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, 2009 **[   ]**
      **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 Capital
          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 whether the registrant has submitted
    electronically and posted on its corporate Web site, if any, every Interactive
    Data File required to be submitted and posted pursuant to Rule405 of Regulation
    S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
    such shorter period that the registrant was required to submit and post such
    files). YES [ ] 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, 2009, the aggregate market value of the registrant's
    Common Stock ($0.001 par value) held by non-affiliates of the registrant was
    $11,664,254 based on the closing sale price as reported on the National Association
    of Securities Dealers Automated Quotation Capital Market System. Number of shares of Common Stock ($0.001 par value) outstanding
    as of March 12, 2010: 3,789,067 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, 2010. 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
      18Item
        1B.
      Unresolved
        Staff Comments
      30Item
        2.
      Properties
      30Item
        3.
      Legal
        Proceedings
      30Item
        4.
      Reserved
      30PART
        IIItem
        5.
      Market for Registrant's Common Equity, Related Stockholder
        Matters, and Issuer Purchases of Equity Securities
      31Item
        6.
      Selected Financial Data
      33Item
        7.
      Management's
        Discussion and Analysis of Financial Condition and Results of Operations
      34Item
        7A.
      Quantitative
        and Qualitative Disclosures about Market Risk
      47Item
        8.
      Financial
        Statements and Supplementary Data
      47Item
        9.
      Changes
        in and Disagreements with Accountants on Accounting and Financial Disclosure
      75Item
        9A(T).
      Controls
        and Procedures
      75Item
        9B.
      Other
        Information
      76PART
        IIIItem
        10.
      Directors, Executive Officers and Corporate Governance
      76Item
        11.
      Executive Compensation
      76Item
        12.
      Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters
      77Item
        13.
      Certain
        Relationships and Related Transactions, and Director Independence
      77Item
        14.
      Principal
        Accounting Fees and Services
      77PART
        IVItem
        15.
      Exhibits, Financial Statement Schedules
      78SIGNATURES
      79 Index
        to Exhibits
      80


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 our future financial condition
  and results, our future 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: continued weakness in the U.S. and world economy generally and in the markets
  we serve in particular; 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 mobility markets. We offer a family of
  handheld computer products and a wide range of data collection products. We
  also offer embedded Bluetooth and wireless LAN products. Our data collection
  peripheral products also work with many third-party mobile handheld devices
  including smartphones, 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 run or enhance mobile applications
  that enable the accessing, collection and processing of data by employees while
  mobile. Our mobile computing products utilize popular Bluetooth and wireless
  LAN connection technologies. Our plug-in and cordless data collection products
  offer a variety of data collection technologies including laser scanning, two
  dimensional (2D) and linear (1D) barcode scanning, plus we offer RFID (radio
  frequency identification) and magnetic stripe readers. See "Products"
  for more information on the products that we produce.



1

---

(Table of
  Contents)

More than 200 software integration companies are offering or developing vertical
  software applications for use with our handheld computers and data collection
  products. Healthcare and hospitality are two of the primary areas of focus for
  our software integration partners and more than half of our handheld computer
  sales now come from organizations within the healthcare and hospitality industries.
  Other vertical markets benefiting from our mobile solutions include 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 or medical 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 growth in the mobile workforce along with 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 run or enhance mobile applications that allow
  access to business data files, or collect and process data while mobile, thereby
  enhancing their productivity and allowing them to exploit time sensitive opportunities
  and improve customer satisfaction. Overall, our hardware products enable mobile
  third-party applications to become complete mobile data collection and connectivity
  solutions.

We also make available to original equipment manufacturers ("OEMs")
  our component Bluetooth and wireless LAN technologies. We develop these components
  for our own products and leverage that investment through the sale of modules
  and plug-in cards to OEM manufacturers to 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, 2009 was 70 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.



2

---

(Table
  of Contents)

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.

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 for
    data collection and connectivity; and
- OEM embedded products.

Our mobile handheld computer
  products are designed to be durable, lightweight and dependable devices
  which meet the requirements of the healthcare and hospitality markets we serve.
  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
  and accessories. 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. In order to extend the life of the current product family, we expect
  to upgrade SoMo technology components from time to time in response to decisions
  by component manufacturers to improve or replace their components. 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,
  an extended battery, programmable action buttons to activate peripheral devices,
  reinforced CompactFlash and SDIO card slots, and a durable case. The SoMo is
  available with multiple language support. 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 made with antimicrobial materials
  added to the case plastics to provide an extra layer of protection to the device
  to aid against the multiplication and spread of potentially harmful bacteria
  and microbes found in healthcare environments. We also introduced a SoMo 650
  Dx Model without Bluetooth or wireless LAN for high security environments. We
  have also developed accessory products such as a back pack to enable direct
  connections to mobile phone networks using network phone cards and a durable
  case to provide additional protection in the event the computer is dropped.
  In addition, we work with third-party accessory providers, who have qualified
  to make a number of accessory products that work with the SoMo family of products,
  including headsets, battery chargers, keyboards, and smartcard readers. We are
  in the process of approving mobile printers for use with our products. Mobile
  handheld computer products and accessories represented approximately 38 percent,
  18 percent and 6 percent of our revenue for the years ended December 31, 2009,
  2008 and 2007, respectively.





3

---

(Table
  of Contents)

Our mobile peripheral products
  consist of data collection, connectivity and through September 30, 2009, serial
  interface products, which together represented approximately 43 percent, 47
  percent and 67 percent of our revenues for the three years ended December 31,
  2009, 2008 and 2007, respectively.

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 7/Vista/XP/Embedded, RIM Blackberry, or Nokia Symbian
    for E Series 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 price/performance
  levels. Our plug-in barcode scanners are available in both CompactFlash and
  SDIO form factors and we offer standalone Cordless Hand Scanners that use Bluetooth
  as the connection interface. We also offer a ring scanner worn on the index
  finger which connects via Bluetooth to computing systems. During this past year,
  we realigned our data collection barcode scanning products to introduce an entry
  level laser barcode scanner, upgraded the durability of our ring scanner, and
  introduced both a CompactFlash and a Bluetooth cordless 2D barcode scanner.
  2D scanning enables larger amounts of data to be scanned compared to linear
  1D barcodes, and the use of 2D scanning is becoming more widespread.

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



4

---

(Table
  of Contents)

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 over a wire 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:

- a modem for telephone connections that connects over a cable; and
- an Ethernet card for local area network connections that connects over a
    cable.

Most users of mobile computing devices now connect to networks wirelessly,
  and we expect to phase out our connectivity products during 2010.

Our serial interface products
  enable the connection of a mobile computer to electronic devices either by way
  of a plug-in card (one, two or four ports) connecting over cables, or wirelessly
  over a Bluetooth network. These products were legacy products first introduced
  in 1993, and we have been selling them over the past several years under a SocketSerial
  brand name and logo. Serial technology has gradually been replaced by alternative
  technologies such as USB (Universal Serial Bus) and serial product revenue had
  become less than 5 percent of our total revenue. On September 30, 2009, we sold
  our serial product technology and business to Quatech, Inc., who will continue
  to offer the line under the SocketSerial brand, and we discontinued distributing
  the product line in our distribution channels.

Our OEM embedded products
  consist of Bluetooth and wireless LAN modules and plug-in cards used primarily
  by Original Equipment Manufacturers (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 Bluetooth products use the Bluetooth 2.1 + EDR standard, upgraded
  from the Bluetooth 2.0 standard used in 2008, continuing our commitment to keep
  our Bluetooth products current with evolving Bluetooth technology standards.
  Our plug-in cards for connecting wirelessly to local area networks were upgraded
  in 2009 to use the wireless LAN 802.11 a/b/g Wi-Fi standard, upgrading our products
  from the wireless LAN 802.11b/g standard used in 2008. Our wireless LAN products
  include extensive communications software with Cisco Compatible Extensions (CCX)
  designed to make these products easy to use. In 2008 our Bluetooth module sales
  peaked due to last time buys of older Bluetooth chip technology that was being
  phased out by the chip manufacturer. Our OEM product sales are primarily based
  on the acceptance of our designs by OEM customers (referred to as design-wins),
  and the product transitions described have resulted in last-time buys and reductions
  in ongoing revenue as new design-wins are pursued. OEM embedded products represented
  approximately 19 percent, 35 percent and 27 percent of our revenue for the years
  ended December 31, 2009, 2008 and 2007, respectively.

Our SocketCare services provide extended warranty and accidental
  breakage coverage for selected products including our handheld computers and
  our ring and cordless hand scanners. Premium service purchased at the time of
  product purchase provides coverage for three years. Service revenue was $0.3
  million or approximately 2 percent of our revenue for the year ended December
  31, 2009. Service revenues were insignificant for the years ended December 31,
  2008 and 2007.



5

---

(Table
  of Contents)

Vertical Market Applications

We support the use of our products by third-party software developers, value
  added resellers 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 supporting over 200 participants to promote
  the development of vertical market solutions using our products. For the program
  participants generating the largest amounts of revenue, 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.

Our product design priorities have focused on the healthcare and hospitality
  vertical market segments. Other vertical markets using our products in mobile
  applications include 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, healthcare 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.

Crosslink Orthopaedics equips its mobile sales force with the Socket
  SD Scan Card and a handheld computer to track inventory of surgery kits in real
  time.

El Rio Community Health Center expands patient access to medications
  by offering a free prescription delivery service that uses barcodes to keep
  prescription information confidential.

Epocal has integrated our
  handheld computer and CF plug-in barcode scanner 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.

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





6

---

(Table
  of Contents)

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.

Hypertag combines our handheld computer and their application software
  to create a visitor engagement and education program for museums, art galleries,
  visitor centers and other public attractions.

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

Retail Merchandising

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

First Stop Convenience Stores uses our barcode scanners to streamline
  inventory processes.

