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, 2008 **[   ]**
      **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 MOBILE, 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.)  **39700 Eureka Drive, Newark, CA 94560**(Address of principal executive offices including zip code) **(510) 933-3000**(Registrant's telephone number, including area code)
    Securities registered pursuant to Section 12(b) of the Exchange Act: Title
          of Each Class
      
      Name of Exchange on Which RegisteredCommon Stock, $0.001
          Par Value per Share
      
      NASDAQ Captial
          Market Securities registered
    pursuant to Section 12(g) of the Exchange Act:
    None Indicate by check
    mark if the registrant is a well-known seasoned issuer, as defined in Rule
    405 of the Securities Act. YES [ ] NO [X] Indicate by check
    mark if the registrant is not required to file reports pursuant to Section
    13 or Section 15(d) of the Act. YES [ ] NO [X] Indicate by check
    mark whether the registrant (1) has filed all reports required to be filed
    by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
    12 months (or for such shorter period that the registrant was required to
    file such reports), and (2) has been subject to such filing requirements for
    the past 90 days. YES [X] NO [ ] Indicate by check
    mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
    S-K (§ 229.405 of this chapter) is not contained herein, and will not
    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 a large accelerated filer, an accelerated filer,
    a non-accelerated filer, or a smaller reporting company. See the definitions
    of "large accelerated filer," "accelerated filer," and "smaller reporting
    company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated
    filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] Indicate by check
    mark whether the registrant is a shell company (as defined in Rule 12b-2 of
    the Exchange Act). YES [ ] NO [X] As of June 30, 2008,
    the aggregate market value of the registrant's Common Stock ($0.001 par value)
    held by non-affiliates of the registrant was $20,757,373 based on the closing
    sale price as reported on the National Association of Securities Dealers Automated
    Quotation Global Market System. Number of shares
    of Common Stock ($0.001 par value) outstanding as of March 6, 2009: 3,229,916
    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
    29, 2009. 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
        1A.
      Risk
        Factors
      17Item
        1B.
      Unresolved
        Staff Comments
      27Item
        2.
      Properties
      27Item
        3.
      Legal
        Proceedings
      27Item
        4.
      Submission
        of Matters to a Vote of Security Holders
      27PART
        IIItem
        5.
      Market for Registrant's Common Equity, Related Stockholder
        Matters, and Issuer Purchases of Equity Securities
      28Item
        6.
      Selected Financial Data
      30Item
        7.
      Management's
        Discussion and Analysis of Financial Condition and Results of Operations
      31Item
        7A.
      Quantitative
        and Qualitative Disclosures about Market Risk
      42Item
        8.
      Financial
        Statements and Supplementary Data
      42Item
        9.
      Changes
        in and Disagreements with Accountants on Accounting and Financial Disclosure
      66Item
        9A(T).
      Controls
        and Procedures
      66Item
        9B.
      Other
        Information
      67PART
        IIIItem
        10.
      Directors, Executive Officers and Corporate Governance
      67Item
        11.
      Executive Compensation
      67Item
        12.
      Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters
      68Item
        13.
      Certain
        Relationships and Related Transactions, and Director Independence
      68Item
        14.
      Principal
        Accounting Fees and Services
      68PART
        IVItem
        15.
      Exhibits, Financial Statement Schedules
      69SIGNATURES
      70 Index
        to Exhibits
      71


PART
  I

This Annual Report contains forward-looking
  statements within the meaning of Section 27A of the Securities Act of 1933,
  as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
  These statements include 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 other forecasts discussed under
  "Management's Discussion and Analysis of Financial Condition and Results of
  Operations." 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.
  Such forward-looking statements are based on current expectations, estimates,
  and projections about our industry, management's beliefs, and assumptions made
  by management. 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 could cause actual results and outcomes to differ materially
  include, but are not limited to: the risk of delays in the availability of our
  products due to technological, market or financial factors including the availability
  of necessary working capital; our ability to successfully develop, introduce
  and market future products; our ability to effectively manage and contain our
  operating costs; the availability of announced third-party handheld computer
  hardware and software that our products are intended to work with; product delays
  associated with new model introductions and product changeovers by the makers
  of products that our products are intended to work with; continued growth in
  demand for handheld computers; market acceptance of emerging standards such
  as Bluetooth and wireless LAN and of our related connection, data collection
  and mobile handheld computer products; the ability of our strategic relationships
  to benefit our business as expected; our ability to enter into additional distribution
  relationships; or other factors described in this Form 10-K including "Item
  1A. Risk Factors" and recent Form 8-K and Form 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.

You should read the following
  discussion in conjunction with the consolidated financial statements and notes
  included elsewhere in this report, and other information contained in other
  reports and documents filed from time to time with the Securities and Exchange
  Commission.

Item 1. Business

The Company

We are a producer of mobile computing
  hardware systems serving the business and medical mobility market. We offer
  a family of handheld computer products and a wide range of data collection and
  connectivity peripheral products for use with third-party vertical applications
  software and devices. We also offer embedded Bluetooth and wireless LAN products.
  Our peripheral products also work with many third-party mobile handheld devices
  including smart phones, handheld computers, tablet computers, ultra-mobile personal
  computers (UMPCs), and notebooks, adding data collection and connectivity capabilities
  to these devices. Our products are designed to enable the accessing, collection
  and processing of data by employees while mobile. Our products utilize popular
  Bluetooth and wireless LAN wireless connection technologies. Our plug-in and
  Bluetooth data collection products offer a variety of data collection technologies
  including laser and CMOS barcode scanning, linear and two dimensional barcode
  scanning, plus we offer RFID (radio frequency identification) and magnetic stripe
  readers. See "Products" for more information on the products that we produce.



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We work with more than 200 software
  integration companies that are offering or developing vertical software applications
  for use with handheld computers. Healthcare has been a primary area of focus
  for our software integration partners and more than half of our handheld computer
  sales now come from organizations within the healthcare industry. Other vertical
  markets benefiting from our mobile solutions include hospitality, retail merchandising,
  automotive, government and education. These mobile solutions are designed to
  improve the productivity of business enterprises and service providers by automating
  manual tasks, improving the quality of information collected, and enhancing
  mobile productivity by processing and transferring information from remote locations
  and mobile devices to the business enterprise, and then if required, back to
  the remote locations and mobile devices. See "Vertical Market Applications",
  "Market Dynamics" and "Marketing Strategy" for more information on the markets
  that we serve and our application partners.

We believe that growth in the mobile
  workforce, technical advances and cost reductions in mobile devices and networking
  technologies, and the pervasive use of the Internet are driving broader adoption
  of mobile computing. Our products are designed to address the growing need for
  mobile computing by today's mobile workforce by enabling them to access, collect
  and process data while mobile, thereby enhancing their productivity, allowing
  them to exploit time sensitive opportunities and improving customer satisfaction.
  Overall, our products enable the integration of hardware, software and applications
  into complete mobile data collection and connectivity solutions.

We make available to original equipment
  manufacturers ("OEMs") the Bluetooth and wireless LAN wireless technologies
  that we incorporate in our own products through the sale of modules and plug-in
  cards that these manufacturers embed into their products, including driver and
  device management software that is designed to simplify the ability of mobile
  employees to get and stay connected with Wi-Fi as well as with Bluetooth.

Total employee headcount on December
  31, 2008 was 75 people. We subcontract the manufacturing of all of our products
  to independent third-party contract manufacturers located in the U.S., China
  and Taiwan and who have the equipment, know-how and capacity to manufacture
  products to our specifications. Our handheld computers and peripheral products
  are sold through a worldwide network of distributors and resellers, vertical
  industry partners, and value added resellers (VARs). Our OEM products are sold
  directly to the original equipment manufacturers. See "Personnel," "Sales and
  Marketing," and "Manufacturing" for additional information about our personnel,
  sales and marketing and manufacturing operations.

We have financed our operations
  since inception primarily from the sale of equity capital and have no material
  long term debt. We also have a receivables-based working capital line of credit
  with a bank that we use for additional cash resources.



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We were founded in March 1992 as
  Socket Communications, Inc. and reincorporated in Delaware in 1995 prior to
  our initial public offering in June 1995. We began doing business as Socket
  Mobile, Inc. in January 2007 to better reflect our market focus on the mobile
  business market and changed our legal name to Socket Mobile, Inc. in April 2008.
  Our Common Stock trades on the NASDAQ Capital Market under the symbol "SCKT".
  Our principal executive offices are located at 39700 Eureka Drive, Newark, CA
  94560, and our phone number is (510) 933-3000. Our Internet home page is located
  at http://www.socketmobile.com; however, the information on, or that can be
  accessed through, our home page, is not part of this Annual Report. Our annual
  reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
  8-K, and any 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.

Products

Our products are classified into
  three broad product families:

- Mobile handheld computer products;
- Mobile peripheral products: data
    collection, connectivity and serial interface; and
- OEM embedded products.

Our mobile handheld computer
  products are designed to be a durable device that has features similar
  to heavier duty industrial handheld devices but at a significantly lower price.
  Our initial model, the SoMo® 650 (SoMo is derived from Socket Mobile), was
  introduced in June 2007 with initial volume shipments in September 2007, and
  features the Microsoft Windows Mobile Classic operating system, Versions 5.0
  and 6. Windows Mobile is the industry standard OS for mobile applications thereby
  ensuring that the SoMo is compatible with a large number of business applications
  and giving workers a familiar computing environment. Our mobile handheld computers
  are easy to customize for a particular application with peripherals. The SoMo
  products have an expected product life cycle of three to five years which meets
  the needs of our customers who are deploying mobile solutions. The SoMo's features
  include wireless LAN and Bluetooth, a fast processor, a large, bright screen
  display enabling its use outdoors, large amounts of SDRAM and flash memory,
  extended battery life, programmable action buttons to activate peripheral devices,
  reinforced CompactFlash and SDIO card slots, and a durable case. The SoMo is
  available in multiple language support and includes our Bluetooth, wireless
  LAN and barcode scanning software. The SoMo 650 was specifically designed without
  an integrated mobile phone to serve the market for business mobility applications
  that are not mobile phone centric such as medication dispensing in the healthcare
  market or serving tables in the hospitality market, many of which use Bluetooth
  or wireless LAN connections for data communications. In late 2008, we introduced
  the SoMo 650 Rx Model with an antimicrobial additive incorporated into its plastic
  case for the healthcare market to reduce the risk of the spread of bacteria
  from the use of handheld devices in a healthcare environment. We have also introduced
  a SoMo 650 Dx Model without Bluetooth or wireless LAN for high security environments.
  Mobile handheld computer products represented approximately 18 percent and 6
  percent of our revenue for the years ended December 31, 2008 and 2007, respectively.

Our mobile peripheral
  products consist of data collection, connectivity and serial interface
  products, which together represented approximately 47 percent, 67 percent, and
  68 percent of our revenues for the three years ended December 31, 2008, 2007
  and 2006, respectively.



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Our data collection products
  enable the electronic collection of data from barcodes, radio frequency identification
  (RFID) tags, or magnetic stripes and consist of:

- barcode scanning products that
    plug into or connect wirelessly to handheld computers, tablet computers, ultra-mobile
    personal computers, notebook computers and smartphones that use Windows Mobile,
    Windows CE, Windows Vista/XP, RIM Blackberry, or Nokia E71 operating systems,
    and turn these devices into portable barcode scanners and RFID readers that
    can be used in various retail and industrial workplaces; Our cordless hand
    scanner and cordless ring scanner may also be connected wirelessly to a desktop
    computer, enabling mobile barcode scanning around a fixed workstation;
- RFID plug-in products that read
    radio frequency identification tags;
- a combination plug-in barcode
    scanner and RFID reader; and
- a plug-in magnetic stripe reader.

Our plug-in and Bluetooth cordless
  data collection products offer a variety of data collection technologies at
  several performance levels including laser and CMOS barcode scanning, linear
  and two dimensional barcode scanning and RFID reading, enabling solutions to
  be tailored to optimal price/performance levels. Our plug-in barcode scanners
  are available in both CompactFlash and SDIO form factors. We also offer a ring
  scanner worn on the index finger which connects to computing systems using the
  Bluetooth standard for short-range wireless connectivity.

We have developed extensive barcode
  scanning and RFID reading software called SocketScan that supports all of our
  data collection products, and have software developer kits that assist third-party
  developers in integrating our SocketScan software and our hardware products
  into their applications and solutions.

Our connectivity products
  are connection devices that can be plugged into standard CompactFlash or Secure
  Digital SDIO expansion slots in handheld computers, tablet computers, ultra
  mobile personal computers, and notebook computers that use Windows Mobile, Windows
  XP/Vista, or Windows Tablet operating systems. These products allow users to
  connect their devices via Ethernet or telephone to communicate with other networks
  and devices such as desktop computers, other handheld computers, tablet computers,
  ultra-mobile personal computers, and notebook computers, smartphones and printers.
  Our connectivity products include:

- modems for telephone connections
    that connect over a cable
- Ethernet cards for local area
    network connections that connect over a cable; and
- accessory products such as batteries
    and cables.

Our serial interface products
  enable the connection of a mobile computer to electronic devices either as a
  plug-in card (one, two or four ports) connecting over cables, or wirelessly
  over a Bluetooth network. During 2008 we introduced a USB to serial connector
  to enable a serial connection through a USB interface and plan to introduce
  in the first half of 2009 a USB to Ethernet Adapter to reflect the growing use
  of USB as a connection technology for mobile products.

Our OEM embedded products
  consist of Bluetooth and wireless LAN modules and plug-in cards used primarily
  by OEMs of industrial grade handheld computers and other devices to build wireless
  connection functions into their products using the Bluetooth and wireless LAN
  standards for wireless connectivity. Our plug-in cards and modules using the
  Bluetooth standard for short-range wireless connectivity include extensive communications
  software enabling the use of these products. Our products in 2008 used the Bluetooth
  2.0 standard, and we plan to upgrade in 2009 to the Bluetooth 2.1 + EDR standard,
  continuing our commitment to keep our products current with evolving technology
  standards. Our plug-in cards for connecting to local wireless networks during
  2008 used the wireless LAN 802.11b/g (or Wi-Fi) standard and included extensive
  communications software designed to make these products easy to use. We have
  recently added Cisco Compatible Extensions (CCX) 4.0 certification to our wireless
  LAN software to enable our wireless LAN products to be compatible with a Cisco
  wireless LAN infrastructure and have been upgrading our plug-in cards and modules
  to incorporate the wireless LAN 802.11 a/b/g standard. OEM embedded products
  represented approximately 35 percent, 27 percent and 32 percent of our revenue
  for the years ended December 31, 2008, 2007, and 2006, respectively.



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Vertical Market Applications

We support the use of our products
  by third-party software developers, value added resellers (VARs) and end users
  in a number of vertical markets where workers are mobile and can benefit from
  the collection, processing and transmittal of data or access to data while mobile.
  We offer software developer kits to enable the integration of our Bluetooth,
  wireless LAN and data collection hardware and software programs with vertical
  market applications and we have a Vertical Industry Partners (VIP) Program with
  over 200 participants to promote the development of vertical market solutions
  using our products. The VIP Program includes competitive pricing, an online
  partner portal, tailored sales resources, and inclusion of partners in our marketing
  programs and communications tools including a listing on our internet website
  at www.socketmobile.com. At December 31, 2008, approximately one-half
  of our VIP partners had applications in the market and were generating revenue
  through the sale of solutions to their customers that included our products.
  The remaining partners are developing vertical market applications to be introduced
  as their applications are completed.

The vertical markets that have the
  largest number of mobile applications include healthcare, hospitality, retail
  merchandising, automotive, government and education. Highlighted below are examples
  of partner solutions that result in productivity enhancing benefits to the users
  of the solutions:

Healthcare

Healthcare applications involve
  the real-time collection of and access to patient data, the updating of patient
  records, the prevention of medication errors, the management and control of
  pharmaceuticals prescribed for patients, and the analysis of patient laboratory
  specimens.

Aranz Medical, Ltd. has selected
  the SoMo handheld computer to run its Silhouette product suite for advanced
  wound care. The system provides comprehensive imaging, measurement and documentation
  capabilities that provide significant advantages for patients, health care providers
  and funding organizations.

Arrowhead Electronic Healthcare
  has developed electronic patient diaries to assist patients with chronic care
  conditions to manage and communicate their home therapy to caregivers.



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Epocal has integrated our
  handheld computer into its blood diagnostic system.

Evangelical Lutheran Good Samaritan
  Society, the largest not-for-profit provider of senior care and services
  in the United States, is managing and monitoring daily patient care, capturing
  data at the point of care and providing immediate access to patient records
  and patient care diagnostic tools.

Hospira is marketing the
  VeriScan system to prevent medication errors at a patient's hospital bedside.

InfoLogix Systems offers
  enterprise mobile wireless computing solutions to provide healthcare enterprises
  with access to real-time information.

Resource Systems is using
  their CareTracker system to improve the quality of care in long term care facilities.

Zeta Compliance Technologies,
  Ltd. has selected the SoMo handheld computer to run its ZetaMobile®
  PDA software as part of ZetaSafe®, a web based compliance solution for accurately
  and efficiently capturing, analyzing and communicating data obtained from the
  routine testing of assets in the field. The software enables field engineers
  to test for health, safety and environmental compliance and to input test results
  via bar code scanning or data input and synchronize to a main data base.

Hospitality

Hospitality applications include
  tableside order processing, curbside check-in, poolside service, ticket scanning,
  mobile point of sale, and contact information tracking.

Amadeus'Restaurant Management
  System software enables customer restaurant orders to be placed tableside. Amadeus
  also offers a property management system to hotels.

Capture Technologies markets
  their LeadWare Pocket Edition as a handheld data collection and survey tool
  for collecting information at conferences, events and retail.

Neutron Solutions markets
  their Qlead system for use by exhibitors at tradeshow and industry events to
  capture, qualify and measure sales leads.

Retail Merchandising

Fujitsu Systems is marketing
  a mobile point of sale solution with their tablet notebooks.

Tiva Software's Pricebook
  Connect software is used by First Stop Convenience Stores with a handheld computer
  barcode scanning solution to streamline ordering, pricing, inventory and back
  office activities.



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Automotive

Cardinal Tracking streamlines
  inventory management for automotive recyclers, and announced the adoption of
  their mobile solution by Buddy Automotive Innovations.

Manheim Auto Auction, the
  largest wholesale auto auction in the United States, enables dealers to view
  pricing and other details about vehicles being auctioned while the dealers are
  mobile.

Government and Education

Plasco ID offers a mobile
  tracking and data retrieval solution for identifying and tracking students and
  managing and processing real-time student information.

Telemedicine and Advanced Technology
  Research Center of the U.S. Army efficiently inventories blood supplies
  in combat zones, reducing blood spoilage and increasing availability.

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 those using the Windows Mobile operating
  system including our SoMo line of mobile handheld computers, have built-in expansion
  capabilities in standard form factors, typically CompactFlash and/or Secure
  Digital Input/Output plug-in slots or Bluetooth wireless connection capabilities
  to allow for transfer of data in and out of the handheld computer over wireless
  or wired connections. Many mobile phones, such as Research-In-Motion's Blackberry
  and smartphones (handheld computers with integrated phones running the Windows
  Mobile operating system) support our cordless data collection peripherals over
  a Bluetooth connection and also have an integrated phone to enable voice communications
  over mobile phone networks. Notebooks and tablet computers also have expansion
  capabilities to enable their use in mobile environments using Bluetooth and
  wireless LAN connections for data communications.

