to record, process, summarize and report financial information; and
>   (b) Any fraud, whether
>     or not material, that involves management or other employees who have a significant
>     role in the registrant's internal control over financial reporting.

|Date:
      March 11, 2005 | By:
      /s/ David W. Dunlap
      Name: David W. Dunlap
      Title: Vice President of Finance and Administration and Chief Financial
      Officer (Principal Financial Officer)
|-------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------









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(Table
  of Contents)




Exhibit 32.1

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

I, Kevin J. Mills, certify,
  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002, that the Annual Report of Socket Communications,
  Inc. on Form 10-K for the year ended December 31, 2004 fully complies with the
  requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
  and that information contained in such Annual Report on Form 10-K fairly presents
  in all material respects the financial condition and results of operations of
  Socket Communications, Inc.

| | By: /s/ Kevin
        J. Mills
        Name: Kevin J. Mills
        Title: President and Chief Executive Officer (Principal Executive Officer)Date: March 11, 2005
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------





I, David W. Dunlap, certify,
  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002, that the Annual Report of Socket Communications,
  Inc. on Form 10-K for the year ended December 31, 2004 fully complies with the
  requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
  and that information contained in such Annual Report on Form 10-K fairly presents
  in all material respects the financial condition and results of operations of
  Socket Communications, Inc.





| | By:
      /s/ David W. Dunlap
      Name: David W. Dunlap
      Title: Vice President of Finance and Administration and Chief Financial
      Officer (Principal Financial Officer)
      Date: March 11, 2005
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------











---