Kelleher Corporation fulfills sales orders for its lumber and molding
  products more than 600% faster by using our scan card and a handheld computer
  to track inventory in real-time and dispatch sales orders right from a Home
  Depot store.

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

Automotive

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.

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.



7

---

(Table
  of Contents)

Government and Education

Hanson Bridgett LLP tracks law library materials with a mobile self-checkout
  system.

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 and Bluetooth)
  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.



8

---

(Table
  of Contents)

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 and 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 SoMo
  product line is designed to service this business market. 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 SocketScan
  middleware software that works with our barcode scanning, RFID and magnetic
  stripe reader products, and our Bluetooth and our wireless LAN driver and management
  software. Our wireless LAN 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
  made with antimicrobial materials added to the case plastics to provide an extra
  layer of protection to the device to aid against the multiplication and spread
  of potentially harmful bacteria and microbes found in healthcare environments.
  Compared to industrial devices, our computers are smaller in size and weight,
  less rugged, and less expensive. Our entire product line of handheld computers
  is offered with the expectation that they will be offered for sale for a minimum
  three to five year time period which reduces the number of times 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. 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.

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.



9

---

(Table
  of Contents)

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 part
  of 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 Business Mobility 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 smartphones, tablets, and notebook
  computers, and market the strengths of our wireless driver and management software
  to other equipment manufacturers of mobile devices.

Transition from peripherals supplier
  to systems supplier to the Business Mobility 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. Since the introduction of our SoMo family of handheld computers
  in 2007, we have sold more than 25,000 units around the world and sales of our
  handheld computer family of products grew to $6.2 million in 2009 or 37% of
  our revenue.

10

---

(Table
  of Contents)

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.
  We are active in a number of standards setting bodies whose technologies are
  used in our products including the Bluetooth SIG (Special Interest Group), SD
  Card Association, and AIM, the international trade association representing
  automatic identification and mobility technology solution providers.

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 mobile application
  needs, instead of having to rely on individual product offerings from a number
  of different companies. During the past three years, we 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 have expanded our data collection product
  offerings with 2D imaging technology that is replacing 1D or linear bar code
  scanning in many mobile applications. 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 Business
  Mobility market."

Support the development of third-party software applications
  and integrator solutions. We have created software developer kits (SDK's)
  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.



11

---

(Table
  of Contents)

Expand awareness within the business community of the data collection capabilities
  of all of the mobile computing platforms that we serve including smartphones,
  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 smartphones (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 software developer kits 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 durable, 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 25,000 units shipped since its introduction
  in June 2007 through the end of 2009. 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 add 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 introduction of units made with an antimicrobial
  additive in the case plastics to provide an extra layer of protection to the
  device to aid against the multiplication and spread of potentially harmful bacteria
  and microbes found in healthcare environments. Consumer grade handheld computers
  are offered by Hewlett-Packard 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.



12

---

(Table
  of Contents)

Data Collection Products. Our laser and imager barcode scanning products
  face competition from ruggedized integrated barcode scanning devices from Motorola,
  Intermec, Honeywell, Datalogic and others. We purchase laser engines from Motorola
  and imagers 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 Code Corporation, 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. Our SDIO modem and low power Ethernet cards face
  competition from a number of manufacturers including Ambicom Technology, Billionton
  Systems, Hawking Technologies, Zonet, OvisLink, Trendware and Xircom. These
  products use legacy technologies that are being replaced by wireless LAN alternatives
  and by wireless mobile phone connectivity replacing connectivity through land
  line phones.

Serial Interface
  Products. Our serial interface card products and business were sold on September
  30, 2009 to Quatech, Inc., a former competitor of this product line, who plans
  to continue to offer the product line under its SocketSerial brand name.



13

---

(Table
  of Contents)

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 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, ConnectBlue, Stonestreet
  One and Summit Data, 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 802.11 cards, including AmbiCom,
  Mobis, Silex, Spectec and Summit Data for SDIO cards. Our wireless LAN 802.11
  a/b/g cards and modules incorporate the most recent wireless LAN technologies
  for mobile devices, but we anticipate that other competitors will follow with
  similar products.

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. 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 7/Vista/XP operating systems. We have been
  awarded sixteen U.S. Patents and ten 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.





14

---

(Table
  of Contents)

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, 2009 was 70 people. Our employees are not represented by a union, and we
  consider our employee relationships to be good.

Sales and Marketing

We target business customers in selected vertical 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.



15

---

(Table
  of Contents)

During the year ended December 31, 2009, 58 percent of our sales were in North
  America, 31 percent in Europe, and 11 percent in Asia and Pacific Rim countries.
  In 2008, 64 percent of our sales were in North America, 24 percent in Europe,
  and 8 percent were in Asia and Pacific Rim countries. In 2007, 65 percent of
  our sales were in North America, 27 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 are
  designed to enable mobile workers to access data and record information while
  mobile. 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, 2009, we had 28 people
  in sales, marketing and customer support.

Our United States distributors Ingram Micro and Tech Data Corporation, accounted
  for 18 percent and 17 percent of our revenue in 2009, respectively. In 2008,
  Ingram Micro accounted for 16 percent of our revenue, Tech Data accounted for
  15 percent of our revenue and our OEM customer Intermec accounted for 14 percent
  of our revenue. In 2007, Ingram Micro accounted for 13 percent of our revenue
  and Tech Data accounted for 23 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.

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, 2009, we had 21 people employed in
  manufacturing operations, including planning, buying, manufacturing engineering,
  quality control, product assembly, shipping and receiving, and product support.



16

---

(Table
  of Contents)

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, wireless LAN and Bluetooth chips, our imager
    and laser scanning engines, our SDIO plug-in cards, and 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 $2.9 million in 2009,
    $4.5 million in 2008, and $5.0 million in 2007. The amount of expense is determined
    in part by the number of development projects. As of December 31, 2009, 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. General and Administration As of December 31, 2009, we had 11 people responsible for our financial and
    administrative activities including accounting and finance, personnel, internal
    computer systems and administrative support.


17

---

(Table
  of Contents)

Item 1A. Risk Factors Our independent registered public accounting firm included an explanatory
    paragraph in their report expressing substantial doubt about our ability to
    continue as a going concern. Our financial statements have been prepared on a going concern basis. The
    report of our Independent Registered Public Accounting Firm on our financial
    statements for the year ended December 31, 2009 contains an explanatory paragraph
    noting that certain conditions raise substantial doubt about our ability to
    continue as a going concern. These conditions include continuing operating
    losses, declines in our working capital balances and our failure to achieve
    the revenue levels required to maintain compliance with our bank line covenants.
    Our ability to continue as a going concern is dependent upon our ability to
    establish profitable operations and to raise additional financing. We have
    been taking steps intended to reduce operating losses and achieve profitability
    including the introduction of new products, continued close support of our
    distributors and of our application partners as they establish their mobile
    applications in key vertical markets, and management of our costs. We believe
    that we will be able to improve our liquidity and secure additional sources
    of financing by managing our working capital balances, returning to compliance
    with the bank line covenants as operating results improve, and raising additional
    capital as needed, including development funding from development partners
    and the issuance of additional equity securities. There can be no assurance
    that we will be successful in achieving any of these steps, and there can
    be no assurance that additional financing will be available on acceptable
    terms, if at all, and any such terms may be dilutive to existing stockholders.
    Our inability to secure and maintain the necessary liquidity will have a material
    adverse effect on our financial condition and results of operations. Our financial
    statements do not include any adjustments to reflect the possible future effects
    on the recoverability and classification of assets or the amounts and classification
    of assets and liabilities that may result from the outcome of this uncertainty. The global economic 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 economic conditions and conditions in
    the financial markets do not improve or continue to worsen. In particular,
    should these conditions cause our revenues to be materially less than forecast,
    we may find it necessary to initiate further reductions in our expenses and
    defer additional product development programs. In addition, 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.




18

---

(Table
  of Contents)