Advances in mobile network access
  and transfer speeds enable mobile computing device users to access the Internet,
  send and receive email including attachments, access corporate data files, and
  transfer data directly to and from other mobile devices using Bluetooth wireless
  technology or cables for short distances, wireless local area networks, or broadband
  cellular networks with increased speed and bandwidth. Our connectivity products
  and technologies (wireless LAN, Bluetooth, USB and serial interface products)
  are designed to easily add these technologies to mobile devices. In addition,
  mobile devices with standard expansion capabilities are effective at collecting
  data. Our data collection products are designed to facilitate the collection
  of barcode, RFID, and magnetic stripe information on these devices by plugging
  into the standard expansion slots of these data collection devices or connecting
  wirelessly over a Bluetooth connection.



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Handheld computers
  have traditionally been classified into consumer and industrial categories.
  Consumer devices such as those offered by Hewlett-Packard are designed for personal
  use and fit in a pocket or purse. Industrial devices such as those offered by
  Motorola or Intermec are designed for rugged environments such as outdoors or
  in warehouses and are much larger, heavier and more expensive. Businesses have
  had to choose from these two categories in designing mobile solutions, and we
  believe neither solution is an ideal fit for many business needs. Consumer units
  often are not designed with the durability required for the more extensive use
  required by businesses. Industrial units are designed for warehouse or inclement
  weather conditions and add unnecessary size, cost and expense for those businesses
  not needing that level of ruggedness. Our mobile handheld computers are similar
  in size and weight to consumer units which fit in a pocket or purse, but are
  designed to be more durable and come with our extensive driver software including
  our barcode scanning and RFID reading software SocketScan, and our Bluetooth
  and our wireless LAN driver and management software. This software incorporates
  features needed by businesses such as seamless roaming to improve worker connectivity
  and the worker experience in using wireless LAN, easy and reliable Bluetooth
  connections with Socket's Connect!Agent, and multiple language support. Other
  features needed by businesses include fast processors, large memory and extended
  battery life. Recently added to our mobile handheld computer family of products
  were handheld computer models with anti-microbial cases which reduce the risk
  of bacterial growth on handheld devices in healthcare environments. Compared
  to industrial devices, our computers are smaller in size and weight, less rugged,
  and less expensive. All of our handheld computer models are offered with an
  expectation that they will continued to be offered for sale for a minimum three
  to five year time period which reduces the number of times that customers must
  upgrade their systems and test and purchase new 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 collect data in the field and to transfer it electronically
  generally improves the timeliness and accuracy of information such as order
  entry, process management or transaction reporting. Advances in connection technologies,
  local area networking and wide area networking are being commercialized to enable
  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 (GPS) receivers, automobile
  communications systems, barcode scanners, RFID tags, home entertainment and
  security systems, public kiosks, public Internet access locations and vending
  machines.

Current market dynamics driving
  the adoption of mobile data communications by enterprises include:

Functionality of today's mobile
  computing devices is extensive and improving. Most mobile computing devices
  offer bright outdoor color screens and longer battery life, have software allowing
  their use as business messaging devices with capacity to store personal information,
  and have standard expansion capabilities 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 barcode, RFID, and magnetic stripe scanning devices when
  used with our barcode scanning, RFID, or magnetic stripe reader products, enabling
  the capture and processing of barcode, RFID, or magnetic stripe information
  (such as credit or identification cards) in a mobile environment.



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The mobile workforce is growing
  and is increasingly reliant on email and the Internet. The worldwide mobile
  workforce has been estimated at more than 20 percent of the global workforce.
  Before 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 wireless LAN and mobile
  phone connectivity for dial-up networking, and deployment of mobile computers
  by corporations to their mobile workforce are expected to be major factors driving
  growth in mobile data applications over the next several years.

Third-party applications for
  enterprises are becoming available in increasing numbers. Third-party software
  applications are becoming increasingly available for the collection, processing
  and transfer of information by a mobile workforce. Mobile computing devices
  are being used for such diverse applications as checking patient medications
  when administering them in a hospital, 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. We have supported the development and
  deployment of our products in third-party applications through our Vertical
  Industry Partners Program and more than 200 companies are participants in this
  program. Our Vertical Industry Partners Program is described more fully under
  "Vertical Market Applications." The availability of productivity-enhancing application
  software is a major driver of enterprise deployment of mobile computing devices.

Marketing Strategy

Our marketing strategy has been
  to transition from being a peripherals supplier to being a systems supplier
  to the mobile business markets, capitalize on our strategic relationships, expand
  and improve our product offerings including software to enable wireless and
  wired connections designed to provide an easy-to-use experience, build a strong
  brand name, support the development of third-party software applications and
  integrator solutions, expand awareness within the business community of the
  data collection capabilities of all of the mobile computing platforms that we
  serve including smart phones, tablets, and notebook computers, and market the
  strengths of our wireless driver and management software to other equipment
  manufacturers of mobile devices.

Transition from being a peripherals
  supplier to being a system supplier to the mobile business markets. Our
  introduction in June 2007 of our handheld computer marked the start of our transition
  from being a peripherals supplier to being a systems supplier. As a peripherals
  supplier, we were dependent upon other third-party computer manufacturers for
  the handheld computers that comprised mobile business solutions. Changes by
  such third-parties to handheld computer models, operating systems and handheld
  computer programs forced us to expend significant efforts to make our peripherals
  work following such changes. Customer support was also more complicated in determining
  whether any reported problems were due to the handheld computer or to our peripherals.
  Solutions being developed by third-party application providers were also more
  complicated by the need to integrate their solutions with multiple hardware
  manufacturers. Although we continue to support third-party handheld computers,
  with the introduction of our mobile handheld computer we offer a complete hardware
  solution consisting of a mobile handheld computer and peripherals which allows
  value added resellers and systems integrators to offer a one-stop solution in
  combination with vertical software applications for the mobile workforce. We
  have also expanded and refocused our sales personnel from selling peripherals,
  in which we'd work closely with the handheld computer manufacturers and their
  distribution channel partners, to selling systems, in which we are working more
  closely with third-party application providers, value added resellers and systems
  integrators.

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Capitalize on Strategic
  Relationships. We support and encourage direct endorsements and referrals
  for our products from our strategic relationships, including operating system
  providers, device manufacturers, third-party software developers, vertical industry
  partners, distributors, and end-user customers. We actively promote third-parties
  to integrate our products into their solutions through our Vertical Industry
  Partners Program. We have a team of employees that manages each strategic relationship,
  and we provide software developer kits, training and technical support to our
  software and hardware developers. 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 that our
  data collection peripheral products are compatible with a wide variety of handheld
  computers including Windows Mobile handheld computers, the Blackberry from Research-In-Motion,
  and smartphones using the Microsoft Windows Mobile and Nokia E71 operating systems.

Expand and improve
  our product offerings. We offer a wide range of data collection and connectivity
  peripheral products that are used with our SoMo family of mobile computers and
  other third-party mobile devices, and we encourage our distributors to carry
  the full range of our products. The goal is for customers to view Socket as
  a primary source for their connection needs, instead of having to rely on individual
  product offerings from a number of different companies. During the past two
  years, we have introduced a mobile handheld computer and added many operating
  system features such as multiple language support, upgrades to the latest versions
  of the Windows Mobile operating system without replacing the versions first
  introduced, and upgraded Bluetooth and wireless LAN management software. We
  design our products to comply with the regulations of the many worldwide agencies
  that regulate the safety, performance and use of electronic products.

Build a Stronger
  Brand Name. We are building a brand image of "Business Mobility Now!"
  This image closely associates us with business and medical mobility solutions
  and to reflect this image, we changed our name to Socket Mobile, Inc. in April
  2008. We stress with customers the design of our products for the mobile enterprise
  markets, emphasizing quality and standards-based connectivity. Mobility requires
  products that are compact and designed to be handled while mobile, with low
  power consumption to extend time between charges, and easy to use. We work closely
  with our partners developing productivity enhancing applications for the mobile
  workforce. Our overall company brand identity and positioning goal is to become
  "the leading provider of easy-to-deploy business mobility systems and peripherals
  to the mobility market."

Support the development
  of third-party software applications and integrator solutions. We have created
  software developer kits for many of our products including barcode scanning,
  RFID, Bluetooth, and wireless LAN. In addition, we have employees dedicated
  to assisting developers and integrators with integrating our products into their
  solutions. Our Vertical Industry Partners Program includes over 200 companies
  that offer or are developing software solutions which incorporate Socket products.
  These solutions primarily involve handheld computing and data collection and
  address improving the productivity of the mobile workforce in a number of vertical
  markets including healthcare, hospitality, retail merchandising, automotive,
  government and education.



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Expand awareness within the business
  community of the data collection capabilities of all of the mobile computing
  platforms that we serve including smart phones, tablets, and notebook computers.
  Our data collection software SocketScan has been designed to enable our barcode
  scanning peripherals to work on a number of third-party computing platforms
  including smart phones (Blackberry, Windows Mobile and Nokia E71 devices), tablets,
  UMPCs, and notebook or desktop computers (Windows based). Most of these devices
  can be used to collect barcode scanned or RFID read information from our Bluetooth
  enabled or plug-in scanners and readers, however many application providers
  are not aware of the capabilities of these devices, and increasing such awareness
  is a key step at increasing the number of mobile data collection applications
  available on these devices.

Market the strengths of our wireless
  driver and management software to original equipment manufacturers of mobile
  devices. To capture embedded connection business from original equipment
  manufacturers, we have built relationships with certain mobile device manufacturers
  and work with them to integrate our Bluetooth and wireless LAN modules and value-add
  software into their own product designs. Our value-add is the extensive driver
  and management software for Bluetooth and wireless LAN products that we use
  in our own products. The majority of these manufacturers are building vertical
  application devices for special purpose markets and it is often cost effective
  for them to purchase Bluetooth and wireless LAN software and connection cards
  or modules rather than developing and maintaining such software themselves.
  We have an internal team of employees that manages our OEM products business.
  We also provide developer support 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 mobile computing
  solutions is both complex and competitive. Our hardware products compete with
  similar hardware products in all of our markets in the United States, Europe
  and Asia. However, our longtime focus on creating innovative mobile solutions
  for the mobile workforce has resulted in good brand name recognition and reputation.
  We also believe that our brand name identifies our products as robust, dependable,
  small form factor, 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 addition of a mobile handheld
  computer since June 2007 has enabled us to better control the handheld computing
  environment for our peripheral products and allows us to offer one-stop shopping
  for the hardware portion of mobile business solutions. Our handheld computer
  is becoming better recognized for its features and capabilities with over 10,000
  units shipped since its introduction in June 2007 through the end of 2008. The
  competition in each of our product families is discussed in more detail below.

Mobile handheld computers.
  Our SoMo mobile handheld computers address the price/performance market gap
  between consumer handheld computers and industrial-grade handheld computers.
  Consumer-oriented handheld computers offer fewer features at a lower cost than
  industrial handheld computers. Our SoMo mobile handheld computer offers improved
  features beneficial in a business environment including increased durability,
  improved software features such as wireless LAN roaming (staying connected between
  wireless LAN access points), and a combination of a fast processor, large memory,
  CompactFlash and Secure Digital plug-in slots to plug peripherals directly into
  the computer and wireless LAN and Bluetooth technologies to enable the transfer
  of data wirelessly. The SoMo mobile handheld computer is less rugged than an
  industrial handheld computer but has many of the same features at a significantly
  reduced price point. More recent additions to our family of SoMo mobile handheld
  computers are addressing specific needs of our customers such as the recent
  introduction of an anti-microbial case to reduce the growth of bacteria in a
  healthcare environment. Consumer grade handheld computers are offered by Hewlett-Packard,
  Acer, Siemens and others but the trend has been for them to offer more phone
  integrated units. In 2008, Siemens and Acer discontinued their units that did
  not have integrated phones, thus reducing the number of alternatives to the
  SoMo handheld computer available in the marketplace. Ruggedized industrial grade
  handheld computers are offered by Motorola, Intermec, Honeywell and others.
  These companies have offered handheld computers for many years and have an established
  market presence. Their handheld computers are functional competitive alternatives
  to our mobile handheld computers, but are priced significantly higher and in
  most cases are larger in size because of their ruggedized features.



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Data Collection Products.
  Our laser and CMOS imager barcode scanning products face competition from ruggedized
  integrated barcode scanning devices from Motorola, Intermec, Honeywell, Casio,
  Itronix and others. We purchase laser engines from Motorola. We also purchase
  imagers from Motorola and from Intermec for use in our products. We face competition
  outside of the United States from a product similar to our plug-in barcode scanning
  card from BeInteractive, from products similar to our Cordless Hand Scanner
  from Baracoda, and from other competitive laser scanning products from Grabba
  (Australia) and Opticon (Japan). Motorola's patent position for laser barcode
  scanning tends to limit the sale of laser scanning barcode products by competitors
  in the United States, but a number of the Motorola patents will expire over
  the next several years, and we may face increasing competition from competitors
  both inside and outside the United States. We produce our laser barcode scanning
  products under a license from Motorola, which, to date, has not licensed these
  technologies to potential competitors. Motorola has historically been selective
  in licensing their technologies to third-parties. The continued availability
  of our licenses from Motorola and the continued absence of other licensees are
  dependent upon future licensing decisions by Motorola.

In addition, companies
  such as Intermec have improved imager technology making such technology a viable
  alternative to laser scanning, and we expect both our laser and our imaging
  products to face more competition over time from devices deploying imaging technology.

Connectivity Products
  - Cable Connections. We are one of two principal manufacturers of low
  power Ethernet cards, the other being OvisLink. Our CompactFlash modem cards
  face competition from a number of manufacturers including Ambicom, Billionton
  Systems, Hawking, Zonet, OvisLink, Pharos, Trendware and Xircom.

Serial Interface
  Products. Our serial interface card products compete from time to time with
  similar products from small manufacturers including BeInteractive, Brainboxes,
  B&B Electronics, Elan Digital Systems, Quatech (a subsidiary of DPAC Technologies),
  and Ratoc Systems. We also offer a cordless serial adapter with Bluetooth wireless
  technology. Companies that offer competing Bluetooth serial products include
  AIRcable, Brainboxes, ConnectBlue, Digi International, Ezurio, Free 2 Move,
  Initium and Wavespeed. Our USB products compete with products from Dlink, Linksys,
  and TRENDnet.



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OEM Embedded Products - Wireless
  Connections. We offer our wireless connection Bluetooth and wireless LAN
  technologies in the form of modules for embedding in third-party devices. We
  also offer CompactFlash plug-in cards and SDIO plug-in cards that may be plugged
  into the expansion slots of devices needing these technologies. We compete based
  on our brand name and customer support infrastructure, as well as software enhancements
  that provide ease-of-use, security features, and monitoring and troubleshooting
  tools. Our Bluetooth and wireless LAN software works well with our hardware,
  providing us a complete solution for embedding Bluetooth and wireless LAN connections
  into third-party devices.

Manufacturers in Asia 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
  solutions which may compete with our products and services. In addition, manufacturers
  of products that are sold in high volume may choose to build and support their
  own Bluetooth or wireless LAN connections.

Our wireless LAN cards face competition
  in the market today principally from other manufacturers of low power wireless
  LAN 802.11g cards, including Ambicom for CF cards, and AmbiCom, Spectec and
  Mobis for SDIO cards. Our wireless LAN 802.11 a/b/g cards and modules are early
  to market but we anticipate that other competitors will follow with similar
  products. The market for Bluetooth wireless communications technology is highly
  competitive. A number of companies offer competing CompactFlash Bluetooth cards
  including Ambicom, Brainboxes and Billionton.

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.

We own and control the design of
  our handheld computer, enabling us to modify its features or software to meet
  specific customer requirements.

One of our most important chip hardware
  building blocks 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 peripheral products to control
  signal transmission between these products and the handheld or notebook computer's
  PC card or CompactFlash slot.

Another area of intellectual property
  is our expertise in embedded radio-dependent firmware. Within our Bluetooth
  cordless products are software and firmware that include a wide variety of functions
  to enable efficient radio control and overall systems functionality. For cordless
  barcode scanning and RFID reading, this includes our patented Error Proof Protocol,
  which is designed to ensure that scanned data is correctly received by the mobile
  computing device and allow for real-time validation of data and error notification
  to the user.



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We have 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 Windows
  XP/Vista operating systems. We have been awarded fourteen U.S. Patents and nine
  design patents covering various inventions that relate to mobile products and
  to the design of our products. In July 2004 we also acquired from Khyber Technologies
  a U.S. patent entitled Card Shaped Computer Peripheral Device. The patent is
  a basic patent covering the design and functioning of plug-in barcode scanners,
  barcode imagers, and RFID products. We have additional patents covering our
  proprietary technology pending with the U.S. Patent and Trademark Office.

We have 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
  barcode scanning products to scan a variety of barcodes 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. Our
  wireless local area network software called Wi-Fi Companion provides an extensive
  set of features to help the user get and stay connected. We have also introduced
  a version incorporating Cisco Compatible Extension protocols called Enhanced
  Wi-Fi Companion or e-WFC. Either of these software programs used in conjunction
  with our wireless local area network hardware, provides a completely functional
  wireless local area network solution, enabling connections and data transfers
  from mobile computing devices over wireless local area networks. In addition,
  our Bluetooth and wireless LAN software programs are aligned to insure optimal
  performance even when both technologies are being utilized at the same time.

We have registered trademarks with
  the U.S. Patent and Trademark Office for the mark "Socket", our logo, the term
  "Go-WiFi" associated with our wireless LAN products and "SoMo", the mark associated
  with our mobile handheld computer.

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.

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, 2008 was 75 people. In the fourth
  quarter of 2008, we reduced the number of employees by 11 employees to 75 in
  order to reduce our operating expenses in 2009. Our employees are not represented
  by a union, and we consider our employee relationships to be good.



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Sales and Marketing

We target business customers and
  markets with our products. Most of our products, except our embedded products,
  are sold through distributors and resellers that service businesses. Our OEM
  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.

During the year ended December 31,
  2008, 64 percent of our sales were in North America, 24 percent in Europe, and
  12 percent in Asia and Pacific Rim countries. In 2007, 65 percent of our sales
  were in North America, 27 percent in Europe, and 8 percent were in Asia and
  Pacific Rim countries. In 2006, 68 percent of our sales were in North America,
  24 percent in Europe and 8 percent in Asia and Pacific Rim countries. 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 and Value Added Resellers. In addition, we have more
  than 200 companies that are participants in our Vertical Industry Partners Program.
  Participants offer or are developing third-party software applications that
  utilize our products with their software solutions. Vertical markets addressed
  by participants include healthcare, hospitality, retail merchandising, automotive,
  government and education. Applications include checking patient medications
  when administering them in a hospital, capturing lot numbers of drug samples
  given to a doctor, managing the stocking of shelves in retail establishments,
  entering sales orders from the field, taking inventory of barcoded items, and
  entering and updating information in an enterprise data base. See "Vertical
  Market Applications" for additional information. We support our distributors,
  resellers, integration and application partners with software developer kits
  and we provide education, training and customer assistance through our sales,
  marketing, and technical support staff in the U.S., Europe and Asia-Pacific
  regions. As of December 31, 2008, we had 32 people in sales, marketing and customer
  support.