If we do not maintain compliance with the financial covenants in our bank
    line, which we are dependent upon as a source of cash for our operations,
    we may lose our ability to draw upon it and the bank may accelerate our obligation
    to repay the amounts due. We are dependent upon our bank line under loan agreements with Silicon Valley
    Bank as a source of cash to fund our operations. The availability of the bank
    line is conditioned upon our complying with the terms of the loan agreements,
    including meeting certain financial covenants. We failed to meet our financial
    covenants at the end of April, May and June 2009. On July 7, 2009, we amended
    our loan agreements with Silicon Valley Bank in order to avoid defaults under
    the terms of these agreements due to our non-compliance with a covenant to
    maintain minimum liquidity based on an "adjusted quick ratio." The
    amendments provided for the waiver of our non-compliance with the adjusted
    quick ratio covenant for the months of April, May and June 2009, and replaced
    this covenant with new covenants that required us, commencing June 1, 2009,
    to maintain at all times minimum unrestricted cash and cash equivalents at
    the bank of not less than $1,000,000, and to achieve minimum revenue targets
    for each of the quarters ended June 30, 2009, September 30, 2009, December
    31, 2009, and each quarter thereafter. We failed to meet the minimum revenue
    covenant for the quarter ended December 31, 2009. Subsequently Silicon Valley
    Bank agreed to forbear any actions relating to this event of default through
    March 24, 2010. On March 3, 2010, we agreed with Silicon Valley Bank to extend the term of
    the existing credit facility to March 23, 2011 and to amend its terms. Under
    the terms of the amendment we are required to (i) maintain at all times a
    minimum balance of unrestricted cash and cash equivalents of no less than
    $1,000,000; and (ii) achieve minimum revenues of at least $4,565,000 for the
    quarter ending March 31, 2010; $5,495,000 for the quarter ending June 30,
    2010; $6,115,000 for the quarter ending September 30, 2010; and $6,265,000
    for the quarter ending December 31, 2010. The terms of the amendment extend
    the period that Silicon Valley Bank has agreed to forbear from enforcing its
    rights and remedies under the credit facility through April 30, 2010 relating
    to the existing event of default, and provides that Silicon Valley Bank will
    waive the existing event of default under the credit facility if we meet the
    requisite financial covenants on March 31, 2010. Should we fail to meet any of the financial covenants specified in the credit
    facility agreement, such failure would constitute an event of default under
    the terms of the credit agreement, and Silicon Valley Bank may, among its
    remedies, declare all obligations under the credit facility immediately due
    and payable and terminate its forbearance. As of December 31, 2009, we had
    $1,002,088 outstanding under the loan agreements. Should the bank line become
    unavailable, we may not be able to find alternative sources of financing,
    and we may not be able to pay our liabilities and expenses when due, which
    could require us to suspend some or all of our current operations. It could
    also adversely affect the willingness of our vendors and employees to continue
    to work with us. As of December 31, 2009, we had $1,940,295 of unrestricted
    cash and cash equivalents at the bank. Our ability to maintain a cash balance
    at the required minimum level for compliance with the financial covenant is
    dependent on a number of factors, including our ability to (i) manage payment
    terms with our customers and suppliers, (ii) manage our inventory levels,
    (iii) achieve sufficient revenues, and (iv) manage our expenses. We can provide
    no assurance that we will be able to continue to meet the requirements under
    any of the financial covenants under the loan agreements.   19  (Table
    of Contents) We have a history of operating
    losses and may not achieve ongoing profitability. We were profitable in the third quarter of 2009 due to the one time gain
    on the sale of our serial product line assets. We were unprofitable in each
    of other three quarters of 2009, unprofitable for fiscal year 2009 as a whole,
    and 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 as a whole. Fiscal year 2004 was the only profitable year in our history,
    and 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 would need to raise
    capital to fund such losses. Our forecasts are highly dependent on factors
    beyond our control, including market acceptance of our products and deployments
    by businesses of applications that use our handheld computers and our data
    collection products. 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. 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
      and deployments of new applications that work with our 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;
    timing of distributors' shipments
      to their customers; and
    general economic conditions and conditions specific to our customers'
      industries.   20  (Table
    of Contents) Because we base our staffing
    and other operating expenses on anticipated revenues, unanticipated declines
    or 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
    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
    vertical market software applications for use with our handheld computer and
    peripheral products, and 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. A number of manufacturers of handheld computers have reduced the number
    of handheld products they offer, or curtailed development of future handheld
    computer products. 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 fail to achieve or maintain
    market acceptance, the number of our potential new customers could be reduced
    and we might not be able to meet our sales expectations. 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:




21

---

(Table
  of Contents)

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 35%, 31%, and 36% of our worldwide revenues in fiscal
  years 2009, 2008, and 2007, 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.

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

Substantially all of our peripheral products are designed for use with mobile
  computers, including handhelds, notebooks, tablets, and handhelds with integrated
  phones. If the mobile 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, or if the markets for our mobile handheld
  computers do not grow, or if the impact of the global economic financial crisis
  continues, we may 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:



22

---

(Table
  of Contents)

- 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 products with 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, 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.

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 and working capital liquidity.



23

---

(Table
  of Contents)



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 and working capital liquidity by reducing our accounts
  receivable and increasing our inventory balances, 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.

We have devoted significant research and development resources
  to design activities for Windows Mobile, Windows CE, Windows 7/Vista/XP, RIM
  Blackberry, and Nokia Symbian for E Series 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.





24

---

(Table
  of Contents)

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

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

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

In the course of 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., claiming
  that certain of our wireless LAN products infringe on 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.

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.



25

---

(Table
  of Contents)

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.

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 fifteen to eighteen 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.



26

---

(Table
  of Contents)

The expensing of
  options will continue to reduce our operating results and may continue to cause
  us to incur net losses such that we 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 2009, 2008, and 2007, will continue
  to adversely affect future quarters, and will make profitability harder to achieve.
  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.

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.



27

---

(Table
  of Contents)

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
  42%, 37%, and 35% of our revenue in fiscal years 2009, 2008, and 2007. 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.

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.



28

---

(Table of
  Contents)

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 control 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 control 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 12, 2010, we had 3,789,067 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 12, 2010, we had 1,207,652 shares of Common Stock subject to outstanding
  options under our stock option plans, and 228,207 shares of Common Stock 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, the shares of Common Stock underlying vested
  options will be eligible for resale in the public market as soon as the options
  are exercised.

As of March 12, 2010, we had 77,642 shares of Common Stock subject to outstanding
  warrants issued in a private placement. We have registered the resale of all
  shares of Common Stock subject to the warrants. Accordingly, the shares of Common
  Stock underlying these warrants will be eligible for resale in the public market
  as soon as the warrants are exercised, subject to S-3 prospectus delivery requirements.





29

---

(Table of
  Contents)

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

During the period from January 1,
  2009 through March 12, 2010, our Common Stock price fluctuated between a high
  of $3.98 and a low of $1.32. Following a one-for-ten reverse stock split effected
  on October 23, 2008, which significantly decreased the Company's share float,
  we have experienced low trading volumes 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 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. Reserved





30

---

(Table of
  Contents)

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 12, 2010 (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                 |  |                 
|2008                                    |  |                     
|March 31, 2008                          |  | $                   
|June 30, 2008                           |  | $                   
|September 30, 2008                      |  | $                   
|December 31, 2008                       |  | $                   
|2009                                    |  |                     
|March 31, 2009                          |  | $                   
|June 30, 2009                           |  | $                   
|September 30, 2009                      |  | $                   
|December 31, 2009                       |  | $                   
|2010                                    |  |                     
|March 31, 2010 (through March 12, 2010) |  | $                   

|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 for the periods prior to the reverse split have been retroactively
      restated to reflect the effects of the reverse split. See "Note 8 -
      Reverse Stock Split" for additional information.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On March 12, 2010, the closing sales price for our Common Stock as reported
  on the NASDAQ Capital Market was $2.94. We had 4,925 beneficial stockholders
  of record as of March 1, 2010. 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.



31

---

(Table
  of Contents)

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, 2004 through December 31, 2009 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.









32

---

(Table
  of Contents)





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 loss applicable to common stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |         | $                            
|Net loss per share applicable to common stockholders (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |         | $                            
|Weighted average shares outstanding: (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |         |                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Basic   |                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 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, the Company began accounting for share-based awards
        to employees, including grants of employee stock options, in its financial
        statements based on the fair values of the share-based awards. In 2009
        and 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.
|(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 for the periods presented
        prior to the reverse split have been retroactively restated. See "Note
        8 - Reverse Stock Split" for additional information.                                                                                                                                                                                                                                
|(c) Amounts for 2009 include goodwill impairment charges of $5.4 million
        recorded as of December 31, 2009. Additional information regarding goodwill
        impairment is contained in "Item 7. Management's Discussion and Analysis
        of Financial Condition and Results of Operations" and in "Note
        1 - Summary of Significant Accounting Policies."                                                                                                                                                                                                                                               





33

---

(Table
  of Contents)

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, 2009. 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 also earn revenue from an extended warranty service program offered on select
  products. Revenues from the extended warranty service program are recognized
  ratably over the life of the extended warranty contract. The amount of unrecognized
  warranty service revenue is classified as deferred service revenue and presented
  on our balance sheet in its short and long term components. We also earn revenue
  from services performed in connection with consulting arrangements. For those
  contracts that include contract milestones or acceptance criteria we recognize
  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, in which
  case revenue recognition is deferred until those requirements are met.

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.



34

---

(Table
  of Contents)

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.

Stock-Based Compensation

On January 1, 2006, we began accounting for share-based awards
  to employees, including grants of employee stock options, in our financial statements
  based on the fair values of the share-based awards. We use 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 stock option grants. We use a Black-Scholes
  valuation model for options granted prior to January 1, 2006.

Valuation
  of Goodwill and Other Intangible Assets

Goodwill is tested for impairment at least annually and between annual tests
  if indicators of potential impairment exist. We test goodwill for impairment
  at the reporting unit level. A two-step test is required to be performed to
  assess goodwill for impairment. The first step of the goodwill impairment test
  requires a determination of whether the fair value of the reporting unit is
  less than its carrying value. If the fair value exceeds the carrying value,
  goodwill is not impaired and no further testing is performed. The second step
  is performed only if the carrying value exceeds the fair value. The second step
  involves an analysis reflecting the allocation of fair value determined in the
  first step (as if it was the purchase price in a business combination). This
  process may result in the determination of a new amount of goodwill. If the
  calculated fair value of the goodwill resulting from this allocation is lower
  than the carrying value of the goodwill in the reporting unit, the difference
  is reflected as a non-cash impairment loss. The purpose of the second step is
  only to determine the amount of goodwill that should be recorded on the balance
  sheet. The recorded amounts of other items on the balance sheet are not adjusted.
  We have determined that we have one reporting unit for purposes of goodwill
  testing.

We estimate the fair value of our single reporting unit utilizing up to three
  valuation methods: market capitalization, income approach and market approach.
  Revenue and expense forecasts used in the evaluation of goodwill are based on
  trends of historical performance and our estimate of future performance. 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.



35

---

(Table
  of Contents)

Revenues

Our revenues have been classified into three broad product families for the
  years ended December 31, 2009, 2008, and 2007, and are presented in the following
  table:

|(revenues
      in thousands)     |  | Years
        ended December 31, |        | Increase
        (Decrease)
        in years
|--------------------------------- |  | -------------------------------- | ------ | --------------------------------------------
|                                  |  | 2009                             |        | 2008                                        
|Product
      family:             |  |                              | $'s    |                                             
|Mobile handheld computer products |  | $                                | 6,467  |                                             
|Mobile peripheral products:       |  |                                  |        |                                             
|Data collection                   |  |                                  | 5,632  |                                             
|Connectivity                      |  |                                  | 815    |                                             
|Serial interface                  |  |                              | 895    |                                             
|                                  |  |                                  | 7,342  |                                             
|                                  |  |                                  |        |                                             
|OEM embedded products             |  |                              | 3,318  |                                             
|Total                             |  | $                                | 17,127 |                                             

Our mobile handheld computer product revenues in 2009 increased by $1.7
  million from mobile handheld computer product revenues in 2008. We began shipping
  our first mobile handheld computer, the SoMo 650, to customers through 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. In late 2008, we
  introduced the SoMo 650Rx with an antimicrobial case for the healthcare market
  designed to reduce the risk of the spread of bacteria from the use of handheld
  devices in a healthcare environment, and the SoMo 650DX without Bluetooth or
  wireless LAN for high security environments. Increased revenues in 2009 from
  our mobile handheld computer products reflect higher sales volumes due to a
  growing customer base with larger average unit deployments. Although the annual
  revenues in 2009 indicate growth in our mobile handheld computer revenues, we
  believe this growth has been slowed by the worldwide economic slowdown, as our
  customers are taking longer to make their deployment decisions. In the second
  half of 2009 mobile handheld computer revenues declined by 3% compared to the
  first half of 2009 due to the completion of a year-long roll-out to a key customer
  in the healthcare market early in the third quarter. Declines in sales to this
  key customer in the second half of 2009 were partially offset by growth in sales
  to existing customers in healthcare and other markets, which grew at a rate
  of 33% in the second half of 2009 compared to the first half.

Our mobile handheld computer product revenues in 2008 increased by $3.4 million
  from mobile handheld computer product revenues in 2007. 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 compared to
  2007, and due to the fact that we did not start recognizing revenue for these
  products until the second quarter of 2007.





36

---

(Table
  of Contents)

Our data collection product
  revenues in 2009 decreased by $3.7 million from data collection revenues in
  2008. The decrease was due to a decline of $1.6 million in sales of our CompactFlash
  In-Hand Scan card product, a decline of $1.1 million in sales of our Cordless
  Hand Scanner, a decline $0.9 million in reduced sales of our SDIO In-Hand Scan
  card, and a decline in sales of our Cordless Ring Scanner. Revenue declines
  in 2009 were due primarily to lower sales volumes of these primary scanning
  products due to the effects of the worldwide economic slowdown which began in
  the fourth quarter of 2008.

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 beginning in
  the fourth quarter and continuing throughout 2009.

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 2009 decreased by $0.8
  million from connectivity product revenues in 2008. The decrease was due primarily
  to a decline of $0.7 million from reduced sales of our modem plug-in products
  with remaining declines from reduced sales of our Ethernet plug-in products.
  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. 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. Most
  users of mobile computing devices now connect to networks wirelessly, and we
  expect to phase out our connectivity products during 2010.

Our serial interface product
  revenues declined in 2009 by $0.7 million from revenues in 2008, and in 2008
  declined by $0.2 million from revenues in 2007. The decrease in 2009 was primarily
  from declines of $0.6 million in sales of our standard serial PC card products
  with additional declines due to lower sales of our Bluetooth serial adapter
  product, which were due in part to the sale of our serial product line to Quatech,
  Inc. on September 30, 2009 (see "Note 6 - Sale of Product Line Assets"
  for more information). Our standard serial PC card products were primarily sold
  to connect peripheral devices or other electronic equipment to notebook computers.
  In 2008, half of the decline 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. 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.



37

---

(Table
  of Contents)

Our OEM embedded product
  revenues declined in 2009 by $6.0 million from revenues in 2008, and in 2008
  increased by $2.8 million from revenues in 2007. Revenue decreases of $5.6 million
  in 2009 were from reduced sales of our Bluetooth modules to our OEM customers
  as a result of phasing out older Bluetooth technology and a last-buy purchase
  program. Our OEM customers made last-buy Bluetooth module purchases beginning
  in the third quarter of 2008, with the majority of these shipments occurring
  in the latter half of 2008, followed by the final remaining shipments completed
  primarily in the first quarter of 2009. Additional declines in 2009 of $0.5
  million were from reductions in sales of our wireless LAN plug-in cards. Remaining
  declines in 2009 were from reduced sales of our Bluetooth plug-in cards, a trend
  that continued from 2008, 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. Partially offsetting
  these declines in 2009 were increases of $0.2 million in sales of our wireless
  LAN modules. Revenue increases in 2008 of $2.1 million were from increased sales
  of our Bluetooth modules due to a recovery in market conditions that existed
  in early 2007, and the last-buy purchases of Bluetooth modules in the latter
  half of 2008, already discussed above. 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. Additional revenue increases
  in 2008 of $0.9 million were from increased sales of our wireless LAN plug-in
  cards reflecting a shift in our customer base for this product towards customers
  within our OEM customer group in need of this wireless technology and away from
  non-OEM customers for whom availability of this wireless technology was increasingly
  already built-in by handheld computer manufacturers.

Gross Margins

Gross margins for 2009 were 43 percent of revenues compared to gross margins
  of 47 percent in 2008 and 49% in 2007. We generally price our products as a
  markup from our cost, and we offer discount pricing for higher volume purchases.
  Reductions in overall margins in 2009 were due primarily to increased sales
  of our mobile handheld computer which comprised 37% of our revenues in 2009
  compared to 18% in 2008. Margins on our mobile handheld computer are below our
  average product margins. Additional margin declines in 2009 are due to our fixed
  overhead costs, which comprise a greater portion of the overall revenues and
  cost of goods sold due to lower revenues in 2009 compared to 2008. 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.

Research and Development
  Expense

Research and development expense
  in 2009 was $2.9 million, a decrease of 37 percent from research and development
  expense in 2008 of $4.5 million. 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. Sixty three percent of the reduction in research and
  development expense in 2009 was due to reduced personnel costs as the result
  of a reduction-in-force action initiated in the fourth quarter of 2008, followed
  by additional reductions in employee compensation and related expense in 2009.
  In the fourth quarter of 2008 the Company initiated a range of expense reductions
  across all departments and functional expense categories in response to the
  worldwide economic slowdown, with additional reductions following in the first
  and second quarters of 2009, and a continuation of the reduced expense levels
  throughout the remaining quarters of 2009. Additional reductions in research
  and development expense in 2009 were from decreases in development fees due
  to a reduction in product development activities, and decreases in equipment
  costs related to the reductions in product development activities. 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. We will continue to monitor our research and development expense in
  2010 in response to the current economic conditions.





38

---

(Table
  of Contents)

Sales and Marketing
  Expense

Sales and marketing expense in 2009 was $5.2 million, a decrease of 34 percent
  compared to sales and marketing expense in 2008 of $7.8 million. Sales and marketing
  expense in 2008 increased by 5 percent compared to sales and marketing expense
  in 2007 of $7.4 million. Seventy five percent of the reduction in sales and
  marketing expense in 2009 was due to reduced personnel costs as a result of
  the reduction-in-force action initiated in the fourth quarter of 2008 referred
  to above and further reductions in employee compensation and related expense
  during 2009. Additional reductions in sales and marketing expense in 2009 were
  in the categories of advertising and promotion expense, travel, outside services,
  and equipment costs. 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 a senior sales executive 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. We will continue
  to monitor our sales and marketing expense in 2010 in response to the current
  economic conditions.

General and Administrative
  Expense

General and administrative expense in 2009 was $2.24 million, a decrease of
  16 percent compared to general and administrative expense of $2.67 million in
  2008. General and administrative expense in 2008 decreased by 2 percent compared
  to general and administrative expense in 2007 of $2.74 million. Over half of
  the reduction in expense in 2009 was due to decreases in payroll costs primarily
  from reductions in employee compensation expense for the year. Additional reductions
  in general and administrative expense were primarily from decreases in consulting
  and professional fees and reduced investor relations expense. 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. We will continue to monitor our general and administrative
  expense in 2010 in response to the current economic conditions.





39

---

(Table
  of Contents)

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 2000 consisted of developed
  software and technology with estimated lives at the time of acquisition of 8.5
  years. Such amount has now been fully amortized. 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 2009 for all acquired intangibles were $77,000,
  compared to $127,000 in 2008, and $135,000 in 2007. The lower annual amortization
  charges are due to components of intangible property becoming fully amortized.
  Future intangible amortization charges are solely related to the patent acquired
  in 2004, and will be $15,000 per quarter going forward until fully amortized.

Goodwill Impairment

Goodwill is tested for impairment annually as of September 30th or more frequently
  when events or circumstances indicate that the carrying value of our single
  reporting unit more likely than not exceeds its fair value. Based on indicators
  in the fourth quarter of 2009 we are performing additional impairment testing
  with the assistance of a third party valuation specialist. We are using the
  two step test as required to assess goodwill for impairment. The first step
  of the goodwill impairment test consisted of comparing the carrying value of
  the reporting unit to its fair value. We estimated the fair value of the Company
  using various methods and compared the fair value to the carrying amount (net
  book value) to ascertain if potential goodwill impairment existed. We utilized
  methods that focused on our ability to produce income ("Income Approach") and
  the estimated consideration we would receive if there were a sale of the Company
  ("Market Approach"). Key assumptions utilized in the determination of fair value
  in step one of the test included the following: our market capitalization; market
  multiples of comparable companies within our industry; revenue and expense forecasts
  used in the evaluation were based on trends of historical performance and our
  estimate of future performance; cash flows utilized in the discounted cash flow
  analysis were estimated using a weighted average cost of capital determined
  to be appropriate for our company.