Our United States distributors Ingram
  Micro and Tech Data Corp. accounted for 16 percent and 15 percent of our revenue
  in 2008, respectively, and our OEM customer Intermec accounted for 14 percent
  of our revenue in 2008. In 2007, Tech Data accounted for 23 percent of our revenue
  and Ingram Micro accounted for 13 percent of our revenue. In 2006, Tech Data
  accounted for 26 percent of our revenue and Ingram Micro, Inc. accounted for
  14 percent of our revenue.

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.

We rely significantly on our distributors
  and resellers for distribution of our products. Our agreements with our distributors
  and resellers generally are nonexclusive and may be terminated on short notice
  by either party without cause. Furthermore, our 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 distributors or 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
    located in the U.S., 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. As of December 31, 2008, we had 24 people employed
    in manufacturing operations, including planning, buying, manufacturing engineering,
    quality control, product assembly, shipping and receiving, and product support. Certain of our products or product
    components are available from only one vendor. These sole sourced products
    or components include the interface chip that controls the signal transmission
    between all of our plug-in CompactFlash products (except our Ethernet and
    wireless LAN cards) and the card slot on the mobile computer, our Ethernet
    and wireless LAN chips, our laser scanning engines, our SDIO plug-in cards,
    certain cable and connector components and several major components of our
    mobile handheld computers including our flash memory, screen, processor and
    audio components. Although to date we have generally been able to obtain adequate
    supplies of these products or components, they 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 products or components.
    Accordingly, the manufacturers could stop providing these products or 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 products or components should it become necessary.
    We generally stock higher inventory quantities of sole sourced products or
    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. Research and development
    expenditures were $4.5 million in 2008, $5.0 million in 2007, and $5.1 million
    in 2006. The level of expenditures are determined in part by the number of
    development projects which included in 2007 and 2006 higher costs for the
    initial development of our handheld computers. As of December 31, 2008, we had
    10 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, 2008, we had
    9 people responsible for our financial and administrative activities including
    accounting and finance, personnel, and administrative support. Item 1A. Risk Factors The global financial crisis
    may continue to have an impact on our business and financial condition in
    ways that we currently cannot predict, and may further limit our ability to
    raise additional funds. The continued credit crisis and
    related turmoil in the global financial system may continue to have an impact
    on our business and our financial condition. We may face significant challenges
    if conditions in the financial markets do not improve or continue to worsen.
    In particular, our ability to access the capital markets and raise funds required
    for our operations may be severely restricted at a time when we would like,
    or need, to do so, which could have an adverse effect on our ability to meet
    our current and future funding requirements and on our flexibility to react
    to changing economic and business conditions. We have a history of operating
    losses and may not achieve ongoing profitability. We were unprofitable in each of
    the quarters in fiscal years 2008, 2007 and 2006. We were profitable in two
    quarters in 2005, but unprofitable for fiscal year 2005. Fiscal year 2004
    was the first profitable year in our history, but only to the extent of $288,000.
    Prior to 2004, we incurred significant operating losses in each financial
    period since our inception. To achieve ongoing 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 or manage our expenses sufficiently 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 and bank line of credit 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 may require additional capital
    in the future, but that capital may not be available, if at all, on reasonable
    terms or on terms that would not cause substantial dilution to your stock
    holdings. 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
    a minimum monthly liquidity covenant (see "Note 3 - Bank Financing Arrangements"
    for more information). Future operating losses could cause us to lose the
    availability of our bank line as a result of becoming non-compliant with this
    covenant.




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Our quarterly operating results
    may fluctuate in future periods, which could cause our stock price to decline. We expect to experience quarterly
    fluctuations in operating results in the future. We generally ship orders
    as received, and as a result we may have little backlog. Quarterly revenues
    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 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 revenues, 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, or a combination,
    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. If third-parties do not produce
    and sell innovative products with which our products are compatible, or if
    our own line of mobile handheld computers is not successful, we may not achieve
    our sales projections. Our success has been dependent
    upon the ability of third-parties in the mobile personal computer industry
    to successfully develop products that include or are compatible with our technology
    and then to sell these products into the marketplace. Even if we are successful
    in marketing and selling our new line of mobile handheld computers, our ability
    to generate increased revenue depends significantly on the commercial success
    of other parties' Windows mobile products, particularly standard Pocket PC
    handhelds, phone-integrated devices, tablet computers, and other phone-integrated
    devices, including those from Palm, Nokia, and Blackberry, with which our
    plug-in and wireless peripherals can be used, and the adoption of these mobile
    computer devices for business use. If manufacturers are unable or choose not
    to ship new products such as Pocket PC and other Windows mobile devices, or
    experience difficulties with new product transitions that cause delays in
    the market as we have experienced in the past three years, or if these products,
    including our new line of mobile handheld computers, the first model of which
    we began shipping in June 2007, 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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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 to 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 and compete successfully, if we fail to: invest significant resources
      in research and development, sales and marketing, and customer support;
    identify emerging trends, demands
      and standards in the field of mobile computing products;
    enhance our products by adding
      additional features;
    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 identify trends or make the technological advances
    necessary to be competitive. 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 31%, 36%, and 40% of our worldwide revenues in fiscal
  years 2008, 2007, and 2006, respectively. 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 carries
  our competitors' products. If we lose our relationship with Tech Data Corp.
  or Ingram Micro, Inc., we would experience disruption and delays in marketing
  our products.



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If the market for
  mobile computers experiences delays, or fails to grow, we will not achieve our
  sales projections.

Substantially all of our peripheral
  products are designed for use with mobile personal computers, including handhelds,
  notebook computers, tablets, and handheld computers with integrated phones.
  If the mobile personal computer industry does not grow, if its growth slows,
  or if product or operating system changeovers by mobile computer manufacturers
  and partners cause delays in the market, as we have experienced repeatedly in
  the past three years, or if the markets for our mobile handheld computers do
  not grow, we will not achieve our sales projections.

Our sales will be hurt if the
  new technologies used in our products do not become widely adopted, or are adopted
  slower than expected.

Many of our products use new technologies,
  such as two dimensional bar code scanning and radio frequency identification,
  which are not yet widely adopted in the market. If these technologies fail to
  become widespread, or are adopted slower than expected, our sales will suffer.

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

The market for mobile 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 OEMs of personal computers,
    mobile phones and handheld computers offer built-in functions, such as Bluetooth
    wireless technology, Wi-Fi, or bar code scanning, that compete with our 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 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 [given current economic conditions and] as
  we introduce and support more products and as competition in the market for
  our products intensifies. 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, and reductions in our cash balances. Lower than forecasted
  demand could also result in excess manufacturing capacity at our third-party
  manufacturers and in our failure to meet minimum purchase commitments, each
  of which may lower our operating results.



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If demand increases
  beyond forecasted levels, we would have to rapidly increase production at our
  third-party manufacturers. We depend on suppliers to provide additional volumes
  of components, and 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.

We rely primarily
  on distributors, resellers, vertical industry partners, and OEMs 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, vertical industry partners, and OEMs, 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.

Our agreements with
  distributors, resellers, vertical industry partners, and OEMs are generally
  nonexclusive and may be terminated on short notice by them without cause. Our
  distributors, resellers, vertical industry partners, and OEMs 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 sales
  channels. We cannot predict whether we will be successful in establishing new
  distribution relationships, expanding our sales channels or maintaining our
  existing relationships. A failure to enter into new distribution relationships
  or to expand our 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.

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 handheld 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.



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We have devoted significant research
  and development resources to design activities for Windows Mobile, Windows CE,
  Windows Vista/XP, RIM Blackberry, or Nokia E71 operating systems, and more recently,
  to develop our own family of mobile handheld computers. 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, Research In Motion, or Symbian is 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.

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 operating
  our business, we may receive claims of intellectual property 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.
  In June 2007, we received a letter from Wi-LAN, Inc., accusing certain of our
  wireless LAN products of infringing two U.S. and one Canadian patent held by
  Wi-LAN, Inc. In October 2007, Wi-LAN, Inc. filed patent infringement lawsuits
  against a number of companies alleging that those companies infringe the two
  U.S. patents by manufacturing, using, or offering for sale products with wireless
  capability compliant with the IEEE 802.11 standards. Wi-LAN, Inc. is asking
  for money damages and a court order barring the sale of products that use the
  patented technology. We have not been named in the lawsuit, and we do not plan
  to make any changes to our current business at this time. Nonetheless, we may
  be added to the lawsuit in the future, and even if we are not, the outcome of
  this lawsuit may result in future changes to our business, including potential
  increased costs for those of our products that make use of the related technology.
  In October 2007, we received a letter from WIAV Solutions, LLC, offering to
  license the wireless technology covered by two U.S. patents held by WIAV Solutions,
  LLC. The two patents cover implementations of the 802.11 standard. To date we
  have not entered into discussions to license their technology.

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. These independent 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 sell our products for use with new hardware components from mobile computer
  manufacturers and OEMs, thus affecting our business.



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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.

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 thirteen to sixteen years by us,
  including our President, Executive Vice President, Chief Financial Officer,
  and Chief Technical Officer. 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 one or more of our officers or key
  senior managers could adversely affect our ability to compete.

Beginning January
  1, 2006 we began to expense options granted under our employee stock plans as
  compensation, and as a result our net income and earnings per share were negatively
  affected, we may continue to have net losses as a result of the requirement
  to expense options, 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 adversely
  affected our net income and earnings per share in each of the quarters in fiscal
  years 2008, 2007, and 2006, will continue to adversely affect future quarters,
  and will make profitability harder to achieve or make our future profits or
  net losses worse. 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.

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



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

Our accounts receivable are derived
  primarily from distributors and OEMs. 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. The
  current global financial crisis may have an impact on our customers' ability
  to pay us in a timely manner, and consequently, we may experience increased
  difficulty in collecting our accounts receivable, and we may have to increase
  our reserves in anticipation of increased uncollectible accounts.

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, our bar code scanning
  modules, and our new line of mobile handheld computers, 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.

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%, 35%, and 32% of
  our revenue in fiscal years 2008, 2007, and 2006. 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 primarily 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 if left unhedged.





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

Our corporate headquarters is located
  near an earthquake fault. The potential impact of a major earthquake on our
  facilities, infrastructure, and overall business is unknown. Additionally, we
  may experience electrical power blackouts or natural disasters that could interrupt
  our business. 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.

Failure to maintain effective
  internal controls could have a material adverse effect on our business, operating
  results and stock price.

We have evaluated and will continue
  to evaluate our internal control procedures in order to satisfy the requirements
  of Section 404 of the Sarbanes-Oxley Act, which requires an annual management
  assessment of the design and effectiveness of our internal controls over financial
  reporting. If we fail to maintain the adequacy of our internal controls, as
  such standards are modified, supplemented or amended from time to time, we may
  not be able to ensure that we can conclude on an ongoing basis that we have
  effective internal controls over financial reporting in accordance with Section
  404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly
  those related to revenue recognition, are necessary for us to produce reliable
  financial reports and are important to helping prevent financial fraud. If we
  cannot provide reliable financial reports or prevent fraud, our business and
  operating results could be harmed, investors could lose confidence in our reported
  financial information, and the trading price of our stock could drop significantly.

The sale of a substantial number
  of shares of our 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.

As of March 6, 2009, we had 3,229,916
  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 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 6, 2009, we had 1,278,785
  shares subject to outstanding options under our stock option plans, and 53,292
  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.



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

During the period from January 1,
  2007 through March 6, 2009, our Common Stock price (adjusted to reflect a one-for-ten
  reverse stock split effected on October 23, 2008) fluctuated between a high
  of $14.00 and a low of $0.50. Following the reverse stock split which significantly
  decreased the Company's share float, we have experienced low trading volume
  in our stock, and thus relatively small purchases and sales can have a significant
  effect on our stock price. The trading price of our Common Stock could be subject
  to wide fluctuations in response to many factors, some of which are beyond our
  control, including general economic conditions and the outlook of securities
  analysts and investors on our industry. In addition, the stock markets in general,
  and the markets for high technology stocks in particular, have experienced high
  volatility that has often been unrelated to the operating performance of particular
  companies. These broad market fluctuations may adversely affect the trading
  price of our Common Stock.Item 1B. Unresolved Staff Comments

None.

Item 2.
  Properties

We lease a 37,100 square foot office
  facility in Newark, California under a lease expiring in June 2012. We have
  one option to extend the term of the lease for an additional five-year period
  with respect to the entire premises. This facility houses our headquarters and
  manufacturing operations, and is fully used by all segments of the Company.
  We believe that our current facilities are sufficient and adequate to meet our
  needs for the foreseeable future.

Item 3. Legal Proceedings

We are currently not a
  party to any material legal proceedings.Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted for vote
  by security holders during the fourth quarter of 2008.



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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 Capital Market under the symbol "SCKT."

The quarterly high and low sales
  prices of our Common Stock, as reported on the NASDAQ Capital Market through
  March 6, 2009 (and the NASDAQ Global Market prior to June 10, 2008), and for
  the last two fiscal years are as shown below:

|                                       |  | Common
        Stock
|-------------------------------------- |  | --------------------
|Quarter
          Ended                |  |                 
|2007                                   |  |                     
|March 31, 2007                         |  | $                   
|June 30, 2007                          |  | $                   
|September 30, 2007                     |  | $                   
|December 31, 2007                      |  | $                   
|2008                                   |  |                     
|March 31, 2008                         |  | $                   
|June 30, 2008                          |  | $                   
|September 30, 2008                     |  | $                   
|December 31, 2008                      |  | $                   
|2009                                   |  |                     
|March 31, 2009 (through March 6, 2009) |  | $                   

|Note: The Company effected a one-for-ten reverse stock split on October
      23, 2008. The sales prices of the Company's Common Stock in the above table
      have been retroactively restated to reflect the effects of the reverse split.
      See "Note 2 - Reverse Stock Split" for additional information.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On March 6, 2009, the closing sales price for our Common Stock as reported on
  the NASDAQ Capital Market was $2.17. We had 5,530 beneficial stockholders of
  record as of March 2, 2009. We have not paid dividends on our Common Stock,
  and we currrently intend to retain future earnings for use in our business and
  do not anticipate paying dividends in the foreseeable future.

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



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Performance Graph

The performance graph shown below
  shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange
  Act of 1934, as amended, or otherwise subject to the liabilities under that
  section, and shall not be deemed to be incorporated by reference into any filing
  of Socket Mobile, Inc. under the Securities Act of 1933, as amended, or the
  Exchange Act. The performance graph below shows a five-year comparison of cumulative
  total stockholder return, calculated on a dividend reinvestment basis and based
  on a $100 investment, from December 31, 2003 through December 31, 2008 comparing
  the return on the Company's Common Stock with the Russell 2000 Index and the
  NASDAQ Computer & Data Processing Index. No dividends have been declared or
  paid on the Common Stock during such period. Historical stock price performance
  is not necessarily indicative of future stock price performance.









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Item 6. Selected Financial
  Data

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |         | Years
      Ended December 31
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | -----------------------------
|(Amounts
      in thousands except per share)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |         |                          
|Income
      Statement Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |         |                              
|Revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |         | $                            
|Gross profit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |         | $                            
|Operating expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |         | $                            
|Net income (loss) applicable to common stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |         | $                            
|Net income (loss) per share applicable to common stockholders (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |         | $                            
|Weighted average shares outstanding: (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |         |                              
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Diluted |                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |         |                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |         |                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |         |                              
|Balance
      Sheet Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |         |                              
|Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |         | $                            
|Bank line of credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |         | $                            
|Capital leases and deferred rent - long term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |         | $                            
|Preferred stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |         | $                            
|Total stockholders' equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |         | $                            
|Dividends and preferred stock accretion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |         | $                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(a) On January
          1, 2006, we adopted Financial Accounting Standard SFAS 123R, "Share-Based
          Payment." SFAS 123R requires the valuation of compensatory stock option
          grants and the expensing of the fair market value of these grants over
          the vesting period of the grants. In 2008, operating expenses and the
          net loss applicable to common stockholders includes stock compensation
          expense of $0.6 million and $0.7 million, respectively. In 2007, operating
          expenses and the net loss applicable to common stockholders includes
          stock compensation expense of $0.9 million and $1.0 million, respectively.
          In 2006, operating expenses and the net loss applicable to common stockholders
          includes stock compensation expense of $1.1 million and $1.2 million,
          respectively.
          Prior to fiscal 2006, we accounted for stock option grants to our employees
          and directors in accordance with Accounting Principles Board Opinion
          No. 25, "Accounting for Stock Issued to Employees" (APB 25), and reported
          in accordance with the disclosure-only alternative described in SFAS
          123, "Accounting for Stock-Based Compensation."
          (b) Shares used in per share calculations of basic and diluted net loss
          per share, reflect a one-for-ten reverse stock split effected by the
          Company on October 23, 2008. Net income and loss per share has been
          retroactively restated for all periods presented. See "Note 2 - Reverse
          Stock Split" for additional information.





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

Critical Accounting
  Policies

Our significant accounting policies
  are described in Note 1 to our financial statements for the year ended December
  31, 2008. 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,
  Stock Based-Compensation, and Valuation of Goodwill and Other Intangible Assets.

Revenue Recognition
  and Accounts Receivable Reserves

We defer revenue recognition on
  products sold to distributors until our distributors sell the products to their
  customers, because our distributors generally have rights to return products
  to us for stock rotation, stock reduction, or replacement of defective product.
  The amount of deferred revenue net of related cost of revenue is classified
  as deferred income on shipments to distributors 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 income to defer. Stock rotation and stock reduction from our distributors
  generally results in a balance sheet adjustment to our deferred income 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 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 products after we receive orders from
  our customers. We purchase or have manufactured 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. Surplus or
  obsolete inventory 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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Stock-Based Compensation

On January 1, 2006,
  the Company adopted SFAS 123R for fiscal years ended December 31, 2006 and onward.
  SFAS 123R requires all share-based awards to employees, including grants of
  employee stock options, to be recognized in the financial statements based on
  their fair values. The valuation provisions of SFAS 123R apply to new grants
  and to grants that were outstanding as of the effective date. Under SFAS 123R,
  the Company uses a binomial lattice valuation model to estimate the fair value
  of stock option grants made on or after January 1, 2006. The binomial lattice
  model incorporates calculations for expected volatility, risk-free interest
  rates, employee exercise patterns and post-vesting employment termination behavior,
  and these factors affect the estimate of the fair value of the Company's stock
  option grants. The fair value of stock option grants outstanding as of the effective
  date is estimated using the Black-Scholes option pricing model used under SFAS
  123. The Company adopted the modified prospective recognition method and implemented
  the provisions of SFAS 123R beginning with the first quarter of 2006.