Based on the fair value estimated in step one, we determined a step one failure
  occurred which indicated a goodwill impairment may exist. We proceeded to the
  step two analyses which includes estimating the fair value of our assets and
  liabilities, including previously unrecognized intangible assets. The Income
  Approach is being utilized to value our identified intangible assets, including
  developed technology, trade name, patents, and internally developed software.
  As a result of a preliminary step two of the test, the estimated fair value
  of our goodwill is $4.4 million which exceeds the carrying value by $5.4 million.
  As a result, we recorded an estimated $5.4 million goodwill impairment as of
  December 31, 2009. We are currently finalizing the identification and valuation
  of the intangible assets with the assistance of a third party specialist and
  any adjustment to the estimated impairment based on the completion of the step
  two analyses shall be recognized in the quarter ending March 31, 2010.



40

---

(Table
  of Contents)

Interest Income and
  Other, and Interest Expense

Interest income reflects interest earned on cash balances. Interest income
  in 2009 was immaterial compared to interest income of $22,000 in 2008 and $114,000
  in 2007. Lower interest income in the comparable periods reflects lower average
  cash balances combined with lower average rates of return.

Interest expense was $225,000 in 2009 compared to $71,000 in 2008 and $34,000
  in 2007. Interest expense is related to interest on equipment lease financing
  obligations and interest on amounts drawn on our bank lines of credit, and in
  2008 and 2007 also included interest related to a term loan outstanding. Higher
  interest expense in 2009 is due to higher average balances outstanding on our
  bank lines of credit at higher overall interest rates. Beginning in June 2009
  our credit line agreements included a requirement that we maintain a minimum
  of $1.0 million in cash on hand, and consequently we maintained higher average
  balances on our credit line in order to comply with this requirement. Higher
  interest expense in 2008 was 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 each quarter. The term loan
  was made 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 at that time.

Income 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. Deferred tax assets and liabilities
  are determined based on differences between the financial reporting and the
  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. A reversal of deferred
  tax expense of $214,000 in 2009 was related to the impairment charges on the
  portion of our goodwill being amortized for tax purposes. Deferred tax expense
  of $32,000 in 2008 and 2007, and the corresponding deferred tax liability shown
  on our balance sheet, was related entirely to the deferred tax liability on
  the portion of our goodwill amortized for tax purposes. Due to the indefinite
  characteristic of this deferred tax liability in 2008 and 2007, it could not
  be offset against deferred tax assets. We maintain a full valuation allowance
  for all other components of deferred tax assets. There can be no assurance that
  the deferred tax assets subject to the valuation allowance will be realized.
  We have not generated taxable income in any periods in any jurisdiction, foreign
  or domestic.

Quarterly Results of
  Operations

The following table sets forth summary quarterly statements of operations data
  for each of the quarters in 2008 and 2009. 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.



41

---

(Table
  of Contents)

|                                                                                                                                                                                                                                                                                                                                                                         |                                                 | Quarter
        Ended
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------- | ---------------------
|(amounts
      in thousands, except per share amounts)                                                                                                                                                                                                                                                                                                                   |                                                 | Mar
        31,      
|                                                                                                                                                                                                                                                                                                                                                                         |                                                 | 2008                 
|Summary
        Quarterly Data:                                                                                                                                                                                                                                                                                                                                          |                                                 |                      
|                                                                                                                                                                                                                                                                                                                                                                         | Revenue                                         |                      
|                                                                                                                                                                                                                                                                                                                                                                         | Cost of revenue                                 |                      
|                                                                                                                                                                                                                                                                                                                                                                         | Gross profit                                    |                      
|                                                                                                                                                                                                                                                                                                                                                                         | Operating expenses:                             |                      
|                                                                                                                                                                                                                                                                                                                                                                         | Research and development                        |                      
|                                                                                                                                                                                                                                                                                                                                                                         | Sales and marketing                             |                      
|                                                                                                                                                                                                                                                                                                                                                                         | General and administrative                      |                      
|                                                                                                                                                                                                                                                                                                                                                                         | Amortization of intangibles                     |                      
|                                                                                                                                                                                                                                                                                                                                                                         | Impairment charges                              |                      
|                                                                                                                                                                                                                                                                                                                                                                         | Total operating expenses                        |                      
|Gain on sale of assets                                                                                                                                                                                                                                                                                                                                                   |                                                 |                      
|Interest income (expense), net                                                                                                                                                                                                                                                                                                                                           |                                                 |                      
|Deferred tax expense (benefit)                                                                                                                                                                                                                                                                                                                                           |                                                 |                  
|Net income (loss)                                                                                                                                                                                                                                                                                                                                                        |                                                 | $                    
|                                                                                                                                                                                                                                                                                                                                                                         | Basic and diluted net income (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 for the three quarters in 2008 prior to the reverse split have been
      restated to reflect the effects of the reverse split. See "Note 8 -
      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.

Liquidity and Capital
  Resources

We were profitable in the third quarter of 2009 due in part to the gain on
  the sale of our serial product line assets. We were unprofitable in each of
  other three quarters of 2009, unprofitable for fiscal year 2009, and 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 only profitable year in our history, and 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 $41 million in equity capital to fund
  our operations.



42

---

(Table
  of Contents)

As reflected in our Statements of Cash Flows, net cash provided from operating
  activities was $0.2 million in 2009 compared to $2.0 million used in operating
  activities in 2008, and $1.1 million used in operating activities in 2007. We
  calculate net cash used in operating activities by reducing our net loss ($7.9
  million, $2.8 million, and $3.3 million in 2009, 2008, and 2007, respectively)
  by those expenses that did not require the use of cash, and reversing gains
  that did not generate cash. These items consist of stock based compensation
  expense, depreciation, amortization of intangible assets, net foreign currency
  transaction gains and losses, changes in inventory reserves, changes in deferred
  rent, deferred tax expense, and in 2009 a reversal of deferred tax expense.
  These amounts totaled $1.2 million, $1.5 million, and $2.0 million in 2009,
  2008, and 2007, respectively. Also, in 2009 our net loss includes a gain of
  $450,000 from the sale of our serial product line assets in September of 2009
  (see "Note 6 - Sale of Product Line Assets" for more information)
  and goodwill impairment charges of $5.4 million. We adjusted the net loss for
  2009 to exclude this gain and the impairment charges. Reductions in non-cash
  items in 2009 were primarily from the deferred tax expense reversal related
  to the impairment charges on the portion of our goodwill being amortized for
  tax purposes, reductions in amortization expense due to components of our intangible
  assets becoming fully amortized and reductions in foreign currency losses partially
  offset by an increased change in inventory reserves and deferred rent compared
  to 2008. 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, reduced depreciation expense due
  to lower levels of equipment and tooling purchases, and decreased inventory
  write-downs in 2008 compared to 2007.

In addition, we report increases
  in assets and reductions in liabilities as uses of cash and decreases in assets
  and increases in liabilities as sources of cash, together referred to as changes
  in operating assets and liabilities. In 2009 changes in operating assets and
  liabilities resulted in a net source of cash of $2.0 million and were primarily
  from reductions in inventory due primarily to planned reductions in stocking
  levels of our mobile handheld computer from year end inventory levels, reductions
  in accounts receivable due to lower shipments in the fourth quarter of 2009
  compared to the fourth quarter of 2008, and increases in deferred service revenues,
  partially offset by reductions in accounts payable due to reductions in overall
  expenses and inventory purchases that create those payables, and reductions
  in deferred income on shipments to distributors due to lower stocking levels
  of our products in the distribution channel. Changes in operating assets and
  liabilities 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 of 2008, partially offset by increases in accounts payable due
  to the purchases that led to the increased levels of inventories, increases
  in deferred income on shipments to distributors due to increased stocking levels
  in the domestic distribution channel, and increases in deferred service revenue.
  Changes in operating assets and liabilities 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 deferred service
  revenue and accrued payroll, partially offset by increases in inventory and
  prepaid royalties related to our new mobile handheld computer.



43

---

(Table
  of Contents)

Cash provided by investing activities was $0.2 million in 2009,
  compared to cash used in investing activities of $0.3 million in 2008 and $1.0
  million in 2007. Proceeds of $450,000 from the sale of our serial product line
  assets in September 2009 were partially offset by cash used for equipment and
  tooling purchases in 2009. Reductions in equipment and tooling purchases in
  2009 were due to fewer development projects requiring these expenditures compared
  to 2008. Reduced investing activities in 2008 reflects reductions in equipment
  and tooling purchases due to fewer development projects requiring these expenditures,
  and lower non-recurring leasehold improvements than in 2007. Remaining investing
  activities in each of the periods presented reflect the costs of new computer
  hardware and software costs.

Cash provided from
  financing activities was $0.9 million in 2009, compared to cash used in financing
  activities of $1.9 million in 2008, and cash provided by financing activities
  of $ 0.9 million in 2007. Financing activities in 2009 consisted primarily of
  net proceeds of $0.9 million from the issuance of common stock and warrants.
  Financing activities in 2008 consisted primarily of net amounts paid of $1.6
  million on our bank lines of credit and repayment of the outstanding balance
  of $0.4 million on our term loan in December 2008 in conjunction with entering
  into a new credit line agreement at that time, and payments on capital leases,
  partially offset by proceeds from the exercise of stock options and warrants
  totaling $0.2 million. 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.