Valuation
  of Goodwill and Other Intangible Assets

We account for goodwill in accordance
  with Statement of Financial Accounting Standards No. 142, "Goodwill and Other
  Intangible Assets" ("SFAS 142"). Goodwill is tested for impairment at least
  annually and between annual tests if indicators of potential impairment exist.
  Also in accordance with SFAS 142, we test goodwill for impairment at the reporting
  unit level. We have determined it is appropriate to report as a single unit.
  The fair value of the reporting unit at December 31, 2008 was calculated using
  the income approach. Under the income approach, the fair value of the reporting
  unit was calculated by estimating the present value of associated future cash
  flows. In addition, we also review the market capitalization of the Company
  in conjunction with our analysis of goodwill impairment. We assess the impairment
  of certain long-lived assets, including intangible assets with definite useful
  lives, at least annually and whenever events or changes in circumstances indicate
  that the carrying value may not be recoverable.

As of December 31, 2008, 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 the acquired businesses are impaired.
  Any resulting impairment loss could have a material adverse impact on our financial
  condition and results of operations.



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Revenues

Our revenues have been classified
  into three broad product families for the years ended December 31, 2008, 2007,
  and 2006, and are presented in the following table:

|(revenues
      in thousands)      |  | Years
        ended December 31, |        | Increase
        (Decrease)
        in years
|---------------------------------- |  | -------------------------------- | ------ | --------------------------------------------
|                                   |  | 2008                             |        | 2007                                        
|Product
      family:              |  |                              | $'s    |                                             
|Mobile handheld computer products: |  | $                                | 4,730  |                                             
|Mobile peripheral products:        |  |                                  |        |                                             
|Data collection                    |  |                                  | 9,296  |                                             
|Connectivity                       |  |                                  | 1,617  |                                             
|Serial interface                   |  |                              | 1,608  |                                             
|                                   |  |                                  | 12,521 |                                             
|                                   |  |                                  |        |                                             
|OEM embedded products              |  |                              | 9,306  |                                             
|Total                              |  | $                                | 26,557 |                                             

Our mobile handheld computer product revenues in 2008 increased by $3.4
  million from mobile handheld computer product revenues in 2007. We began shipping
  our first mobile handheld computer, the SoMo 650, to customers in our distribution
  channel in the second quarter of 2007. In the third quarter of 2007, we completed
  our objectives of ramping up production and fully stocking our distribution
  channel to enable the commencement of widespread customer evaluation, qualification,
  and deployment. We began offering Windows Mobile 6 Classic and multiple language
  support for the SoMo 650 in the second quarter of 2008 giving customers a choice
  of operating systems and languages to best fit their needs. We have also introduced
  the SoMo 650 Model Rx with an antimicrobial case for the healthcare market to
  reduce the risk of the spread of bacteria from the use of handheld devices in
  a healthcare environment, and the SoMo 650 Model DX without Bluetooth or wireless
  LAN for high security environments. Increased revenues for our mobile handheld
  computer products in 2008 reflect higher sales volumes due to a growing customer
  base with larger average unit deployments, and due to the fact that we did not
  start recognizing revenue for these products until the second quarter of 2007.

Our data collection product
  revenues in 2008 decreased by $2.8 million from data collection revenues in
  2007. The decrease was due to a decline of $1.2 million in sales of our CompactFlash
  In-Hand Scan card product, a decline of $0.7 million in sales of our Cordless
  Hand Scanner, and a decline $0.8 million in reduced sales of our Cordless Ring
  Scanner and our SDIO In-Hand Scan card. Data collection revenues in 2008 were
  slowed in the first quarter but began to recover in the second quarter due in
  part to delayed availability of new handheld computer models originally announced
  by a major handheld computer manufacturer in the third quarter of 2007, which
  did not begin shipping until February 2008. Such announcements and delayed timing
  of product availability typically slow customer deployments of our peripheral
  products because of the time needed by customers to evaluate or adopt the new
  handheld computer models. Following this revenue recovery was the fourth quarter
  of 2008, in which data collection product sales were adversely affected by the
  worldwide economic slowdown.



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Our data collection product revenues
  in 2007 increased by $1.6 million from data collection revenues in 2006. Record
  quarterly data collection revenues in the first half of 2007 were slowed in
  the second half of 2007 due in part to an announcement by a major handheld computer
  manufacturer of new handheld models for the consumer market. Such announcements
  typically slow customer deployments of our peripheral products because of the
  time needed by customers to evaluate or adopt new handheld models. Overall growth
  in 2007 in our data collections revenues compared to 2006 was due to both our
  efforts in developing programs such as our Vertical Industry Partners Program,
  and a recovery in the first half of 2007 from adverse market conditions that
  existed in 2006. We are dependent upon VARs, integrators and developers of third-party
  software applications to supply vertical application software that uses the
  computers and peripheral products that we manufacture or support, and we have
  developed programs such as our Vertical Industry Partners Program to encourage
  VARs, integrators and developers of such applications to do so. Overall growth
  in data collection revenues for 2007 reflects in part the growth in availability
  and deployment of software applications by businesses. The primary contributor
  to growth in data collection product revenues in 2007 was our Cordless Hand
  Scanner product which had revenue increases of $0.8 million. Additional increases
  in data collection revenues in 2007 were $0.5 million from increased sales of
  our primary data collection product, our CompactFlash In-Hand Scan card, $0.3
  million from increased sales of our Cordless Ring Scanner, and increased sales
  of our SDIO In-Hand Scan card, partially offset by declines in revenues of discontinued
  scanning products.

Our connectivity product
  revenues for the three years presented in the above table consist of Ethernet
  plug-in cards, modems, and accessory products including our Mobile Power Pack,
  adapters and cables. Connectivity product revenues in 2008 decreased by $0.9
  million from connectivity product revenues in 2007. The decrease was due to
  a decline of $0.5 million from reduced sales of our modem plug-in products and
  a decline of $0.3 million from reduced sales of our Ethernet plug-in products.
  Connectivity product revenues decreased by $1.6 million in 2007 from connectivity
  product revenues in 2006. Connectivity product revenue declines in 2007 of $0.8
  million were from reduced sales of our modem plug-in products and $0.5 million
  from reduced sales of our Ethernet plug-in products. Additional declines in
  2007 were from reduced sales of our accessory products including our Mobile
  Power Pack, and our Cordless GPS receiver with navigation kit which was discontinued
  in 2006. Overall connectivity product revenues have declined in the periods
  presented, reflecting a trend of year over year reductions in corporate deployments
  of these wired connection solutions.

Our serial interface product
  revenues declined in 2008 by $0.2 million from revenues in 2007, and in 2007
  declined by $0.8 million from revenues in 2006. Half of the decline in 2008
  was from lower sales of our CompactFlash serial card products. Additional declines
  in 2008 were due to lower sales of our standard serial PC card products and
  cordless Bluetooth serial adapter product. Serial interface product revenue
  declines of $0.6 million in 2007 were due to reduced sales of our standard serial
  PC card products. Our standard serial PC card products are primarily sold to
  connect peripheral devices or other electronic equipment to notebook computers.
  Additional revenue declines in 2007 were from lower sales of our CompactFlash
  card products compared to 2006. Overall serial product revenues have declined
  in the periods presented, continuing a trend reflecting the gradual replacement
  of serial technology with USB and other newer connection technologies.



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Our OEM embedded product
  revenues in 2008 increased overall by $2.8 million, compared to a decrease of
  $1.4 million in 2007. Within our OEM products family, our Bluetooth module revenues
  increased $2.1 million in 2008, compared to a decrease of $0.4 million in 2007.
  The Bluetooth module revenue increase in 2008 was due to a recovery in market
  conditions that existed in early 2007, and last-buy purchases of Bluetooth modules
  in the latter half of 2008. In the first quarter of 2007 our OEM customers in
  the industrial ruggedized market segment experienced pronounced increased competition
  due to a short-term aggressive price discounting begun in the fourth quarter
  2006 by a major competitor, a trend which adversely affected our related Bluetooth
  module revenues in the first quarter of 2007, but improved steadily in the following
  quarters of 2007 and throughout 2008, following cessation of the aggressive
  discounting by the competitor. Our wireless LAN product revenues in 2008 increased
  by $0.9 million, compared to a decline of $1.0 million 2007. In 2007, we began
  classifying our wireless LAN plug-in card and Bluetooth plug-in card revenues
  within the OEM embedded products family to reflect the beginning of a shift
  in the customer base to OEM customers within our OEM embedded products group,
  whereas sales of these products in 2006 and earlier were primarily driven by
  non-OEM customers. Revenues of our wireless LAN products in 2008 reflect higher
  volumes of sales to customers within the OEM customer group, whereas revenue
  declines in 2007 in our wireless LAN plug-in cards reflect the availability
  to non-OEM customers of this wireless technology already built-in by handheld
  computer manufacturers. Our Bluetooth plug-in product revenues declined $0.2
  million in 2008 and $0.8 million in 2007, reflecting lower overall requirements
  for these products by our OEM customer group and the availability of this wireless
  technology already built into handheld computers to our non-OEM customers.

Gross Margins

Gross margin for 2008 was 47 percent
  of revenues compared to gross margins of 49 percent in years 2007 and 2006.
  Reductions in overall margins in 2008 are due primarily to discounts we granted
  on volume purchases of our Bluetooth modules by customers in our OEM embedded
  business segment, and increased sales of our mobile handheld computer which
  began shipping late in the second quarter of 2007. Margins on our mobile handheld
  computer products are currently below our average product margins. Margins in
  2007 reflect overall margin improvements in data collection products offset
  by lower than average margins on our mobile handheld computer which began shipping
  late in the second quarter of 2007. We generally price our products as a markup
  from our cost, and we offer discount pricing for higher volume purchases. We
  anticipate our margins will continue to be within a couple of percentage points
  of the gross margins in 2008.

Research and Development
  Expense

Research and development expense
  in 2008 was $4.5 million, a decrease of 10 percent from research and development
  expense in 2007 of $5.0 million. Research and development expense in 2007 decreased
  by 3 percent from research and development expense in 2006 of $5.1 million.
  Decreases of $0.2 million in 2008 were attributable to the costs incurred in
  the first quarter of 2007 related to the development of our SoMo 650 mobile
  handheld computer, the development of which was begun in the fourth quarter
  of 2006, with the majority of the development expense concluded by the end of
  the first quarter of 2007. Additional decreases in 2008 of $0.3 million were
  from reductions in consulting and professional fees related to fewer projects
  requiring the use of external technical expertise, and from reductions in equipment
  costs due to higher amounts of depreciation expense related to capitalized tooling
  in the first quarter of 2007. Reductions in 2007 totaling $0.4 million were
  from reduced equipment costs and consulting and professional fees, and were
  partially offset by increases in personnel costs as we staffed in-house expertise
  for technical skills formally sourced to outside consulting and professional
  service providers. We will continue to monitor our research and development
  expense in response to the current economic conditions.



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Sales and Marketing
  Expense

Sales and marketing expense in 2008
  was $7.8 million, an increase of 5 percent compared to sales and marketing expense
  in 2007 of $7.4 million. Sales and marketing expense in 2007 increased by 3
  percent compared to sales and marketing expense in 2006 of $7.1 million. Increases
  in 2008 were primarily from increased personnel costs of $0.4 million due to
  the additions of key personnel beginning in the second quarter of 2007, including
  our Senior VP of Sales & Marketing, and additional salespersons in North America
  to begin selling our new SoMo 650 mobile handheld computer, which began shipping
  late in the second quarter of 2007, and from expenses relating to the recruitment
  and development of new third-party channel partners. Additional increases in
  2008 were from higher levels of advertising and promotional expenses, offset
  by reductions in outside services and travel expenses. Increases in personnel
  costs of $0.5 million in 2007 were due to the sales and marketing initiatives
  described above. Additional increases were from increased travel expenses related
  to the additions of staff members to the sales team. Partially offsetting these
  increases were reductions of $0.5 million from lower levels of advertising and
  promotional expenses. We will continue to monitor our sales and marketing expense
  in response to the current economic conditions.

General and Administrative
  Expense

General and administrative expense
  in 2008 was $2.67 million, a decrease of 2 percent compared to general and administrative
  expense of $2.74 million in 2007. General and administrative expense in 2007
  was $2.7 million, an increase of 2 percent compared to general and administrative
  expense in 2006. Decreases in 2008 were primarily from reduced stock-based compensation
  expenses as older grants with higher valuations compared to more current grants,
  became fully expensed. Partially offsetting these decreases were higher overall
  occupancy related costs compared to 2007. Increases in 2007 were primarily from
  higher equipment expense as we began to depreciate the costs of capitalized
  leasehold improvements and furniture and fixtures related to our new corporate
  headquarters as of January 2007, and higher overall occupancy related costs
  compared to the prior year. We will continue to monitor our general and administrative
  expense in response to the current economic conditions.

Amortization of Intangibles

In July 2004 we acquired a patent
  which covers the design and functioning of plug-in bar code scanners, bar code
  imagers, and radio frequency identification 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 a ten-year period. Intangible
  assets of $571,000 remaining from a prior acquisition in October 2000 consist
  of developed software and technology with estimated lives at the time of acquisition
  of 8.5 years. At December 31, 2004, a licensing agreement with a book value
  of $38,000 was reclassified as an intangible asset and was amortized over its
  remaining life of three years ending in December 2007. Total amortization charges
  in 2008 for all acquired intangibles were $127,000, compared to $135,000 in
  2007, and $140,000 in 2006. The lower annual amortization charges are due to
  components of intangible property becoming fully amortized.



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Interest Income and
  Other, and Interest Expense

Interest income reflects interest
  earned on cash balances. Interest income was $22,000 in 2008, $114,000 in 2007,
  and $175,000 in 2006. Lower interest income in 2008 compared to 2007 reflects
  lower average cash balances combined with lower average rates of return. Lower
  interest income in 2007 compared to 2006 reflects lower average cash balances
  in 2007 partially offset by higher rates of return. Lower levels of cash in
  2007 compared to 2006 are primarily the result of an increased use of cash in
  financing greater quarterly operating losses in 2007 compared to 2006.

Interest expense was $71,000 in
  2008, $34,000 in 2007, and $8,000 in 2006. Higher interest expense in 2008 is
  due to higher average balances outstanding on our bank lines of credit partially
  offset by lower interest rates, and higher average amounts outstanding on our
  bank term loan compared to 2007. Beginning in the second quarter of 2008, average
  amounts outstanding on our bank lines of credit increased from prior quarters'
  levels. Prior to the second quarter of 2008 we used our bank lines of credit
  only at the end of the quarter in the first quarter of 2008 and at the end of
  each quarter in 2007. The term loan was advanced at the end of the second quarter
  of 2007 and was being repaid in 36 monthly installments beginning in July of
  2007 until repaid in full in December 2008 in conjunction with a new credit
  line agreement (see "Note 3 - Bank Financing Arrangements" for more information)
  which replaced our existing credit line agreement at that time. Higher interest
  expense in 2007 as compared to 2006 was due to interest on our term loan and
  higher interest rates on our lines of credit in 2007 compared to 2006.

Income Taxes

We account for income taxes in accordance
  with Statement of Financial Accounting Standards No. 109, "Accounting for Income
  Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are
  determined based on differences between the 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. We record
  a valuation allowance against deferred tax assets when it is more likely than
  not that such assets will not be realized. We have not generated taxable income
  in any periods in any jurisdiction, foreign or domestic. The Company has maintained
  a full valuation allowance for all deferred tax assets. There can be no assurance
  that the deferred tax assets subject to the valuation allowance will be realized.

In June 2006, the Financial Accounting
  Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty
  in Income Taxes - An Interpretation of FASB Statement No. 109" ("FIN 48"), to
  create a single model to address accounting for uncertainty in tax positions.
  FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition
  threshold a tax position is required to meet before being recognized in the
  financial statements. FIN 48 also provides guidance on derecognition, measurement,
  classification, interest and penalties, accounting in interim periods, disclosure
  and transition. FIN 48 is effective for fiscal years beginning after December
  15, 2006. The Company adopted FIN 48 as of January 1, 2007, as required. There
  were no adjustments to the financial statements as a result of the adoption
  of FIN 48. See Note 11 - Income Taxes, for additional information.





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Preferred Stock Dividends

Preferred stock dividends in 2006
  reflect dividends of $10,700 accrued at the rate of 8% per annum on Series F
  Preferred Stock through the date of mandatory conversion in the first quarter
  2006. Series F Preferred Stock was originally issued in March 2003. Series F
  dividends were payable quarterly in cash or in Common Stock, at the option of
  the Company. Dividends in the first quarter 2006 through the date of conversion
  were paid prior to the end of the first quarter. On March 21, 2006 the outstanding
  shares of Series F Preferred Stock automatically converted into Common Stock
  resulting in the issuance of 823,300 shares of Common Stock (82,330 shares on
  a post reverse split basis, see "Note - 2 Reverse Stock Split" for more information).

Quarterly Results of
  Operations

The following table sets forth summary
  quarterly statements of operations data for each of the quarters in 2007 and
  2008. 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 amounts)                                                                                                                                                                                                                                                   |                                        | Mar
        31,      
|                                                                                                                                                                                                                                                                                                         |                                        | 2007                 
|Summary
        Quarterly Data:                                                                                                                                                                                                                                                                          |                                        |                      
|                                                                                                                                                                                                                                                                                                         | Revenue                                |                      
|                                                                                                                                                                                                                                                                                                         | Cost of revenue                        |                      
|                                                                                                                                                                                                                                                                                                         | Gross profit                           |                      
|                                                                                                                                                                                                                                                                                                         | Operating expenses:                    |                      
|                                                                                                                                                                                                                                                                                                         | Research and development               |                      
|                                                                                                                                                                                                                                                                                                         | Sales and marketing                    |                      
|                                                                                                                                                                                                                                                                                                         | General and administrative             |                      
|                                                                                                                                                                                                                                                                                                         | Amortization of intangibles            |                      
|                                                                                                                                                                                                                                                                                                         | Total operating expenses               |                      
|Interest income (expense), net                                                                                                                                                                                                                                                                           |                                        |                      
|Deferred tax expense                                                                                                                                                                                                                                                                                     |                                        |                  
|Net loss                                                                                                                                                                                                                                                                                                 |                                        | $                    
|                                                                                                                                                                                                                                                                                                         | Basic and diluted net loss per share * |                      
|* Note: The Company effected a one-for-ten reverse stock split on October
      23, 2008. The basic and diluted net loss per share amounts in the above
      table have been restated to reflect the affects of the reverse split. See
      "Note 2 - Reverse Stock Split" for additional information.

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 us 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.



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Liquidity and Capital
  Resources

We were unprofitable in each of
  the quarters in fiscal years 2008, 2007 and 2006. We were profitable in two
  quarters in 2005, but unprofitable for fiscal year 2005. Fiscal year 2004 was
  the first profitable year in our history, but only to the extent of $288,000.
  Prior to 2004, we incurred significant operating losses in each financial period
  since our inception. We may continue to be unprofitable in the foreseeable future.
  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 to fund our operations.

Cash used in operating activities
  was $2.0 million in 2008 compared to $1.1 million used in operating activities
  in 2007, and $0.4 million used in operating activities in 2006. Cash used in
  2008 from our net loss adjusted for non-cash items was $1.3 million, compared
  to cash used in 2007 of $1.4 million from our net loss adjusted for non-cash
  items, and cash used of $0.8 million in 2006 from our net loss adjusted for
  non-cash items. Adjustments for non-cash items consisting of depreciation and
  amortization, amortization of intangibles, gains and losses on foreign currency
  transactions, changes in deferred rent, deferred tax expense, and stock-based
  compensation expense, totaled $1.5 million in 2008, compared to $1.9 million
  in 2007, and $2.1 million in 2006. Reductions in non-cash items in 2008 compared
  to 2007 were primarily from lower stock compensation expense due to older grants
  with higher valuations compared to more current grants becoming fully expensed,
  and reduced depreciation and amortization due to lower levels of equipment and
  tooling purchases in 2008 compared to 2007. Reductions in non-cash items in
  2007 were primarily from lower stock compensation expense compared to 2006.
  Changes in working capital balances resulted in a use of cash of $0.7 million
  in 2008, a source of cash of $0.3 million in 2007, and a source of cash of $0.4
  million in 2006. Changes in working capital balances in 2008 were primarily
  from increased levels of inventories due to stocking higher quantities of our
  mobile handheld computer and increases in accounts receivable due to shipments
  concentrated in the last month of the fourth quarter, partially offset by increases
  in accounts payable due to the purchases that led to the increased levels of
  inventories, and increases in deferred income on shipments to distributors due
  to increased stocking levels in the domestic distribution channel. Changes in
  working capital balances in 2007 were primarily from increases in deferred income
  on shipments to distributors due to increased levels of inventory in our channel
  primarily from distributors stocking our new mobile handheld computer which
  we began shipping in June 2007, and increases in accrued payroll, partially
  offset by increases in inventory and prepaid royalties related to our new mobile
  handheld computer. Changes in working capital balances in 2006 were primarily
  from increases in deferred income on shipments to distributors due to increased
  inventory levels in our distribution channel, and reductions in accounts receivables
  due to lower shipments in the fourth quarter, partially offset by decreases
  accounts payables and increases in inventory and other assets.



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Cash used in investing
  activities was $0.3 million in 2008, $1.0 million in 2007, and $0.8 million
  in 2006. Reduced investing activities in 2008 reflects reductions in equipment
  and tooling purchases due to fewer development projects requiring these expenditures,
  and non-recurring leasehold improvements incurred in 2007. Increased investing
  activities in 2007 reflects the costs of leasehold improvements related to our
  new corporate headquarters incurred primarily in the first quarter of 2007.
  Remaining investing activities in each of the periods presented reflects the
  costs of new computer hardware and software costs.

Cash used in financing
  activities was $1.9 million in 2008, compared to cash provided by financing
  activities of $ 0.9 million in 2007 and $0.5 million in 2006. Financing activities
  in 2008 consisted primarily of net amounts paid on our bank lines of credit
  and payment of all outstanding amounts on our term loan in December 2008 in
  conjunction with a new credit line agreement (see "Note 3 - Bank Financing Arrangements"
  for additional information), partially offset by proceeds from the exercise
  of stock options and warrants. Financing activities in 2007 consisted primarily
  of a net increase of $0.4 million in the amounts drawn on our bank lines of
  credit, $0.4 million from a term loan advance in June 2007 net of repayments,
  and proceeds from the exercise of stock options. At the end of 2007 we drew
  $2.6 million in cash against our bank credit line, which we repaid in January
  2008. Financing activities in 2006 consisted primarily of proceeds totaling
  $0.6 million from the exercise of warrants and stock options, partially offset
  by a net decrease in the amounts drawn on our bank lines of credit, and the
  final dividend payments on Series F Preferred Stock. At the end of 2006 we drew
  $2.2 million in cash against our bank credit line, which we repaid in January
  2007.

Our cash balances at
  December 31, 2008 were $0.8 million, including cash of $1.0 million drawn against
  our bank line of credit. In February 2009, we extended our bank line of credit
  agreement which will now expire on March 24, 2010. At December 31, 2008 we had
  additional unused borrowing capacity of approximately $1.04 million on our bank
  lines of credit. Our balance sheet has a current ratio (current assets divided
  by current liabilities) of 1.08 to 1.0, and no material long term debt. In the
  fourth quarter of 2008 the Company took actions to reduce expenses, including
  a reduction in force of 12% of our worldwide workforce, to align our cost structure
  with current economic conditions in light of slowing business spending due to
  the current economic downturn. We have taken additional actions in the first
  quarter of 2009 to reduce expenses. We have the ability to further reduce expenses
  if necessary. We believe our existing cash, plus our ability to reduce costs,
  and our bank lines of credit will be sufficient to meet our funding requirements
  at least through December 31, 2009. If we can return to profitability and 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 salaries, benefits, and related support
  costs for employees. If we cannot return to 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. There can be no assurance that additional
  capital will be available on acceptable terms, if at all, and any such terms
  may be dilutive to existing stockholders. If we are unable to secure the necessary
  capital for our business, we may need to suspend some or all of our current
  operations.



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Our contractual obligations at December
  31, 2008 are outlined in the table below:

|                                                               |       | Payments
      Due by Period
|-------------------------------------------------------------- | ----- | ----------------------------
|Contractual
        Obligations                                |   | Total                       
|Capital leases                                                 |       | $                           
|Operating
        leases                                       |       |                             
|Term loan, principle and interest                              |       |                         
|Unconditional purchase obligations with contract manufacturers |       |                         
|Total contractual cash obligations                             |       | $                           

Off-Balance Sheet Arrangements

As of December 31, 2008, we have
  no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

Recent Accounting Pronouncements

In September 2006, the FASB issued
  Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
  ("SFAS 157"), which establishes a framework for measuring fair value and enhanced
  disclosures about fair value measurements. In February 2008, FASB issued FASB
  Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157," which
  provides for a one year deferral of the effective date of SFAS 157 for non-financial
  assets and non-financial liabilities, except those that are recognized or disclosed
  in the financial statements at fair value on a recurring basis. We adopted the
  provisions of SFAS 157 as of January 1, 2008, with respect to our financial
  assets and liabilities only. The adoption of this statement did not have a material
  impact on our financial statements. For additional discussion on fair value
  measurements see Note 1 to the Condensed Financial Statements.

In February 2007, the FASB issued
  SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
  ("SFAS 159"), which permits companies to choose to measure certain financial
  instruments and certain other items at fair value. The standard requires that
  unrealized gains and losses on items for which the fair value option has been
  elected be reported in earnings. SFAS 159 is effective for fiscal years beginning
  after November 15, 2007. We adopted SFAS 159 as of January 1, 2008. The adoption
  of SFAS 159 did not have a material impact on our financial statements.



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Item 7A. Quantitative
  and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk for
  changes in interest rates relates primarily to invested cash. Our cash is invested
  in short-term money market investments backed by U.S. Treasury notes and other
  investments that mature within one year and whose principal is not subject to
  market rate fluctuations. Accordingly, interest rate declines would adversely
  affect our interest income but would not affect the carrying value of our cash
  investments. Based on a sensitivity analysis of our cash investments during
  the quarter ended December 31, 2008, a decline of 1% in interest rates would
  not have had a material effect on our quarterly interest income.

Our bank credit line facilities
  of up to $2.5 million have variable interest rates based upon the greater of
  either the lender's prime rate plus 2%, or 6%, for both the domestic line (up
  to $1.5 million) and the international line (up to $1.0 million). Accordingly,
  interest rate increases would increase our interest expense on our outstanding
  credit line balances. We utilized only a portion our credit line facility during
  the last three quarters of 2008. In the first quarter of 2008 and in each quarter
  of fiscal year 2007 we utilized the credit line facility only at the end of
  the quarter and therefore did not subject ourselves to significant interest
  rate exposure in such quarters. 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 $25,000 if we utilized our entire credit
  line. The credit line agreement also specifies a fixed collateral handling fee
  of 0.7% per month on the outstanding balances.

Foreign Currency Risk

A substantial majority of our revenue,
  expense and purchasing activities are transacted in U.S. dollars. However, we
  require our European distributors to purchase our products in Euros, we pay
  the expenses of our European employees in Euros and British pounds, and we may
  enter into selected future purchase commitments with foreign suppliers that
  may be paid in the local currency of the supplier. We hedge a significant portion
  of our European receivables balance denominated in Euros to reduce the foreign
  currency risk associated with these assets, and we have not been subject to
  significant losses from material foreign currency fluctuations. Based on a sensitivity
  analysis of our net foreign currency denominated assets and subsidiary expenses
  at the beginning, during and at the end of the quarter ended December 31, 2008,
  an adverse change of 10% in exchange rates would result in an increase in our
  net loss for the third quarter of approximately $63,600, if left unprotected.
  For the fourth quarter of 2008 the total net adjustment for the effects of changes
  in foreign currency on cash balances, collections, payables, and derivatives
  was a net loss of $27,700. We will continue to monitor, assess, and mitigate
  through hedging activities, the risk associated with these exposures.

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."



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REPORT OF INDEPENDENT REGISTERED
  PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying
  balance sheets of Socket Mobile, Inc. as of December 31, 2008 and 2007, and
  the related statements of operations, stockholders' equity, and cash flows for
  each of the years in the three year period ended December 31, 2008. Socket Mobile,
  Inc.'s management is responsible for these financial statements. 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 audits to obtain
  reasonable assurance about whether the financial statements are free of material
  misstatement. The Company is not required to have, nor were we engaged to perform,
  an audit of its internal control over financial reporting. Our audit included
  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 of expressing an opinion on the effectiveness of the Company's internal
  control over financial reporting. Accordingly, we express no such opinion. An
  audit includes examining, on a test basis, evidence supporting the amounts and
  disclosures in the financial statements. An audit also includes assessing the
  accounting principles used and significant estimates made by management, as
  well as evaluating the overall financial statement presentation. We believe
  that our audits provide a reasonable basis for our opinion.

In our opinion, the
  financial statements referred to above present fairly, in all material respects,
  the financial position of Socket Mobile, Inc. as of December 31, 2008 and 2007,
  and the results of its operations and its cash flows for each of the years in
  the three year period ended December 31, 2008, in conformity with accounting
  principles generally accepted in the United States of America.

       
                           
                           
                           
                           
                           
                        /s/ Moss Adams
  LLP

San Francisco, California
  March 12, 2009

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SOCKET
  MOBILE, INC.


BALANCE SHEETS


|                                                                                                                                                                                                    |                                                    | December 31, |            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------ | -----------
|                                                                                                                                                                                                    |                                                    | 2008         |        
|ASSETS                                                                                                                                                                                             
|Current
        assets:                                                                                                                                                                             |                                                    |              |            
|Cash
          and cash equivalents                                                                                                                                                                 |                                                    | $            | 757,342    
|Accounts
          receivable, net of allowance for doubtful accounts of $118,651 at December
          31, 2008 and 2007                                                                           |                                                    |              | 3,334,661  
|Inventories                                                                                                                                                                                         |                                                    |              | 3,929,822  
|Prepaid
          expenses and other current assets                                                                                                                                                 |                                                    |          | 387,428    
|                                                                                                                                                                                                    | Total current assets                               |              |        
|                                                                                                                                                                                                |                                                    |              |            
|Property
        and equipment:                                                                                                                                                                     |                                                    |              |            
|Machinery
          and office equipment                                                                                                                                                            |                                                    |              | 2,332,092  
|Computer
          equipment                                                                                                                                                                        |                                                    |          | 1,206,668  
|                                                                                                                                                                                                |                                                    |              | 3,538,760  
|Accumulated
          depreciation                                                                                                                                                                  |                                                    |          | (2,561,696 
|                                                                                                                                                                                                    | Property and equipment, net                        |              |        
|                                                                                                                                                                                                |                                                    |              |            
|Intangible
        assets, net                                                                                                                                                                      |                                                    |              | 346,787    
|Goodwill                                                                                                                                                                                            |                                                    |              | 9,797,946  
|Other
        assets                                                                                                                                                                                |                                                    |          | 225,667    
|                                                                                                                                                                                                    | Total assets                                       |              | $          
|                                                                                                                                                                                               
|LIABILITIES
        AND STOCKHOLDERS EQUITY                                                                                                                                                       
|Current
        liabilities:                                                                                                                                                                        |                                                    |              |            
|Accounts
          payable                                                                                                                                                                          |                                                    | $            | 3,432,512  
|Accrued
          expenses                                                                                                                                                                          |                                                    |              | 81,258     
|Accrued
          payroll and related expenses                                                                                                                                                      |                                                    |              | 774,434    
|Bank
          line of credit                                                                                                                                                                       |                                                    |              | 1,005,791  
|Deferred
          income on shipments to distributors                                                                                                                                              |                                                    |              | 2,434,393  
|Term
          loan - short term portion                                                                                                                                                            |                                                    |              | ---        
|Current
          portion of capital leases and deferred rent                                                                                                                                       |                                                    |          | 30,019     
|                                                                                                                                                                                                    | Total
          current liabilities                |              |        
|                                                                                                                                                                                                |                                                    |              |            
|Long
        term portion of capital leases and deferred rent                                                                                                                                       |                                                    |              | 109,724    
|Term
        loan - long term portion                                                                                                                                                               |                                                    |              | ---        
|Deferred
        income taxes                                                                                                                                                                       |                                                    |          | 214,261    
|Total
          liabilities                                                                                                                                                                         |                                                    |              | 8,082,392  
|                                                                                                                                                                                               
|Commitments
        and contingencies                                                                                                                                                               |                                                    |              |            
|Stockholders'
        equity:                                                                                                                                                                       |                                                    |              |            
|Common
          stock, $0.001 par value: Authorized shares100,000,000,
                 Issued and outstanding shares3,229,916
          at December 31, 2008 and 3,198,962 at December 31, 2007 |                                                    |              | 3,230      
|Additional
          paid-in capital                                                                                                                                                                |                                                    |              | 54,588,192 
|Accumulated
          deficit                                                                                                                                                                       |                                                    |          | (42,917,097
|                                                                                                                                                                                                    | Total
          stockholders equity               |              |        
|                                                                                                                                                                                                    | Total
        liabilities and stockholders equity |              | $          

|Note: Authorized shares and issued and outstanding shares reflect a one-for-ten
      reverse stock split effected by the Company on October 23, 2008. See "Note
      2 - Reverse Stock Split" for additional information.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying
  notes.





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  of Contents)



SOCKET
  MOBILE, INC.


STATEMENTS OF OPERATIONS


|                                                     |                          | Years
        Ended December 31, |           
|---------------------------------------------------- | ------------------------ | -------------------------------- | ----------
|                                                     |                          | 2008                         |           
|Revenues                                             |                          | $                                | 26,557,048
|Cost of revenues                                     |                          |                              | 14,167,085
|Gross profit                                         |                          |                                  | 12,389,963
|                                                 |                          |                                  |           
|Operating expenses:                                  |                          |                                  |           
|Research
          and development                   |                          |                                  | 4,496,070 
|Sales
          and marketing                        |                          |                                  | 7,777,217 
|General
          and administrative                 |                          |                                  | 2,673,320 
|Amortization
          of intangible assets          |                          |                              | 127,147   
|                                                 | Total operating expenses |                                  |           
|                                                 |                      |                                  |       
|Operating loss                                       |                          |                                  | (2,683,791
|                                                 |                          |                                  |           
|Interest income and other                            |                          |                                  | 22,253    
|Interest expense                                     |                          |                              | (71,126   
| 
                                       |                          |                                  |           
|Net loss before deferred taxes                       |                          |                                  | (2,732,664
|Deferred tax expense                                 |                          |                              | (31,939   
|Net loss                                             |                          |                                  | (2,764,603
|Preferred stock dividends                            |                          |                              | ---       
|Net loss applicable to common stockholders           |                          | $                                | (2,764,603
|                                                 |                          |                                  |           
|Net loss per share applicable to common stockholders |                          |                                  |           
|Basic                                                |                          | $                                | (0.86     
|Diluted                                              |                          | $                                | (0.86     
|                                                 |                          |                                  |           
|Weighted average shares outstanding:                 |                          |                                  |           
|Basic                                                |                          |                                  | 3,218,535 
|Diluted                                              |                          |                                  | 3,218,535 

|Note: Shares used in per share calculations of basic and diluted net loss
      per share, reflect a one-for-ten reverse stock split effected by the Company
      on October 23, 2008. See "Note 2 - Reverse Stock Split" for additional information.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying
  notes.

45

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SOCKET MOBILE,
  INC.
  STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                                           |  | Series
        F        |         |                      |        |       |            |        |             | 
|-------------------------------------------------------------------------- |  | ----------------------- | ------- | -------------------- | ------ | ----- | ---------- | ------ | ----------- | 
|                                                                           |  | Convertible             |         |                      |        |       | Additional |        |             | 
|                                                                           |  | Preferred
        Stock |         | Common
        Stock |        |       | Paid-In    |        | Accumulated | 
|                                                                           |  | Shares                  |         |                      | Amount |       |            | Shares |             | 
|Balance
        at December 31, 2005                                       |  |                         | 82,330  |                      |        | $     | 82         |        |             | 
|Exercise
        of warrants                                               |  |                         | ---     |                      |        |       | ---        |        |             | 
|Exercise
        of stock options                                          |  |                         | ---     |                      |        |       | ---        |        |             | 
|Conversion
        of Series F convertible preferred stock to common stock |  |                         | (82,330 | )                    |        |       | (82        | )      |             | 
|Dividends
        paid in cash on Series F convertible preferred stock     |  |                         | ---     |                      |        |       | ---        |        |             | 
|Stock-based
        compensation                                           |  |                         | ---     |                      |        |       | ---        |        |             | 
|Net
        loss                                                           |  |                         | ---     |                      |        |   | ---        |        |             | 
|Balance
        at December 31, 2006                                       |  |                         | ---     |                      |        |       | ---        |        |             | 
|Exercise
        of warrants                                               |  |                         | ---     |                      |        |       | ---        |        |             | 
|Exercise
        of stock options                                          |  |                         | ---     |                      |        |       | ---        |        |             | 
|Stock-based
        compensation                                           |  |                         | ---     |                      |        |       | ---        |        |             | 
|Net
        loss                                                           |  |                         | ---     |                      |        |   | ---        |        |             | 
|Balance
        at December 31, 2007                                       |  |                         | ---     |                      |        |       | ---        |        |             | 
|Exercise
        of warrants                                               |  |                         | ---     |                      |        |       | ---        |        |             | 
|Series
        F warrant extension                                         |  |                         | ---     |                      |        |       | ---        |        |             | 
|Exercise
        of stock options                                          |  |                         | ---     |                      |        |       | ---        |        |             | 
|Stock-based
        compensation                                           |  |                         | ---     |                      |        |       | ---        |        |             | 
|Net
        loss                                                           |  |                         | ---     |                      |        |   | ---        |        |             | 
|Balance
        at December 31, 2008                                       |  |                         | ---     |                      |        | $     | ---        |        |             | 

|Note: All Common Stock share amounts in the table above reflect the affects
      of a one-for-ten reverse stock split effected by the Company on October
      23, 2008. See "Note 2 - Reverse Stock Split" for additional information.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying
  notes.