Our cash balances at
  December 31, 2009 were $1,940,295, including cash of $1,002,088 drawn against
  our bank lines of credit. Our cash balances at December 31, 2009, reflect net
  proceeds of $884,728 from the issuance of common stock and warrants in May 2009,
  net cash provided by operating activities in 2009 of $158,787, proceeds of $450,000
  from the sale of our serial product line assets (see "Note 6 - Sale of
  Product Line Assets" for more information), and a net decrease of $3,703
  in amounts drawn on our bank lines of credit for fiscal 2009. On July 7, 2009
  we agreed with our bank to amend the terms of the credit agreement to replace
  the adjusted quick ratio covenant with a minimum cash and quarterly revenue
  requirement, revise the advance rate on receivables and the collateral handling
  fee, and to waive the events of non-compliance with respect to the adjusted
  quick ratio covenant for the months of April, May and June 2009. We failed to
  meet the minimum revenue covenant for the quarter ended December 31, 2009, and
  subsequently the bank agreed to forbear any actions relating to the event of
  default through March 24, 2010. On March 3, 2010, we agreed with our bank to
  extend the term of the existing credit facility to March 23, 2011, to amend
  the terms of the credit facility with minimum quarterly revenue requirements
  for fiscal 2010, extend the period of forbearance, and provide that the bank
  will waive the existing event of default if we meet the requisite financial
  covenants for the first quarter of 2010 (see "Note - 3 Bank Financing Arrangements"
  for more information). Our balance sheet at December 31, 2009 has a current
  ratio (current assets divided by current liabilities) of 1.01 to 1.0, and no
  material long term debt. We took actions beginning in the fourth quarter of
  2008 to reduce our expenses, including a reduction 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 took additional actions
  during 2009 to reduce quarterly expenses. We have the ability to reduce expenses
  further if necessary.



44

---

(Table
  of Contents)

The report of the independent registered public accounting firm included an
  explanatory paragraph regarding certain conditions that raise substantial doubt
  about our ability to continue as a going concern. These conditions include continuing
  operating losses, declines in our working capital balances and our failure to
  achieve the revenue levels required to maintain compliance with our bank line
  covenants. Our ability to continue as a going concern is dependent upon our
  ability to establish profitable operations and to raise additional financing.
  We have been taking steps intended to reduce operating losses and achieve profitability
  including the introduction of new products, continued close support of our distributors
  and of our application partners as they establish their mobile applications
  in key vertical markets, and management of our costs. We believe that we will
  be able to improve liquidity and secure additional sources of financing by managing
  our working capital balances, returning to compliance with the bank line covenants
  as operating results improve, and raising additional capital as needed, including
  development funding from development partners and through the issuance of additional
  equity securities. There can be no assurance that we will be successful in achieving
  any of these steps, and there can be no assurance that additional financing
  will be available on acceptable terms, if at all, and any such terms may be
  dilutive to existing stockholders. Our inability to secure and maintain the
  necessary liquidity will have a material adverse effect on our financial condition
  and results of operations. If we are unable to secure the necessary capital
  for our business, we may need to suspend some or all of our current operations.
  The financial statements do not include any adjustments to reflect the possible
  future effects on the recoverability and classification of assets or the amounts
  and classification of assets and liabilities that may result from the outcome
  of this uncertainty. If we can return to revenue growth and attain profitability,
  we anticipate requirements for cash will include funding of higher receivable
  and inventory balances, and increased expenses, including more employees to
  support our growth and increases in salaries, benefits, and related support
  costs for employees.

Our contractual obligations at December 31, 2009 are outlined in the table
  shown below:

|                                                               |       | Payments
      Due by Period
|-------------------------------------------------------------- | ----- | ----------------------------
|Contractual
        Obligations                                |   | Total                       
|Capital leases                                                 |       | $                           
|Operating
        leases                                       |       |                             
|Bank line of credit                                            |       |                         
|Unconditional purchase obligations with contract manufacturers |       |                         
|Total contractual cash obligations                             |       | $                           

Off-Balance Sheet Arrangements

As of December 31, 2009, we had no off-balance sheet arrangements as defined
  in Item 303 of Regulation S-K.

Recent Accounting Pronouncements

In January 2009, the Securities and Exchange Commission ("SEC") issued
  Release No. 33-9002, "Interactive Data to Improve Financial Reporting."
  The final rule requires companies to provide their financial statements and
  financial statement schedules to the SEC and on their corporate websites in
  interactive data format using the eXtensible Business Reporting Language ("XBRL").
  The rule was adopted by the SEC to improve the ability of financial statement
  users to access and analyze financial data. The SEC adopted a phase-in schedule
  indicating when registrants must furnish interactive data. Under this schedule,
  we will be required to submit filings with financial statement information using
  XBRL commencing with our June 30, 2011 quarterly report on Form 10-Q. We are
  currently evaluating the impact of XBRL reporting on our financial reporting
  process.



45

---

(Table
  of Contents)

Effective July 1, 2009, we adopted "The FASB Accounting Standards Codification
  and the Hierarchy of Generally Accepted Accounting Principles" (formerly
  SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy
  of Generally Accepted Accounting Principles - a replacement of FASB Statement
  No. 162'). This standard establishes only two levels of U.S. generally accepted
  accounting principles ("GAAP"), authoritative and nonauthoritative.
  The Financial Accounting Standard Board ("FASB") Accounting Standards
  Codification (the "Codification") became the source of authoritative,
  nongovernmental GAAP, except for rules and interpretive releases of the SEC,
  which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered,
  non-SEC accounting literature not included in the Codification became nonauthoritative.
  We began using the new guidelines and numbering system prescribed by the Codification
  when referring to GAAP in the third quarter of fiscal 2009. As the Codification
  was not intended to change or alter existing GAAP, adoption did not have any
  impact on our financial condition, results of operations or cash flows.

In October 2009, the FASB amended revenue recognition guidance for arrangements
  with multiple deliverables. The guidance eliminates the residual method of revenue
  recognition and allows the use of management's best estimate of selling price
  for individual elements of an arrangement when vendor specific objective evidence
  ("VSOE"), vendor objective evidence ("VOE") or third-party
  evidence ("TPE") is unavailable. This guidance should be applied on
  a prospective basis for revenue arrangements entered into or materially modified
  in fiscal years beginning on or after June 15, 2010, with early adoption permitted.
  Full retrospective application of the guidance is optional. We are currently
  evaluating the impact of adopting this guidance on our financial statements.

In October 2009, the FASB issued guidance which amends the scope of existing
  software revenue recognition accounting. Tangible products containing software
  components and non-software components that function together to deliver the
  product's essential functionality would be scoped out of the accounting guidance
  on software and accounted for based on other appropriate revenue recognition
  guidance. This guidance should be applied on a prospective basis for revenue
  arrangements entered into or materially modified in fiscal years beginning on
  or after June 15, 2010, with early adoption permitted. Full retrospective application
  of the new guidance is optional. This guidance must be adopted in the same period
  that we adopt the amended accounting for arrangements with multiple deliverables
  described in the preceding paragraph. We are currently evaluating the impact
  of adopting this guidance on our financial statements.

In January 2010, the FASB issued guidance which clarifies and provides additional
  disclosure requirements related to recurring and non-recurring fair value measurements.
  We must implement these new requirements in our first quarter of fiscal 2010.
  Certain additional disclosures about purchases, sales, issuances and settlements
  in the roll forward of activity in Level 3 fair value measures are not effective
  until fiscal years beginning after December 15, 2010. Other than requiring additional
  disclosures, implementation of this new guidance will not have a material impact
  on our financial statements.



46

---

(Table
  of Contents)

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, 2009,
  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 6% or the lender's prime rate plus 2%,
  for both the domestic line (up to $1.5 million) and the international line (up
  to $1.0 million). Accordingly, interest rate increases could increase our interest
  expense on our outstanding credit line balances. We utilized only a portion
  of our credit line facility at the end of 2008, followed by higher average outstanding
  balances on our credit line during 2009. Based on a sensitivity analysis, an
  increase of 1% in the interest rate would increase our borrowing costs by $15,100
  for each $1 million of borrowings against our credit facility, if outstanding
  for the entire year, or a maximum of $37,800 if we utilized our entire credit
  line (in cases where the applicable interest rate is greater than 6%). The credit
  line agreement also specifies a fixed collateral handling fee of 0.62% per month
  beginning July 1, 2009 on the full amount of the accounts receivable provided
  as collateral for the outstanding balances advanced under the credit line. Prior
  to the third quarter of 2009 the fixed collateral handling fee was 0.7% per
  month.

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, 2009, an adverse change of 10% in exchange
  rates would have resulted in an increase in our net loss for the fourth quarter
  of approximately $50,900, if left unprotected. For the fourth quarter of 2009
  the total net adjustment for the effects of changes in foreign currency on cash
  balances, collections, payables, and derivatives was a net loss of $11,500.
  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."





47

---

(Table of Contents)

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, 2009 and 2008, and
  the related statements of operations, stockholders' equity, and cash flows for
  each of the years in the three year period ended December 31, 2009. 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, 2009 and 2008, and the results of its operations and its
  cash flows for each of the years in the three year period ended December 31,
  2009, in conformity with accounting principles generally accepted in the United
  States of America.

The accompanying financial statements have been prepared assuming
  that the Company will continue as a going concern. As discussed in Note 1 to
  the financial statements, certain conditions raise substantial doubt about its
  ability to continue as a going concern. Management's plans regarding these matters
  are also described in Note 1. The accompanying financial statements do not include
  any adjustments that might result from the outcome of this uncertainty.

       
                           
                           
                           
                           
                           
                        /s/ Moss Adams
  LLP

Santa Clara, California
  April 1, 2010











48

---

(Table
  of Contents)

SOCKET
  MOBILE, INC.