46

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  of Contents)

SOCKET MOBILE,
  INC.
  STATEMENTS OF CASH FLOWS



|                                                                                                  |  | Years
        Ended December 31, |            
|------------------------------------------------------------------------------------------------- |  | -------------------------------- | -----------
|                                                                                                  |  | 2008                             |            
|Operating
        activities                                                                      |  |                                  |            
|Net loss                                                                                          |  | $                                | (2,764,603 
|Adjustments to reconcile net loss to net cash provided by (used in) operating
        activities: |  |                                  |            
|Stock-based
        compensation                                                                  |  |                                  | 714,836    
|Depreciation                                                                                      |  |                                  | 495,580    
|Amortization                                                                                      |  |                                  | 20,470     
|Amortization
        of intangible assets                                                         |  |                                  | 127,147    
|Net
        foreign currency transaction (gains) losses                                           |  |                                  | 64,514     
|Deferred
        tax expense                                                                      |  |                                  | 31,939     
|Change
        in deferred rent                                                                   |  |                                  | (5,895     
|                                                                                              |  |                                  |            
|Changes
        in operating assets and liabilities:                                              |  |                                  |            
|Accounts
        receivable                                                                       |  |                                  | (810,747   
|Inventories                                                                                       |  |                                  | (1,491,789 
|Prepaid
        expenses and other current assets                                                 |  |                                  | (104,561   
|Other
        assets                                                                              |  |                                  | 32,777     
|Accounts
        payable                                                                          |  |                                  | 1,090,588  
|Accrued
        expenses                                                                          |  |                                  | 4,377      
|Accrued
        payroll and related expenses                                                      |  |                                  | (77,751    
|Deferred
        income on shipments to distributors                                              |  |                              | 689,833    
|Net cash provided by (used in) operating activities                                               |  |                                  | (1,983,285 
|                                                                                              |  |                                  |            
|Investing
        activities                                                                      |  |                                  |            
|Purchase of equipment and tooling                                                                 |  |                              | (348,657   
|Net cash used in investing activities                                                             |  |                                  | (348,657   
|                                                                                              |  |                                  |            
|Financing
        activities                                                                      |  |                                  |            
|Payments on capital leases and equipment financing notes                                          |  |                                  | (37,069    
|Gross proceeds from borrowings under bank line of credit agreement                                |  |                                  | 9,847,786  
|Gross repayments of borrowings under bank line of credit agreement                                |  |                                  | (11,464,004
|Proceeds from bank term loan                                                                      |  |                                  | ---        
|Repayments of bank term loan                                                                      |  |                                  | (426,982   
|Proceeds from stock options exercised                                                             |  |                                  | 54,621     
|Proceeds from warrants exercised                                                                  |  |                                  | 135,492    
|Dividends paid on Series F convertible preferred stock                                            |  |                              | ---        
|Net cash provided by financing activities                                                         |  |                                  | (1,890,156 
|                                                                                              |  |                                  |            
|Effect
        of exchange rate changes on cash and cash equivalents                              |  |                              | 16,081     
|Net
        increase (decrease) in cash and cash equivalents                                      |  |                                  | (4,206,017 
|Cash
        and cash equivalents at beginning of year                                            |  |                              | 4,963,359  
|Cash
        and cash equivalents at end of year                                                  |  | $                                | 757,342    
|                                                                                                  |  |                                  |            
|Supplemental
        cash flow information                                                        |  |                                  |            
|Cash paid for interest                                                                            |  | $                                | 74,678     



See accompanying
  notes.

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  of Contents)

SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS

NOTE 1
  - Summary of Significant Accounting Policies

Organization and BusinessSocket Mobile, Inc. (the
  "Company"), produces mobile computing hardware systems serving the business
  and medical mobility market. The Company offers a family of handheld computer
  products and a wide range of data collection and connectivity peripheral products
  and embedded Bluetooth and wireless LAN products for use with third-party vertical
  applications software and devices. The Company's peripheral products also work
  with many third-party mobile handheld devices including smart phones, handheld
  computers, tablet computers, ultra-mobile personal computers and notebooks,
  adding data collection and connectivity capabilities to these devices. For a
  complete description of the Company's products see "Products" in section Item
  1. Business. The Company works with more than 200 software integration companies
  that are offering or developing vertical software applications for use with
  mobile handheld computers. Healthcare has been a primary area of focus for the
  Company. Other vertical markets benefiting from the Company's mobile solutions
  include hospitality, retail merchandising, automotive, government and education.
  The Company makes available to original equipment manufacturers the Bluetooth
  and wireless LAN wireless technologies that the Company uses in its own products
  through the sale of modules and plug-in cards that are embedded into the products
  of these manufacturers, including the driver and device management software.
  The Company subcontracts the manufacturing of all of its products to independent
  third-party contract manufacturers who are located in the U.S., China and Taiwan
  and who have the equipment, know-how and capacity to manufacture products to
  our specifications. The Company's handheld computers and peripheral products
  are sold through a worldwide network of distributors and resellers, vertical
  industry partners, and VARs. The Company's OEM products are sold directly to
  the other equipment manufacturers. The geographic regions served by the Company
  include the Americas, Europe, the Middle East, Africa and Asia Pacific. The
  Company's total employee headcount on December 31, 2008 was 75 people.

The Company was founded in March
  1992 as Socket Communications, Inc. and reincorporated in Delaware in 1995 prior
  to the Company's initial public offering in June 1995. The Company began doing
  business as Socket Mobile, Inc. in January 2007 to better reflect its market
  focus on the mobile business market, and changed its legal name to Socket Mobile,
  Inc. in April 2008. The Company's Common Stock trades on the NASDAQ Capital
  Market under the symbol "SCKT". The Company's principal executive offices are
  located at 39700 Eureka Drive, Newark, CA 94560.

Principles of Consolidation
  The 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. In 2007 the Company ceased the operations of its subsidiary.
  As a result of this closure there were no subsidiary related expenses in 2008.
  Expenses associated with the operations of the Company's foreign offices in
  2007 and 2006, were $3,055 and $380,173, respectively.

Use of Estimates
  The preparation of financial statements in conformity with U.S. 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.



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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

Cash EquivalentsThe 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, 2008 and 2007,
  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.

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. The Company's derivatives are treated as cash flow hedges for accounting
  purposes.

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, 2008,
  2007, and 2006:





|     |  | Balance
        at   |         |  | Charged
        to |   |     |                     |  |   | Balance
        at
|---- |  | -------------------- | ------- |  | ------------------ | - | --- | ------------------- |  | - | ------------------
|     |  | Beginning
        of |         |  | Costs
        and  |   |     | Amounts             |  |   | End
        of    
|Year |  | Year                 |         |  | Expenses           |   |     | Written
        Off |  |   | Year              
|    
|2008 |  | $                    | 118,651 |  |                    | $ | --- |                     |  | $ | ---               
|2007 |  | $                    | 118,651 |  |                    | $ | --- |                     |  | $ | ---               
|2006 |  | $                    | 118,651 |  |                    | $ | --- |                     |  | $ | ---               





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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

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 at December 31, 2008 and 2007, is reported net of reserves
  of $825,396 and $777, 878, respectively. Inventory components at year-end are
  shown in the following table:

|                                 |  | December
      31,
|-------------------------------- |  | ------------------
|                                 |  | 2008              
|Raw materials and sub-assemblies |  | $                 
|Finished
        goods           |  |               
|                                 |  | $                 

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
  in a manner consistent with the Company's normal depreciation policy for owned
  assets, or the remaining lease term if applicable.

Goodwill and Other Intangible
  Assets Review
  The Company accounts for goodwill in accordance with Statement of Financial
  Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
  142"). Goodwill is tested for impairment at least annually and between annual
  tests if indicators of potential impairment exist. Also in accordance with SFAS
  142, the Company tests goodwill for impairment at the reporting unit level.
  The Company has determined it is appropriate to report as a single unit. The
  fair value of the reporting unit at December 31, 2008 was calculated using the
  income approach. Under the income approach, the fair value of the reporting
  unit was calculated by estimating the present value of associated future cash
  flows. In addition, the Company also reviews the market capitalization of the
  Company in conjunction with its analysis of goodwill impairment. The Company
  assesses the impairment of certain long-lived assets, including intangible assets
  with definite useful lives, at least annually and whenever events or changes
  in circumstances indicate that the carrying value may not be recoverable.

As of December 31, 2008, in the
  Company's judgment, there is no impairment of goodwill or intangible assets.
  Future events could cause the Company to conclude that impairment indicators
  exist and that goodwill and intangible assets associated with the acquired businesses
  are impaired. Any resulting impairment loss could have a material adverse impact
  on the Company's financial condition and results of operations.



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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

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 OEMs. 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.

Revenue
  Recognition and Deferred Income
  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." Revenue on sales to distributors where
  a right of return exists is recognized upon "sell-through," when products are
  shipped from the distributor to the distributor's customer. Revenue related
  to those products in our distribution channel at the end of each reporting period
  which has not sold-through is deferred. The amount of deferred revenue net of
  related cost of revenue is classified as deferred income on shipments to distributors
  on our balance sheet.

The Company also earns revenue 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. Revenues related to
  these services in the years presented were not material.

At December 31, 2008 and 2007, deferred
  revenues totaling $4,168,087, and $3,206,770, respectively, net of related costs
  of those revenues of $1,733,694, and $1,462,210, respectively, are classified
  as deferred income on shipments to distributors.

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.





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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

Advertising Costs
  Advertising costs are charged to sales and marketing as incurred. The Company
  incurred $491,595, $388,629, and $724,553, in advertising costs during 2008,
  2007, and 2006, 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.

The Company adopted the provisions
  of Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting
  for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109"
  ("FIN 48") on January 1, 2007, the first day of fiscal 2007. FIN 48
  clarifies the accounting for income taxes by prescribing a minimum recognition
  threshold a tax position is required to meet before being recognized in the
  financial statements. FIN 48 also provides guidance on derecognition, measurement,
  classification, interest and penalties, accounting in interim periods, disclosure
  and transition. There were no adjustments to the financial statements as a result
  of the adoption of FIN 48. See "Note 11 - Income Taxes," for additional
  information.

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

Liquidity
  The Company's cash balances at December 31, 2008 were $757,342, including cash
  of $1,005,791 drawn against its bank lines of credit. The Company's cash balances
  at year-end reflect a net decrease of $1,616,218 in amounts drawn on its bank
  lines of credit and $426,982 used to retire its outstanding term loan. In February
  of 2009, the Company extended its bank line of credit agreement which will now
  expire on March 24, 2010. At December 31, 2008 the Company had additional unused
  borrowing capacity of approximately $1.04 million on its bank lines of credit.
  The Company's balance sheet has a current ratio (current assets divided by current
  liabilities) of 1.08 to 1.0, and no material long term debt. In the fourth quarter
  of 2008 the Company took actions to reduce its expenses, including a reduction
  of 12% in its worldwide workforce, to align its cost structure with current
  economic conditions in light of slowing business spending due to the current
  economic downturn. The Company has the ability to further reduce expenses if
  necessary. The Company believes its existing cash, plus its ability to reduce
  costs, and its bank lines of credit will be sufficient to meet its funding requirements
  at least through December 31, 2009. The Company may find it necessary to raise
  additional capital to fund its operations, however, there can be no assurance
  that additional capital will be available on acceptable terms, if at all, and
  any such terms may be dilutive to existing stockholders.



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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

Net Loss Per Share
  The Company calculates earnings per share in accordance with Financial Accounting
  Standards Board Statement No. 128, Earnings per Share. The following
  table sets forth, on a post reverse stock split basis, the computation of basic
  net loss per share:

|                                                                                                                                                     |  | Years
        Ended December 31,
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------
|                                                                                                                                                     |  | 2008                            
|Numerator:                                                                                                                                           |  |                                 
|Net
      loss                                                                                                                                       |  | $                               
|Preferred
      stock dividends and accretion                                                                                                        |  |                             
|Net
      loss applicable to common stockholders                                                                                                     |  | $                               
|                                                                                                                                                 |  |                                 
|Denominator:                                                                                                                                         |  |                                 
|Weighted
      average common shares outstanding used in computing net loss per share:
      (adjusted to reflect a one-for-ten reverse stock split) |  |                                 
|Basic                                                                                                                                                |  |                             
|Diluted                                                                                                                                              |  |                             
|                                                                                                                                                 |  |                                 
|Net
        loss per share applicable to common stockholders:                                                                                        |  |                                 
|Basic                                                                                                                                                |  | $                               
|Diluted                                                                                                                                              |  | $                               

For the 2008, 2007, and 2006 periods
  presented, the diluted net loss per share is equivalent to the basic net loss
  per share because the Company experienced losses in these years and thus no
  potential common shares underlying stock options, warrants, or convertible preferred
  stock have been included in the net loss per share calculation. Options to purchase
  1,027,504 shares of Common Stock in 2008, and options and warrants to purchase
  1,091,405, and 982,828 shares of Common Stock in 2007 and 2006, respectively,
  have been omitted from the loss per share calculation as their effect is anti-dilutive.

Stock-Based Compensation
  On January 1, 2006, the Company adopted SFAS 123R for fiscal years ended December
  31, 2006 and onward. SFAS 123R requires all share-based awards to employees,
  including grants of employee stock options, to be recognized in the financial
  statements based on their fair values. The valuation provisions of SFAS 123R
  apply to new grants and to grants that were outstanding as of the effective
  date. Under SFAS 123R, the Company uses a binomial lattice valuation model to
  estimate the fair value of stock option grants made on or after January 1, 2006.
  The binomial lattice model incorporates calculations for expected volatility,
  risk-free interest rates, employee exercise patterns and post-vesting employment
  termination behavior, and these factors affect the estimate of the fair value
  of the Company's stock option grants. The fair value of stock option grants
  outstanding as of the effective date is estimated using the Black-Scholes option
  pricing model used under SFAS 123. The Company adopted the modified prospective
  recognition method and implemented the provisions of SFAS 123R beginning with
  the first quarter of 2006.





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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

The fair values were determined
  using a binomial lattice valuation model for options granted on or after January
  1, 2006, and a Black-Scholes valuation model for options granted prior to January
  1, 2006. Weighted average assumptions for options issued and outstanding during
  the years ended December 31, 2008, 2007, and 2006 are shown below:

|                                     | Years
        Ended December 31.
|------------------------------------ | --------------------------------
|                                     | 2008                            
|Risk-free interest rate (%)          | 4.17                            
|Dividend
        yield               | ---                             
|Volatility factor                    | 0.7                             
|Expected
        option life (years) | 4.9                             

Total stock-based compensation expense recognized in our statement of operations
  for the years ended December 31, 2008, 2007, and 2006 are as follows:

|                                        |  | Years
        Ended December 31, |        
|--------------------------------------- |  | -------------------------------- | -------
|Income
        Statement Classification |  |    
        2008             |        
|Cost
        of revenue                 |  | $                                | 41,990 
|Research
        and development        |  |                                  | 187,653
|Sales
        and marketing             |  |                                  | 264,983
|General
        and administrative      |  |                              | 220,210
|Total                                   |  | $                                | 714,836

At December 31, 2008, the fair value
  of unamortized stock-based compensation expense was $1,161,378, and will be
  amortized over a weighted average period of 2.42 years.

Recent Accounting Standards
  In September 2006, the FASB issued Statement of Financial Accounting Standards
  No. 157, "Fair Value Measurements" ("SFAS 157"), which establishes
  a framework for measuring fair value and enhances disclosures about fair value
  measurements. In February 2008, the FASB issued FASB Staff Position No. FAS
  157-2, "Effective Date of FASB Statement No. 157," which provides
  for a one year deferral of the effective date of SFAS 157 for non-financial
  assets and non-financial liabilities, except those that are recognized or disclosed
  in the financial statements at fair value on a recurring basis. The Company
  adopted the provisions of SFAS 157 as of January 1, 2008, with respect to its
  financial assets and liabilities only. The adoption of SFAS 157 did not have
  a material impact on the Company's financial statements. Under SFAS 157, the
  definition of fair value focuses on the price that would be received upon the
  sale of an asset or the amount paid to transfer a liability. The fair value
  measurement should reflect all of the assumptions that market participants would
  use in pricing the asset or liability. SFAS 157 establishes a three-level hierarchy
  to prioritize the inputs used in valuation techniques for fair value consisting
  of: 1) observable inputs that reflect quoted prices in active markets; 2) inputs
  other than quoted prices with observable market data; and 3) unobservable data.
  SFAS 157 requires disclosures detailing the extent to which the Company measures
  assets and liabilities at fair value, the methods and assumptions used to measure
  fair value and the effect of fair value measurements on earnings.



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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

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. At December 31, 2008, all of the Company's
  cash and cash equivalents consisted of amounts held in demand and money market
  deposits in banks. The Company regularly enters into forward foreign currency
  contracts to reduce exposures related to rate changes in certain foreign currencies.
  The Company's forward foreign currency contracts are recorded at fair value
  and are included in accrued liabilities at December 31, 2008. At December 31,
  2008, these derivative instruments were not designated as hedges, and accordingly,
  changes in the fair value of the forward foreign currency contracts were recorded
  in net income. At December 31, 2008, contracts with a notional amount of $527,400
  to hedge Euros were recorded as a liability with a fair value of $29,000 based
  on quotations from financial institutions.

In February 2007, the FASB issued
  SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
  Liabilities" ("SFAS 159"), which permits companies to choose
  to measure certain financial instruments and certain other items at fair value.
  The standard requires that unrealized gains and losses on items for which the
  fair value option has been elected be reported in earnings. SFAS 159 is effective
  for fiscal years beginning after November 15, 2007. The Company adopted SFAS
  159 as of January 1, 2008. The adoption of SFAS 159 did not have a material
  impact on the Company's financial statements.

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-mobile systems solutions for businesses. Mobile systems solutions typically
  consist of a handheld computer, data collection and connectivity peripherals,
  and third-party vertical applications software. The Company markets its products
  in the United States and foreign countries through its sales personnel and distributors.

Revenues for the geographic areas
  for the years ended December 31, 2008, 2007, and 2006 are as follows:

|                               |  |                                  |        |  |      |       |        |      |  |       |       
|------------------------------ |  | -------------------------------- | ------ |  | ---- | ----- | ------ | ---- |  | ----- | ------
|                               |  | Years
        Ended December 31,
|Revenues: (in thousands)       |  | 2008                             |        |  | 2007 |       |        | 2006
|United
        States          |  | $                                | 16,847 |  |      | $     | 15,634 |      |  | $     | 17,073
|Europe                         |  |                                  | 6,470  |  |      |       | 6,610  |      |  |       | 5,824 
|Asia
        and rest of world |  |                              | 3,240  |  |      |   | 1,874  |      |  |   | 2,084 
|                               |  | $                                | 26,557 |  |      | $     | 24,118 |      |  | $     | 24,981

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





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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

Information regarding product families
  for the years ended December 31, 2008, 2007, and 2006 is as follows:

|                                          |  |                                  |        |  |      |       |        |      |  |       |       
|----------------------------------------- |  | -------------------------------- | ------ |  | ---- | ----- | ------ | ---- |  | ----- | ------
|                                          |  | Years
        Ended December 31,
|(revenues in thousands)                   |  | 2008                             |        |  | 2007 |       |        | 2006
|Mobile
        handheld computer products |  | $                                | 4,730  |  |      | $     | 1,342  |      |  | $     | ---   
|                                          |  |                                  |        |  |      |       |        |      |  |       |       
|Mobile
        peripheral products:       |  |                                  |        |  |      |       |        |      |  |       |       
|Data
      collection                     |  |                                  | 9,296  |  |      |       | 11,989 |      |  |       | 10,371
|Connectivity                              |  |                                  | 1,617  |  |      |       | 2,470  |      |  |       | 4,095 
|Serial
      interface                    |  |                              | 1,608  |  |      |   | 1,776  |      |  |   | 2,532 
|Subtotal                                  |  |                                  | 12,521 |  |      |       | 16,235 |      |  |       | 16,998
|                                          |  |                                  |        |  |      |       |        |      |  |       |       
|OEM
        embedded products             |  |                              | 9,306  |  |      |   | 6,541  |      |  |   | 7,983 
|                                          |  | $                                | 26,557 |  |      | $     | 24,118 |      |  | $     | 24,981

Major Customers
  Customers who accounted for at least 10% of total revenues in fiscal 2008, 2007,
  and 2006 were as follows:

|                                                                       |  |                                  |    |      |  |      |    |   |  |  |    |  
|---------------------------------------------------------------------- |  | -------------------------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                                                       |  | Years
        Ended December 31,
|                                                                       |  | 2008                             |    | 2007 |  | 2006
|Tech
      Data Corp.                                                  |  |                                  | 15 | %    |  |      | 23 | % |  |  | 26 | %
|Ingram
      Micro, Inc.                                               |  |                                  | 16 | %    |  |      | 13 | % |  |  | 14 | %
|Intermec
      Technologies Corp.                                      |  |                                  | 14 | %    |  |      | *  |   |  |  | *  |  
|* Customer accounts for less than 10% of total revenues for the period



NOTE 2 - Reverse Stock Split

On October 22, 2008, the Company's
  Board of Directors approved a one-for-ten reverse split of its Common Stock
  effective at 5 PM Eastern Time on October 23, 2008. The Company implemented
  the reverse stock split under the authority granted to the Board by the Company's
  stockholders at their annual meeting on April 23, 2008, to effect a reverse
  stock split of the Company's Common Stock, par value $0.001 per share, at a
  ratio within a range of from one-for-five to one-for-ten shares. As a result
  of the reverse stock split, each ten shares of Common Stock, par value $0.001
  per share, of the Company issued and outstanding were, automatically and without
  any action on the part of the respective holders thereof, combined and reconstituted
  as one share of Common Stock, par value $0.001 per share, of the Company. The
  reverse stock split reduced the number of outstanding shares of Common Stock
  from 32,300,129 shares to 3,229,916 shares. Holders of a fractional share of
  Common Stock as a result of the reverse stock split were entitled to receive
  a cash amount, without interest, equal to the fair market value of that fraction
  based upon the average of the closing bid prices of the Common Stock as reported
  on the NASDAQ Capital Market for each of the five trading days immediately preceding
  the effective date of the reverse stock split. On the Company's balance sheet,
  the aggregate par value of the issued Common Stock was reduced by reclassifying
  the par value amount of the eliminated shares of Common Stock to additional
  paid-in capital. All per share amounts and outstanding shares, including all
  Common Stock equivalents, stock options, equity compensation plans, and convertible
  preferred stock, have been retroactively restated in the Financial Statements
  and in the Notes to the Financial Statements for all period presented to reflect
  the reverse stock split.



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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 3 - Bank Financing Arrangements

On December 31, 2008 the Company
  entered into a new credit facility agreement with Silicon Valley Bank. The credit
  facility allows the Company to borrow up to $2,500,000 based on the level of
  qualified domestic and international receivables, up to a maximum of $1,000,000
  and $1,500,000, respectively. Advances against the domestic line are calculated
  at 80% of receivables except for receivables from distributors which are calculated
  at 60%. Advances against the international line are calculated at 80% against
  hedged receivables and 70% against non-hedged receivables, except for receivables
  from distributors which are calculated at 60%. Borrowings under the lines bear
  an annual interest rate equal to the greater of (i) the Lender's prime rate
  plus 2%, or (ii) 6%. The annual interest rate in effect at December 31, 2008
  was 6%. There is also a collateral handling fee of 0.7% per month. The applicable
  interest and fees are calculated based on the full amount of the accounts receivable
  provided as collateral for the actual amounts borrowed. The agreement was to
  expire on February 15, 2009. The outstanding amounts borrowed under the domestic
  and international lines at December 31, 2008, were $603,872 and $401,919, respectively.
  In addition, the Company must maintain a minimum liquidity (cash plus availability
  under the lines) of at least $250,000. The Company was in compliance with the
  liquidity requirement at December 31, 2008.

On February 19, 2009, the Company
  agreed with Silicon Valley Bank to extend the term of the existing credit facility
  to March 24, 2010, and to reallocate the domestic and international line limits
  to $1,500,000 and $1,000,000, respectively. The Company must maintain minimum
  liquidity based upon a quick ratio calculated at the end of each month. The
  quick ratio is equal to the quotient of (i) cash and cash equivalents plus net
  eligible accounts receivables, divided by (ii) current liabilities minus deferred
  revenues. The minimum quick ratio required at March 31, 2009 is 0.75 and increases
  to 0.9 at the end of April and May 2009 and to 1.0 thereafter.

Under the credit agreement in effect
  at December 31, 2007, outstanding amounts borrowed under the lines were $1,752,459
  and $869,550, respectively, which were the approximate amounts available on
  the lines. These amounts outstanding at December 31, 2007 were repaid in early
  January 2008. The rates in effect at December 31, 2007 were 7.75% on both the
  domestic and international lines. At December 31, 2007, under the terms of the
  credit agreement, the Company must maintain a balance of cash on deposit of
  at least $500,000, net of any amounts owed by the Company to its bank. The Company
  was in compliance with the minimum cash requirement at the end of fiscal 2007.

NOTE 4 - Intangible Technology

Intangible assets consist of a patent
  purchased in 2004 for $600,000 covering the design and functioning of plug-in
  bar code scanners, bar code imagers, and radio frequency identification products,
  which is being amortized on a straight line basis over its estimated life of
  ten years, and intangible assets of $570,750 remaining from a prior acquisition
  in 2000 consisting of developed software and technology with estimated lives
  at the time of acquisition of 8.5 years.



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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

Amortization of all intangible assets
  for the years ended December 31, 2008, 2007, and 2006, was $127,147, $134,557,
  and $140,446, respectively. Intangible assets as of December 31, 2008 consisted
  of the following:

|                               |  |        |           |  |              |       |         |     |  |       |         | 
|------------------------------ |  | ------ | --------- |  | ------------ | ----- | ------- | --- |  | ----- | ------- | 
|                               |  | Gross  |           |  | Accumulated  |       |         |     | 
|                               |  | Assets |           |  | Amortization |       |         | Net | 
|Patent                         |  | $      | 600,000   |  |              | $     | 270,000 |     |  | $     | 330,000 | 
|Project
      management tools |  |    | 570,750   |  |              |   | 553,963 |     |  |   | 16,787  | 
|Total intangible
      assets  |  | $      | 1,170,750 |  |              | $     | 823,963 |     |  | $     | 346,787 | 

Intangible assets as of December
  31, 2007 consisted of the following:

|                               |  |        |           |  |              |       |         |     |  |       |         | 
|------------------------------ |  | ------ | --------- |  | ------------ | ----- | ------- | --- |  | ----- | ------- | 
|                               |  | Gross  |           |  | Accumulated  |       |         |     | 
|                               |  | Assets |           |  | Amortization |       |         | Net | 
|Patent                         |  | $      | 600,000   |  |              | $     | 210,000 |     |  | $     | 390,000 | 
|Project
      management tools |  |    | 570,750   |  |              |   | 486,816 |     |  |   | 83,934  | 
|Total intangible
      assets  |  | $      | 1,170,750 |  |              | $     | 696,816 |     |  | $     | 473,934 | 

Based on identified intangible assets
  recorded at December 31, 2008 and assuming no subsequent impairment of the underlying
  assets, the annual amortization expense is expected to be as follows:

|Year                    |  | Amount
|----------------------- |  | ------
|2009                    |  | $     
|2010                    |  |       
|2011                    |  |       
|2012                    |  |       
|2013
        and beyond |  |   
|                        |  | $     



NOTE 5 - 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, 2008, property and equipment with a cost of $47,446
  were subject to such financing arrangements. Related accumulated amortization
  at December 31, 2008 amounted to $21,250. Future minimum payments under capital
  lease and equipment financing arrangements as of December 31, 2008, are as follows:

|Annual
        minimum payments               | Amount
|--------------------------------------------- | ------
|2009                                          | $     
|2010                                          |       
|2011                                          |       
|Total
        minimum payments                |       
|Less
        amount representing interest     |       
|Present
        value of net minimum payments |       
|Less
        current portion                  |       
|Long-term
        portion                     | $     





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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)



NOTE 6 - Commitments

The Company operates its headquarters
  under a sixty-four month non-cancelable operating lease which expires in June
  of 2012. The lease provides for the lease by the Company of approximately 37,100
  square feet of space in Newark, California. The Company has one option to extend
  the term of the lease for an additional five-year period with respect to the
  entire premises. Future minimum lease payments under all operating leases are
  as shown below:

|Annual
        minimum payments | Amount |          
|------------------------------- | ------ | ---------
|2009                            | $      | 369,309  
|2010                            |        | 381,711  
|2011                            |        | 394,187  
|2012                            |        | 198,133  
|Total
        minimum payments  | $      | 1,343,340

Rental expense under all operating
  leases was $351,532, $352,745, and $349,428 for each of the years ended December
  31, 2008, 2007, and 2006, 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 approximately $2.3 million in 2009.

NOTE 7 - Series F Convertible
  Preferred Stock

On March 21, 2003, the Company sold
  276,269 units of securities 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 was convertible, in whole
  or in part, into 10 shares of Common Stock (1 share on a post reverse split
  basis, see "Note 2 - Reverse Stock Split" for additional information) 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 on March 21, 2006. The holders of
  Series F Preferred Stock had voting rights equal to the number of shares of
  Common Stock issuable upon conversion. The originally issued Series F Preferred
  Stock was convertible into a total of 2,762,690 shares of Common Stock (276,269
  shares on a post reverse split basis) at a conversion price of $0.722 per share($7.22
  per share on a post reverse split basis), subject to certain adjustments. An
  additional 828,807 shares of Common Stock (82,881 shares on a post reverse split
  basis) were issuable upon exercise of the originally issued warrants at an exercise
  price of $0.722 per share ($7.22 per share on a post split basis). In addition,
  the Company issued five-year warrants to the placement agent to acquire up to
  718,300 shares of Common Stock (71,830 shares on a post reverse split basis)
  at $0.722 per share ($7.22 per share on a post split basis). In the first quarter
  of 2008, the remaining placement agent warrants were granted an extension to
  May 20, 2008, resulting in the issuance of 224,850 shares of Common Stock (22,485
  shares on a post split basis) on May 20, 2008 for total proceeds of $135,492.
  There were no warrants outstanding at December 31, 2008.



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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

On March 21, 2006, the
  remaining outstanding shares of Series F Preferred Stock automatically converted
  into Common Stock, resulting in the issuance of 823,300 shares (82,330 shares
  on a post reverse split basis) of Common Stock. During the first quarter of
  2006, holders elected to exercise the remaining outstanding three-year warrants
  resulting in the issuance of 461,022 shares (46,102 shares on a post split basis)
  of Common Stock. Dividends accrued on the Series F Preferred Stock at the rate
  of 8% per annum and were payable quarterly in cash or in Common Stock, at the
  option of the Company. Dividends for 2006 on the Series F Preferred Stock up
  through the date of mandatory conversion in the first quarter 2006 were $10,653,
  and were paid in cash prior to the end of the first quarter. Additional dividends
  paid in 2006 were from dividends accrued in the fourth quarter of 2005 and paid
  in the subsequent quarter.

NOTE 8 - 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
  granted incentive stock options and nonstatutory stock options at exercise prices
  per share equal to the fair market value per share of Common Stock on the date
  of grant. The vesting and exercise provisions were 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 added to the shares 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           |         |        |                             |       |         | Weighted                |      
|                               |  | Available         |         |        | Number                      |       |         | Average                 |      
|                                   |  | For
        Grant |     |        | of
        Shares           |   |         | Price
        Per Share |  
|Balance
      at December 31, 2005 |  |                   | ---     |        |                             |       | 509,557 |                         |       | $ | 18.68 | 
|Canceled                           |  |                   | 29,326  |        |                             |       | (29,326 | )                       |       | $ | 26.88 | 
|Exercised                          |  |                   | ---     |        |                             |       | (7,631  | )                       |       | $ | 7.95  | 
|Transferred
      to 2004 Plan     |  |                   | (29,326 | )  |                             |       | ---     |                     |       |   |       | 
|Balance
      at December 31, 2006 |  |                   | ---     |        |                             |       | 472,600 |                         |       | $ | 18.29 | 
|Canceled                           |  |                   | 17,614  |        |                             |       | (17,614 | )                       |       | $ | 28.80 | 
|Exercised                          |  |                   | ---     |        |                             |       | (14,599 | )                       |       | $ | 7.29  | 
|Transferred
      to 2004 Plan     |  |                   | (17,614 | )  |                             |       | ---     |                     |       |   |       | 
|Balance
      at December 31, 2007 |  |                   | ---     |        |                             |       | 440,387 |                         |       | $ | 18.29 | 
|Canceled                           |  |                   | 57,109  |        |                             |       | (57,109 | )                       |       | $ | 17.79 | 
|Exercised                          |  |                   | ---     |        |                             |       | (7,583  | )                       |       | $ | 6.35  | 
|Transferred
      to 2004 Plan     |  |                   | (57,109 | )  |                             |       | ---     |                     |       |   |       | 
|Balance
      at December 31, 2008 |  |               | ---     |    |                             |   | 375,695 |                     |       | $ | 18.61 | 





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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

The outstanding and exercisable
  options under the 1995 Plan at December 31, 2008 presented by price range are
  as follows:

|                        |  |                           |         |  |                             |  |      |                        |  |   |                   |  |  |                        |         |  |  |   |       | 
|----------------------- |  | ------------------------- | ------- |  | --------------------------- |  | ---- | ---------------------- |  | - | ----------------- |  |  | ---------------------- | ------- |  |  | - | ----- | 
|                        |  | Options
      Outstanding |         |  | Options
        Exercisable
|                        |  |                           |         |  | Weighted                    |  |      |                        |  |   |                   |  |  |                        |        
|Range
        of        |  | Number
        of         |         |  | Average                     |  |      | Weighted               |  |   | Number
        of |  |  | Weighted               |        
|Exercise                |  | Options                   |         |  | Remaining
        Life      |  |      | Average                |  |   | Options           |  |  | Average                |        
|Prices                  |  | Outstanding               |         |  | (Years)                     |  |      | Exercise
        Price |  |   | Exercisable       |  |  | Exercise
        Price |    
|$5.63                   |  |                           | 10,857  |  |                             |  | 0.50 |                        |  | $ | 5.63              |  |  |                        | 10,857  |  |  | $ | 5.63  | 
|$7.30
        - $7.60   |  |                           | 106,610 |  |                             |  | 4.17 |                        |  | $ | 7.40              |  |  |                        | 106,610 |  |  | $ | 7.40  | 
|$9.70
        - $12.90  |  |                           | 109,946 |  |                             |  | 3.00 |                        |  | $ | 11.33             |  |  |                        | 109,946 |  |  | $ | 11.33 | 
|$23.50
        - $33.75 |  |                           | 148,082 |  |                             |  | 3.42 |                        |  | $ | 32.95             |  |  |                        | 148,082 |  |  | $ | 32.95 | 
|$77.50                  |  |                       | 200     |  |                             |  | 1.00 |                        |  | $ | 77.50             |  |  |                    | 200     |  |  | $ | 77.50 | 
|$5.63
        - $77.50  |  |                       | 375,695 |  |                             |  | 3.42 |                        |  | $ | 18.61             |  |  |                    | 375,695 |  |  | $ | 18.61 | 

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           |        |       |                             |       |         | Weighted                |      
|                                   |  | Available         |        |       | Number                      |       |         | Average                 |      
|                                   |  | For
        Grant |    |       | of
        Shares           |   |         | Price
        Per Share |  
|Balance
      at December 31, 2005 |  |                   | 21,065 |       |                             |       | 107,275 |                         |       | $ | 27.81 | 
|No
      transactions              |  |                   | ---    |   |                             |       | ---     |                     |       |   |       | 
|Balance at December
      31, 2006 |  |                   | 21,065 |       |                             |       | 107,275 |                         |       | $ | 27.81 | 
|No
      transactions              |  |                   | ---    |   |                             |       | ---     |                     |       |   |       | 
|Balance at December
      31, 2007 |  |                   | 21,065 |       |                             |       | 107,275 |                         |       | $ | 27.81 | 
|Canceled                           |  |                   | 1,000  |   |                             |       | (1,000  | )                       |       | $ | 5.63  | 
|Balance
      at December 31, 2008 |  |               | 22,065 |   |                             |   | 106,275 |                     |       | $ | 28.02 | 



The outstanding and exercisable
  options at December 31, 2008 under the 1999 Plan presented by price range are
  as follows:

|                       |  |                           |         |  |                             |  |      |                        |  |   |                   |  |  |                        |         |  |  |   |       | 
|---------------------- |  | ------------------------- | ------- |  | --------------------------- |  | ---- | ---------------------- |  | - | ----------------- |  |  | ---------------------- | ------- |  |  | - | ----- | 
|                       |  | Options
      Outstanding |         |  | Options
        Exercisable
|                       |  |                           |         |  | Weighted                    |  |      |                        |  |   |                   |  |  |                        |        
|Range
        of       |  | Number
        of         |         |  | Average                     |  |      | Weighted               |  |   | Number
        of |  |  | Weighted               |        
|Exercise               |  | Options                   |         |  | Remaining
        Life      |  |      | Average                |  |   | Options           |  |  | Average                |        
|Prices                 |  | Outstanding               |         |  | (Years)                     |  |      | Exercise
        Price |  |   | Exercisable       |  |  | Exercise
        Price |    
|$5.63                  |  |                           | 20,100  |  |                             |  | 0.50 |                        |  | $ | 5.63              |  |  |                        | 20,100  |  |  | $ | 5.63  | 
|$22.80                 |  |                           | 4,000   |  |                             |  | 2.58 |                        |  | $ | 22.80             |  |  |                        | 4,000   |  |  | $ | 22.80 | 
|$33.75                 |  |                       | 82,175  |  |                             |  | 2.08 |                        |  | $ | 33.75             |  |  |                    | 82,175  |  |  | $ | 33.75 | 
|$5.63
        - $33.75 |  |                       | 106,275 |  |                             |  | 1.75 |                        |  | $ | 28.02             |  |  |                    | 106,275 |  |  | $ | 28.02 | 





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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

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 added to the shares 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           |          |       |                             |       |         | Weighted                |      
|                                    |  | Available         |          |       | Number                      |       |         | Average                 |      
|                                    |  | For
        Grant |      |       | of
        Shares           |   |         | Price
        Per Share |  
|Balance at December
      31, 2005  |  |                   | 31,216   |       |                             |       | 209,380 |                         |       | $ | 13.79 | 
|Increase
      in shares authorized |  |                   | 120,895  |       |                             |       | ---     |                         |       |   |       | 
|Transferred
      from 1995 Plan    |  |                   | 29,325   |       |                             |       | ---     |                         |       |   |       | 
|Granted                             |  |                   | (136,180 | )     |                             |       | 136,180 |                         |       | $ | 11.82 | 
|Canceled                            |  |               | 41,579   |   |                             |   | (41,579 | )                       |       | $ | 12.36 | 
|Balance at December
      31, 2006  |  |                   | 86,835   |       |                             |       | 303,981 |                         |       | $ | 13.10 | 
|Increase
      in shares authorized |  |                   | 127,405  |       |                             |       | ---     |                         |       |   |       | 
|Transferred
      from 1995 Plan    |  |                   | 17,614   |       |                             |       | ---     |                         |       |   |       | 
|Granted                             |  |                   | (193,360 | )     |                             |       | 193,360 |                         |       | $ | 9.63  | 
|Canceled                            |  |                   | 45,478   |   |                             |       | (45,478 | )                       |       | $ | 12.32 | 
|Balance at December
      31, 2007  |  |                   | 83,972   |       |                             |       | 451,863 |                         |       | $ | 11.69 | 
|Increase
      in shares authorized |  |                   | 127,967  |       |                             |       | ---     |                         |       |   |       | 
|Transferred
      from 1995 Plan    |  |                   | 57,109   |       |                             |       | ---     |                         |       |   |       | 
|Granted                             |  |                   | (181,630 | )     |                             |       | 181,630 |                         |       | $ | 6.89  | 
|Canceled                            |  |               | 87,959   |   |                             |   | (87,959 | )                       |       | $ | 10.53 | 
|Balance
      at December 31, 2008  |  |               | 175,377  |   |                             |   | 545,534 |                     |       | $ | 10.28 | 

The weighted average fair value of options granted during 2008, 2007, and 2006,
  under the 2004 Plan was $4.13, $5.47, and $6.49 respectively.