BALANCE SHEETS


|                                                                                                                                                                                                     |                                                    | December 31, |            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------ | -----------
|                                                                                                                                                                                                     |                                                    | 2009         |        
|ASSETS                                                                                                                                                                                              
|Current
        assets:                                                                                                                                                                              |                                                    |              |            
|Cash
          and cash equivalents                                                                                                                                                                  |                                                    | $            | 1,940,295  
|Accounts
          receivable, net                                                                                                                                                                   |                                                    |              | 1,659,383  
|Inventories                                                                                                                                                                                          |                                                    |              | 2,044,119  
|Prepaid
          expenses and other current assets                                                                                                                                                  |                                                    |          | 415,102    
|                                                                                                                                                                                                     | Total current assets                               |              |        
|                                                                                                                                                                                                 |                                                    |              |            
|Property
        and equipment:                                                                                                                                                                      |                                                    |              |            
|Machinery
          and office equipment                                                                                                                                                             |                                                    |              | 2,165,775  
|Computer
          equipment                                                                                                                                                                         |                                                    |          | 1,253,511  
|                                                                                                                                                                                                 |                                                    |              | 3,419,286  
|Accumulated
          depreciation                                                                                                                                                                   |                                                    |          | (2,631,822 
|                                                                                                                                                                                                     | Property and equipment, net                        |              |        
|                                                                                                                                                                                                 |                                                    |              |            
|Intangible
        assets, net                                                                                                                                                                       |                                                    |              | 270,000    
|Goodwill                                                                                                                                                                                             |                                                    |              | 4,427,000  
|Other
        assets                                                                                                                                                                                 |                                                    |          | 199,834    
|                                                                                                                                                                                                     | Total assets                                       |              | $          
|                                                                                                                                                                                                
|LIABILITIES
        AND STOCKHOLDERS EQUITY                                                                                                                                                        
|Current
        liabilities:                                                                                                                                                                         |                                                    |              |            
|Accounts
          payable                                                                                                                                                                           |                                                    | $            | 2,815,740  
|Accrued
          expenses                                                                                                                                                                           |                                                    |              | 86,554     
|Accrued
          payroll and related expenses                                                                                                                                                       |                                                    |              | 806,750    
|Bank
          line of credit                                                                                                                                                                        |                                                    |              | 1,002,088  
|Deferred
          income on shipments to distributors                                                                                                                                               |                                                    |              | 917,756    
|Short
          term portion of deferred service revenue                                                                                                                                             |                                                    |              | 304,193    
|Short
          term portion of capital leases and deferred rent                                                                                                                                     |                                                    |          | 42,491     
|                                                                                                                                                                                                     | Total
          current liabilities                |              |        
|                                                                                                                                                                                                 |                                                    |              |            
|Long
        term portion of deferred service revenue                                                                                                                                                |                                                    |              | 282,840    
|Long
        term portion of capital leases and deferred rent                                                                                                                                        |                                                    |              | 96,785     
|Deferred
        income taxes                                                                                                                                                                        |                                                    |          | ---        
|Total
          liabilities                                                                                                                                                                          |                                                    |              | 6,355,197  
|                                                                                                                                                                                                
|Commitments
        and contingencies                                                                                                                                                                |                                                    |              |            
|Stockholders'
        equity:                                                                                                                                                                        |                                                    |              |            
|Common
          stock, $0.001 par value: Authorized shares10,000,000,
                 Issued and outstanding shares
          - 3,788,767 at December 31, 2009 and 3,229,916 at December 31, 2008 |                                                    |              | 3,789      
|Additional
          paid-in capital                                                                                                                                                                 |                                                    |              | 56,190,112 
|Accumulated
          deficit                                                                                                                                                                        |                                                    |          | (50,805,901
|                                                                                                                                                                                                     | Total
          stockholders equity               |              |        
|                                                                                                                                                                                                     | Total
        liabilities and stockholders equity |              | $          

|
|



See accompanying
  notes.





49

---

(Table
  of Contents)



SOCKET
  MOBILE, INC.


STATEMENTS OF OPERATIONS


|                                            |                          | Years
        Ended December 31, |           
|------------------------------------------- | ------------------------ | -------------------------------- | ----------
|                                            |                          | 2009                         |           
|Revenues                                    |                          | $                                | 17,126,630
|Cost of revenues                            |                          |                              | 9,753,006 
|Gross profit                                |                          |                                  | 7,373,624 
|                                        |                          |                                  |           
|Operating expenses:                         |                          |                                  |           
|Research
          and development          |                          |                                  | 2,850,167 
|Sales
          and marketing               |                          |                                  | 5,167,783 
|General
          and administrative        |                          |                                  | 2,236,306 
|Amortization
          of intangible assets |                          |                                  | 76,787    
|Impairment
          charges                |                          |                              | 5,370,946 
|                                        | Total operating expenses |                                  |           
|                                        |                      |                                  |       
|Operating loss                              |                          |                                  | (8,328,365
|                                        |                          |                                  |           
|Interest income                             |                          |                                  | 455       
|Interest expense                            |                          |                                  | (225,155  
|Gain on sale of product line assets         |                          |                              | 450,000   
| 
                              |                          |                                  |           
|Net loss before deferred taxes              |                          |                                  | (8,103,065
|Deferred tax (expense) benefit              |                          |                                  | 214,261   
|Net loss                                    |                          | $                                | (7,888,804
|                                        |                          |                                  |           
|Net loss per share:                         |                          |                                  |           
|Basic                                       |                          | $                                | (2.21     
|Diluted                                     |                          | $                                | (2.21     
|                                        |                          |                                  |           
|Weighted average shares outstanding:        |                          |                                  |           
|Basic                                       |                          |                                  | 3,562,080 
|Diluted                                     |                          |                                  | 3,562,080 

|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 8 - Reverse Stock Split" for additional
      information.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying
  notes.

50

---

(Table
  of Contents)





SOCKET MOBILE,
  INC.
  STATEMENTS OF STOCKHOLDERS' EQUITY

|                                              |  |                      |           |  |            |       |             |        
|--------------------------------------------- |  | -------------------- | --------- |  | ---------- | ----- | ----------- | -------
|                                              |  |                      |           |  | Additional |       |             |        
|                                              |  | Common
        Stock |           |  | Paid-In    |       | Accumulated |        
|                                              |  | Shares               |           |  | Amount     |       |             | Capital
|Balance
        at December 31, 2006          |  |                      | 3,185,129 |  |            | $     | 3,184       |        
|Exercise
        of warrants                  |  |                      | 119       |  |            |       | 1           |        
|Exercise
        of stock options             |  |                      | 13,714    |  |            |       | 14          |        
|Stock-based
        compensation              |  |                      | ---       |  |            |       | ---         |        
|Net
        loss                              |  |                      | ---       |  |            |   | ---         |        
|Balance
        at December 31, 2007          |  |                      | 3,198,962 |  |            |       | 3,199       |        
|Warrant
        extension                     |  |                      | ---       |  |            |       | ---         |        
|Exercise
        of warrants                  |  |                      | 22,485    |  |            |       | 22          |        
|Exercise
        of stock options             |  |                      | 8,469     |  |            |       | 9           |        
|Stock-based
        compensation              |  |                      | ---       |  |            |       | ---         |        
|Net
        loss                              |  |                      | ---       |  |            |   | ---         |        
|Balance
        at December 31, 2008          |  |                      | 3,229,916 |  |            |       | 3,230       |        
|Issuance
        of common stock and warrants |  |                      | 556,786   |  |            |       | 557         |        
|Exercise
        of warrants                  |  |                      | 705       |  |            |       | 1           |        
|Exercise
        of stock options             |  |                      | 1,360     |  |            |       | 1           |        
|Stock-based
        compensation              |  |                      | ---       |  |            |       | ---         |        
|Net
        loss                              |  |                      | ---       |  |            |   | ---         |        
|Balance
        at December 31, 2009          |  |                      | 3,788,767 |  |            | $     | 3,789       |        

|Note: The Common Stock share amounts in the table above for the 2008 period
      and prior, reflect the affects of a one-for-ten reverse stock split effected
      by the Company on October 23, 2008. See "Note 8 - Reverse Stock Split"
      for additional information.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying
  notes.

51

---

(Table
  of Contents)

SOCKET MOBILE,
  INC.
  STATEMENTS OF CASH FLOWS



|                                                                                                  |  | Years
        Ended December 31, |           
|------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----------
|                                                                                                  |  | 2009                             |           
|Operating
        activities                                                                      |  |                                  |           
|Net loss                                                                                          |  | $                                | (7,888,804
|Adjustments to reconcile net loss to net cash provided by (used in) operating
        activities: |  |                                  |           
|Stock-based
        compensation and warrant extension                                            |  |                                  | 715,086   
|Depreciation                                                                                      |  |                                  | 491,746   
|Depreciation
        of equipment under capital lease                                             |  |                                  | 12,237    
|Amortization
        of intangible assets                                                         |  |                                  | 76,787    
|Net
        foreign currency transaction (gains) losses                                           |  |                                  | 16,299    
|Deferred
        tax expense (benefit)                                                            |  |                                  | (214,261  
|Increase
        in inventory write-downs                                                         |  |                                  | 70,106    
|Change
        in deferred rent                                                                   |  |                                  | (17,777   
|Gain
        on sale of product line assets                                                       |  |                                  | (450,000  
|Impairment
        charges                                                                        |  |                                  | 5,370,946 
|                                                                                              |  |                                  |           
|Changes
        in operating assets and liabilities:                                              |  |                                  |           
|Accounts
        receivable                                                                       |  |                                  | 1,628,609 
|Inventories                                                                                       |  |                                  | 1,815,597 
|Prepaid
        expenses and other current assets                                                 |  |                                  | (1,841    
|Accounts
        payable                                                                          |  |                                  | (573,951  
|Accrued
        expenses                                                                          |  |                                  | 5,296     
|Accrued
        payroll and related expenses                                                      |  |                                  | 32,316    
|Deferred
        income on shipments to distributors                                              |  |                                  | (1,083,985
|Deferred
        service revenue                                                                  |  |                              | 154,381   
|Net cash provided by (used in) operating activities                                               |  |                                  | 158,787   
|                                                                                              |  |                                  |           
|Investing
        activities                                                                      |  |                                  |           
|Purchase
        of equipment and tooling                                                         |  |                                  | (285,668  
|Proceeds from sale of product line assets                                                         |  |                              | 450,000   
|Net cash provided by (used in) investing activities                                               |  |                                  | 164,332   
|                                                                                              |  |                                  |           
|Financing
        activities                                                                      |  |                                  |           
|Payments on capital leases and equipment financing notes                                          |  |                                  | (11,405   
|Gross proceeds from borrowings under bank line of credit agreement                                |  |                                  | 8,684,054 
|Gross repayments of borrowings under bank line of credit agreement                                |  |                                  | (8,687,757
|Proceeds from stock options exercised                                                             |  |                                  | 2,665     
|Proceeds from warrants exercised                                                                  |  |                                  | ---       
|Proceeds from the issuance of common stock and warrants                                           |  |                                  | 884,728   
|Proceeds from bank term loan                                                                      |  |                                  | ---       
|Repayments of bank term loan                                                                      |  |                              | ---       
|Net cash provided by (used in) financing activities                                               |  |                                  | 872,285   
|                                                                                              |  |                                  |           
|Effect
        of exchange rate changes on cash and cash equivalents                              |  |                              | (12,451   
|Net
        increase (decrease) in cash and cash equivalents                                      |  |                                  | 1,182,953 
|Cash
        and cash equivalents at beginning of year                                            |  |                              | 757,342   
|Cash
        and cash equivalents at end of year                                                  |  | $                                | 1,940,295 
|                                                                                                  |  |                                  |           
|Supplemental
        cash flow information                                                        |  |                                  |           
|Cash paid for interest                                                                            |  | $                                | 225,132   
|Warrants issued in conjunction with common stock financing                                        |  | $                                | 107,034   
|Addition of equipment under capital lease                                                         |  | $                                | 28,715    