The 2004 Plan provides for an annual
  increase to be added on the first day of each fiscal year equal to the lesser
  of 200,000 shares, four percent of the outstanding shares on that date, or a
  lesser amount as determined by the Board of Directors. On January 1, 2009, 2008,
  and 2007, a total of 129,196, 127,976, and 127,405 shares, respectively, became
  available for grant from the 2004 Plan. As of March 6, 2009, 283,400 shares
  have been granted from the 2004 Plan subsequent to December 31, 2008.



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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

The outstanding and exercisable
  options at December 31, 2008 presented by price range are as follows:

|                        |  |                           |         |  |                             |  |      |                        |  |   |                   |  |  |                        |         |  |  |   |       | 
|----------------------- |  | ------------------------- | ------- |  | --------------------------- |  | ---- | ---------------------- |  | - | ----------------- |  |  | ---------------------- | ------- |  |  | - | ----- | 
|                        |  | Options
      Outstanding |         |  | Options
        Exercisable
|                        |  |                           |         |  | Weighted                    |  |      |                        |  |   |                   |  |  |                        |        
|Range
        of        |  | Number
        of         |         |  | Average                     |  |      | Weighted               |  |   | Number
        of |  |  | Weighted               |        
|Exercise                |  | Options                   |         |  | Remaining
        Life      |  |      | Average                |  |   | Options           |  |  | Average                |        
|Prices                  |  | Outstanding               |         |  | (Years)                     |  |      | Exercise
        Price |  |   | Exercisable       |  |  | Exercise
        Price |    
|$2.38
        - $7.50   |  |                           | 156,841 |  |                             |  | 9.33 |                        |  | $ | 6.82              |  |  |                        | 40,028  |  |  | $ | 6.79  | 
|$8.00
        - $13.80  |  |                           | 286,367 |  |                             |  | 7.83 |                        |  | $ | 10.49             |  |  |                        | 174,933 |  |  | $ | 10.74 | 
|$15.00
        - $15.10 |  |                       | 102,326 |  |                             |  | 6.08 |                        |  | $ | 15.00             |  |  |                    | 88,533  |  |  | $ | 15.00 | 
|$2.38
        - $15.10  |  |                       | 545,534 |  |                             |  | 7.92 |                        |  | $ | 10.28             |  |  |                    | 303,494 |  |  | $ | 11.46 | 



NOTE 9 - Shares Reserved

Common stock reserved for future
  issuance was as follows at December 31, 2008:

|                                                             | Number
        of shares |          
|------------------------------------------------------------ | ------------------------ | ---------
|Stock
        option grants outstanding (see Note 8)         |                          | 1,027,504
|Reserved
        for future stock option grants (see Note 8) |                      | 197,442  
|Total
        Common Stock reserved for future issuance      |                          | 1,224,946



NOTE 10 - Retirement
  Plan

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



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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 11-
  Income Taxes

Deferred tax expense is related
  to the deferred tax liability on the portion of the Company's goodwill amortized
  for tax purposes. Due to the indefinite characteristic of this deferred tax
  liability, it cannot be offset against deferred tax assets, and furthermore,
  the deferred tax liability may never reverse. The provision for deferred tax
  for the periods ended December 31, 2008, 2007, and 2006, consists of the following
  components:

|                                         |  | Years
        Ended December 31,
|---------------------------------------- |  | --------------------------------
|                                         |  | 2008                            
|Current:                                 |  |                                 
|Federal                                  |  | $                               
|State                                    |  |                             
|Total
        Current                    |  |                             
|                                         |  |                                 
|Deferred:                                |  |                                 
|Federal                                  |  |                                 
|State                                    |  |                             
|Total
        Deferred                   |  |                             
|Total
        provision for deferred tax |  | $                           

Reconciliation of the statutory federal income tax rate to the Company's effective
  tax rate:

|                                         |  | Years
        Ended December 31,
|---------------------------------------- |  | --------------------------------
|                                         |  | 2008                            
|Federal
        tax at statutory rate    |  |                                 
|State
        income tax rate            |  |                                 
|Losses
        and credits not benefited |  |                             
|                                         |  |                                 
|Provision
        for taxes              |  |                             



Deferred income tax reflects 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 net deferred tax assets are as follows:

|                                                  |  | Years
        Ended December 31,
|------------------------------------------------- |  | --------------------------------
|Deferred
      tax assets:                        |  | 2008                            
|Net
      operating loss carryforwards            |  | $                               
|Credits                                           |  |                                 
|Capitalized
      research and development costs  |  |                                 
|Other
      acquired intangibles                  |  |                                 
|Accruals
      not currently deductible           |  |                             
|Total
      deferred tax assets                   |  |                                 
|Valuation
      allowance for deferred tax assets |  |                             
|Net
      deferred tax assets                     |  |                                 
|                                                  |  |                                 
|Deferred
      tax liability:                     |  |                                 
|Acquired
      intangibles                        |  |                             
|                                                  |  |                                 
|Net deferred
      tax liabilities                |  | $                               





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(Table
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SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS (Continued)

The Company has not generated taxable
  income in any periods in any jurisdiction, foreign or domestic. The Company
  has maintained a full valuation allowance for all deferred tax assets.
  As of December 31, 2008, the Company had net operating loss carryforwards for
  federal income tax purposes of approximately $19,027,000, which will expire
  at various dates beginning in 2009 and through 2028, and federal research and
  development tax credits of approximately $357,000, which will expire at various
  dates beginning in 2009 and through 2028. As of December 31, 2008, the Company
  had net operating loss carryforwards for state income tax purposes of approximately
  $8,857,000, which will expire at various dates in 2012 and through 2028, and
  state research and development tax credits of approximately $392,000, which
  can be carried forward indefinitely. During 2008, approximately $1,200,000 of
  federal net operating loss carryforwards expired unutilized.
  Utilization of the net operating loss and tax credit carryforwards is subject
  to annual limitations due to the ownership change limitations provided by the
  Internal Revenue Code Section 382 and similar state provisions. The annual limitation
  will result in the expiration of the net operating loss and credit carryforwards
  before utilization.
  On January 1, 2007, the Company adopted Financial Accounting Standards Board
  Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An
  Interpretation of FASB Statement No. 109," ("FIN 48"). FIN 48
  prescribes a recognition threshold that a tax position is required to meet before
  being recognized in the financial statements, and provides guidance on derecognition,
  measurement, classification, interest and penalties, accounting in interim periods,
  disclosure, and transition issues. There were no adjustments to the financial
  statements as a result of the adoption of FIN 48. The application of FIN 48
  does not result in a change to retained earnings, as the unrecognized tax benefit
  would be fully offset by the application of a valuation allowance.

A reconciliation of the beginning
  and ending amount of unrecognized tax benefits ("UTBs"), excluding interest
  and penalties, is as follows:

|                                                          | Amount |        
|--------------------------------------------------------- | ------ | -------
|Beginning balance at January 1, 2008                      | $      | 595,000
|Decreases
      in UTBs taken in prior years              |        | ---    
|Increases
      in UTBs taken in current year             |        | 48,000 
|Amount
      related to settlements                       |        | ---    
|Amount
      related to lapsing of statute of limitations |    | ---    
|Ending balance at
        December 31, 2008               | $      | 643,000

Future changes in the unrecognized
  tax benefit will have no impact on the effective tax rate due to the existence
  of the valuation allowance. It is the Company's policy to include interest and
  penalties related to tax positions as a component of income tax expense. No
  interest was accrued for the period ended December 31, 2008. The Company estimates
  that the unrecognized tax benefit will not change significantly within the next
  twelve months.
  The Company files its tax returns as prescribed by the tax laws of the jurisdictions
  in which it operates. The Company is not currently under audit in any of its
  jurisdictions where income tax returns are filed. The tax years 1993 to 2008
  remain open to examination by the major domestic taxing jurisdictions to which
  the Company is subject, and for the years 2002 to 2008 for the international
  taxing jurisdictions to which the Company is subject.



65

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

Not Applicable.

Item 9A(T). Controls
  and Procedures

Conclusion Regarding
  the Effectiveness 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 Annual
  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 control can provide only reasonable
  assurances with respect to financial statement preparation. Further, 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.

We assessed the effectiveness of
  the Company's internal control over financial reporting as of December 31, 2008.
  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. This assessment included review of the documentation
  of controls, testing of operating effectiveness of controls and a conclusion
  on this assessment.

Based on our assessment using those
  criteria, we believe that, as of December 31, 2008, our internal control over
  financial reporting is effective.

This annual report does not include
  an attestation report of the Company's registered public accounting firm regarding
  internal control over financial reporting. Management's report was not subject
  to attestation by the Company's registered public accounting firm pursuant to
  temporary rules of the Securities and Exchange Commission that permit the Company
  to provide only management's report in this annual report.



> 66

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(Table
  of Contents)

Changes in Internal Control Over
  Financial Reporting

There was no change in our internal
  control over financial reporting that occurred during the last fiscal quarter
  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.

Item 9B. Other Information

None.

PART
  III

Item 10. Directors,
  Executive Officers and Corporate Governance

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 29,
  2009.

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 29,
  2009.





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(Table
  of Contents)

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

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 29, 2009.

The following table provides information
  as of December 31, 2008 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 8 to the Company's 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))
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ | --------- |  | -------------------------------------------------------------- | ------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Equity
      compensation plans approved by security holders (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                        | 921,229   |  |                                                                | $             | 13.68                                                                                                                                                                                              
|Equity
      compensation plans not approved by security holders (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                    | 106,275   |  |                                                                | $             | 28.02                                                                                                                                                                                              
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                                                                                    | 1,027,504 |  |                                                                |  
      $ | 15.16                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(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 in the number of shares authorized under the 2004 Equity
      Incentive Plan is added on the first day of each fiscal year equal to the
      lesser of (a) 200,000 shares, (b) four percent of the total outstanding
      shares of the Company's Common Stock on that date, or (c) a lesser amount
      as determined by the Board of Directors. As a result, a total of 129,196
      shares became available for grant under the 2004 Equity Incentive Plan on
      January 1, 2009, in addition to those set forth in the table above.
      (2) Consists of the 1999 Stock Plan.

Item 13.
  Certain Relationships and Related Transactions, and Director Independence

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 29,
  2009.

Item 14. Principal
  Accounting 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 29, 2009.







> 

68

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(Table of
  Contents)

PART
  IV

Item 15. Exhibits, 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
>         43Balance
>           Sheets
>         44Statements
>           of Operations
>         45Statements
>           of Stockholders' Equity
>         46Statements
>           of Cash Flows
>         47Notes
>           to Financial Statements
>         48
>     
>     
>     
>     
>     2. Financial statement
>       schedules.
>     All financial statement schedules are omitted
>           because they are not applicable or not required or because the required
>           information is included in the financial statements or notes herein.
>     
>     3. Exhibits.
>     See Index of Exhibits on page 71. 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 71. The Exhibits listed on the accompanying Index of Exhibits are filed
>     or incorporated by reference as part of this report.

69

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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
      MOBILE, INC.
      Registrant                                               
|-------------------------- | -----------------------------------------------------------------------------------------
|                           |                                                                                          
|Date:
      March 12, 2009 | /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
      12, 2009
|-- | ---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | -------------------- | --------------------
|   | Kevin
      J. Mills        
|   |                              |                                                                                                                                    |                      |                     
|By | /s/
      Charlie Bass       | Chairman
      of the Board                                                                                                        |                      | March
      12, 2009
|   | Charlie
      Bass          
|   |                              |                                                                                                                                    |                      |                     
|By | /s/
      David W. Dunlap    | Vice
      President of Finance and Administration and Chief Financial Officer 
      (Principal Financial and Accounting Officer) |                      | March
      12, 2009
|   | David
      W. Dunlap       
|   |                              |                                                                                                                                    |                      |                     
|By | /s/
      Micheal L. Gifford | Executive
      Vice President and Director                                                                                        |                      | March
      12, 2009
|   | Micheal
      L. Gifford    
|   |                              |                                                                                                                                    |                      |                     
|By | /s/
      Gianluca Rattazzi  | Director                                                                                                                           |                      | March
      12, 2009
|   | Gianluca
      Rattazzi     
|   |                              |                                                                                                                                    |                      |                     
|By | /s/
      Leon Malmed        | Director                                                                                                                           |                      | March
      12, 2009
|   | Leon
      Malmed           
|   |                              |                                                                                                                                    |                      |                     
|By | /s/
      Enzo Torresi       | Director                                                                                                                           |                      | March
      12, 2009
|   | Enzo
      Torresi          
|   |                              |                                                                                                                                    |                      |                     
|By | /s/
      Peter Sealey       | Director                                                                                                                           |                      | March
      12, 2009
|   | Peter
      Sealey           |                                                                                                                                   
|   |                              |                                                                                                                                    |                     
|By | /s/
      Thomas Miller      | Director                                                                                                                           | March
      12, 2009
|   | Tom
      Miller             |                                                                                                                                   



70

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Index
  to Exhibits

|Exhibit
        Number | Description                                                                                                                            
|---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                        
|2.1
        (1)        | Agreement and Plan of Reorganization.                                                                                                  
|                       |                                                                                                                                        
|3.1                    | Amended and Restated Certificate of Incorporation.                                                                                     
|                       |                                                                                                                                        
|3.2
        (2)        | Certificate of Elimination of Series E 12% Convertible Preferred
      Stock.                                                          
|                       |                                                                                                                                        
|3.3
        (2)        | Certificate of Elimination of Series F Convertible Preferred
      Stock.                                                              
|                       |                                                                                                                                        
|3.4
        (3)        | Bylaws, as amended February 17, 2008.                                                                                                  
|                       |                                                                                                                                        
|10.1
        (4)*      | Form of Indemnification Agreement entered into between the
      Company and its directors and officers.                               
|                       |                                                                                                                                        
|10.2
        (5)*      | 1995 Stock Plan and forms of agreement thereunder.                                                                                     
|                       |                                                                                                                                        
|10.3
        (6)*      | Form of Amendment No.1 to Stock Option Agreement between the
      Company and certain Option Holders under the 1995 Stock Option Plan.
|                       |                                                                                                                                        
|10.4
        (7)*      | 1999 Nonstatutory Stock Option Plan.                                                                                                   
|                       |                                                                                                                                        
|10.5
        (8)*      | 2004 Equity Incentive Plan and forms of agreement
      thereunder.                                                                    
|                       |                                                                                                                                        
|10.8
        (9)*      | Form of Executive Management Bonus Plan between the Company
      and certain eligible participants.                                   
|                       |                                                                                                                                        
|10.9
        (10)*     | Form of Employment Agreement dated January 21, 2009 between
      the Company and the officers of the Company.                         

|                    |                                                                                                                                                                                                                  
|------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.10
        (11)* | Standard Industrial /Commercial Multi-Tenant Lease by and
      between Del Norte Farms, Inc. and the Company dated October 24, 2006 (assigned
      to Newark Eureka Industrial Capital, LLC September 17, 2007.
|                    |                                                                                                                                                                                                                  
|10.11
      (12)*   | Second Amended and Restated Loan and Security Agreement dated
      December 31, 2008 by and between the Company and Silicon Valley Bank as
      amended February 19, 2009.                                     
|                    |                                                                                                                                                                                                                  
|10.12
      (12)*   | Second Amended and Restated Export-Import Bank Loan and Security
      Agreement dated December 31, 2008 by and between the Company and Silicon
      Valley Bank as amended February 19, 2009.                  
|                    |                                                                                                                                                                                                                  



71

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|Exhibit
        Number | Description                                                                                                                                
|---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                            
|11.1                   | Computation
      of Earnings per Share (see Statements of Operations in Item 8).                                                          
|                       |                                                                                                                                            
|14.1
      (13)        | Code of
      Business Conduct and Ethics.                                                                                                 
|                       |                                                                                                                                            
|23.1                   | 23.1 Consent
      of Moss Adams LLP, Independent Registered Public Accounting Firm.                                                       
|                       |                                                                                                                                            
|31.1                   | Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.                            
|                       |                                                                                                                                            
|31.2                   | Certification
      of 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 8-K filed on April
        23, 2008.
      (3) Incorporated
        by reference to exhibits filed with the Company's Form 8-K filed on February
        20, 2008.
      (4) Incorporated
        by reference to exhibits filed with the Company's Form 8-K filed on January
        27, 2009.
      (5) 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.
      (6) Incorporated
        by reference to exhibits filed with the Company's Form 10-KSB filed on
        March 30, 1998.
      (7) Incorporated
        by reference to exhibits filed with the Company's Form 10-QSB filed on
        August 16, 1999.
      (8) Incorporated
        by reference to Appendix C filed with the Company's Form DEF 14A filed
        on April 29, 2004.
      (9) Incorporated
        by reference to exhibits filed with the Company's Form 10-KSB filed on
        April 2, 2001.
      (10) Incorporated
        by reference to exhibits filed with the Company's Form 8-K filed on January
        27, 2009.
      (11) Incorporated
        by reference to exhibits filed with the Company's Form 10-Q filed on November
        13, 2006.
      (12) Incorporated
        by reference to exhibits filed with the Company's Form 8-K filed on January
        7, 2009 and the Company's Form 8-K filed on February 25, 2009.
      (13) Incorporated
        by reference to exhibits filed with the Company's Form 10-K filed on March
        10, 2006.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



72

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