See accompanying
  notes.

52

---

(Table
  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 mobility market. The Company offers a
  family of handheld computer products and a wide range of data collection products.
  The Company's data collection peripheral products also work with many third-party
  mobile handheld devices including smartphones, handheld computers, tablet computers,
  ultra-mobile personal computers (UMPCs), and notebooks, adding data collection
  and connectivity capabilities to these devices. The Company also makes available
  to original equipment manufacturers the Bluetooth and wireless LAN 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. For a complete description of the
  Company's products see "Products" in "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 and hospitality are the primary areas of focus for the
  Company. Other vertical markets benefiting from the Company's mobile solutions
  include retail merchandising, automotive, government and education. 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 mobile 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, 2009 was 70 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.

Basis of Presentation
  The Company's financial statements have been prepared on a going concern basis.
  Certain conditions that exist raise substantial doubt about the Company's ability
  to continue as a going concern. These conditions include continued operating
  losses, declines in working capital balances and the failure to achieve the
  revenue levels required to maintain compliance with bank line covenants. The
  Company's ability to continue as a going concern is dependent upon its ability
  to establish profitable operations and to raise additional financing. Management
  has been taking steps intended to reduce operating losses and achieve profitability
  including the introduction of new products, continued close support of the Company's
  distributors and its application partners as they establish their mobile applications
  in key vertical markets, and management of its costs. Management believes that
  it will be able to improve the Company's liquidity and secure additional sources
  of financing by managing its working capital balances, returning to compliance
  with the bank line covenants as operating results improve, and raising additional
  capital as needed including development funding from development partners and
  the issuance of additional equity securities. There can be no assurance that
  management will be successful in achieving these steps, and there can be no
  assurance that additional financing will be available on acceptable terms, if
  at all, and any such terms may be dilutive to existing stockholders. The Company's
  inability to secure and maintain the necessary liquidity will have a material
  adverse effect on the Company's financial condition and results of operations.



53

---

(Table
  of Contents)

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

Liquidity and Going Concern
  The Company's cash balances at December 31, 2009 were $1,940,295, including
  cash of $1,002,088 drawn against its bank lines of credit. The Company's cash
  balances at December 31, 2009, reflect net proceeds of $884,728 from the issuance
  of common stock and warrants in May 2009, net cash provided by operating activities
  in 2009 of $158,787, proceeds of $450,000 from the sale of the Company's serial
  product line assets (see "Note 6 - Sale of Product Line Assets" for
  more information), and a net decrease of $3,703 in amounts drawn on its bank
  lines of credit in fiscal 2009. On July 7, 2009 the Company's bank agreed to
  amend the terms of the credit agreement to replace the adjusted quick ratio
  covenant with a minimum cash and quarterly revenue requirement, revise the advance
  rate on receivables and the collateral handling fee, and to waive the events
  of non-compliance with respect to the adjusted quick ratio covenant for the
  months of April, May and June 2009. For the quarter ended December 31, 2009
  the Company failed to meet the minimum revenue covenant and subsequently the
  bank agreed to forbear any actions relating to the event of default through
  March 24, 2010. On March 3, 2010, the Company agreed with its bank to extend
  the term of the existing credit facility to March 23, 2011, amend the terms
  of the credit facility with minimum quarterly revenue requirements for fiscal
  2010, extend the period of the forbearance to April 30, 2010, and provide that
  the bank will waive the existing event of default if the Company meets the financial
  covenants for the quarter ending March 31, 2010 (see "Note - 3 Bank Financing
  Arrangements" for more information). The Company's balance sheet at December
  31, 2009 has a current ratio (current assets divided by current liabilities)
  of 1.01 to 1.0, and no material long term debt. The Company took actions beginning
  in the fourth quarter of 2008 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 took additional actions during 2009 to further
  reduce expenses. The Company has the ability to further reduce expenses if necessary.
  If the Company can return to revenue growth and attain profitability, the Company
  anticipates requirements for cash will include funding of higher receivable
  and inventory balances, and increased expenses, including an increase of costs
  relating to new employees to support our growth and increases in salaries, benefits,
  and related support costs for employees. If the Company cannot attain profitability,
  the Company will not be able to support its operations from positive cash flows,
  and the Company would use its existing cash to support operating losses. The
  Company may also 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. If the Company is unable to secure the necessary capital for its
  business, the Company may need to suspend some or all of its current operations.

The accompanying financial statements have been prepared assuming that the
  Company will continue as a going concern, which contemplates the realization
  of assets and the settlement of liabilities and commitments in the normal course
  of business. These financial statements do not include any adjustments to reflect
  the possible future effects on the recoverability and classification of assets
  or the amounts and classification of liabilities that may result from uncertainty
  related to the Company's ability to continue as a going concern.





54

---

(Table
  of Contents)

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

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.

Reclassification of Prior Year Balances
  Reclassifications have been made to prior year's balance sheet and statements
  of cash flows to conform to the current year presentation of deferred income
  on shipments to distributors and deferred service revenues.

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, 2009 and 2008, 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.

Fair Value MeasurementsThe Company's estimates of fair value for assets and liabilities is based
  on a framework that establishes a hierarchy of the inputs used in valuation
  and gives the highest priority to quoted prices in active markets and requires
  that observable inputs be used in the valuations when available. The disclosure
  of fair value estimates is based on whether the significant inputs into the
  valuation are observable. In determining the level of the hierarchy in which
  the estimate is disclosed, the highest priority is given to unadjusted quoted
  prices in active markets and the lowest priority to unobservable inputs that
  reflect our significant market assumptions. The three levels of the hierarchy
  are as follows:

|Level 1: | Unadjusted quoted market prices for identical assets or liabilities
      in active markets that we have the ability to access.                                                                                                                                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 2: | Quoted prices for similar assets or liabilities in active
      markets; quoted prices for identical or similar assets in inactive markets;
      or valuations based on models where the significant inputs are observable
      (e.g., interest rates, yield curves, default rates, etc.) or can be corroborated
      by observable market data.
|Level 3: | Valuations based on models where significant inputs are not
      observable. The unobservable inputs reflect our assumptions about the assumptions
      that market participants would use.                                                                                                                                                      





55

---

(Table
  of Contents)

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

The significant fair value measurements for the year ended December 31, 2009
  are on a nonrecurring basis and relate to the Company's goodwill impairment
  assessment as described below under "Goodwill and Other Intangible Assets
  Review." The Company performed a preliminary valuation analysis of its
  goodwill as of December 31, 2009 using Level 3 inputs and recorded estimated
  goodwill impairment charges of $5.4 million as of December 31, 2009.

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. 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, 2009. At December 31, 2009,
  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, 2009, contracts with a notional amount of $721,500
  to hedge Euros were recorded as an asset with a fair value of $5,175 based on
  quotations from financial institutions, and had maturity dates in January 2010.
  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, and had maturity dates in January 2009.

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, 2009,
  2008, and 2007:





|     |  | Balance
        at   |         |  | Charged
        to |   |       |                     |  |   | Balance
        at
|---- |  | -------------------- | ------- |  | ------------------ | - | ----- | ------------------- |  | - | ------------------
|     |  | Beginning
        of |         |  | Costs
        and  |   |       | Amounts             |  |   | End
        of    
|Year |  | Year                 |         |  | Expenses           |   |       | Written
        Off |  |   | Year              
|    
|2009 |  | $                    | 118,651 |  |                    | $ | 3,062 |                     |  | $ | ---               
|2008 |  | $                    | 118,651 |  |                    | $ | ---   |                     |  | $ | ---               
|2007 |  | $                    | 118,651 |  |                    | $ | ---   |                     |  | $ | ---               





56

---

(Table
  of Contents)

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, 2009 and 2008, is reported net of write
  downs of $895,502 and $825,396, respectively. Inventory components at year-end
  net of write downs are presented in the following table:

|                                 |  | December
      31,
|-------------------------------- |  | ------------------
|                                 |  | 2009              
|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
  Goodwill is tested for impairment annually or more frequently when events or
  circumstances indicate that the carrying value of the Company's single reporting
  unit more likely than not exceeds its fair value. Based on indicators in the
  fourth quarter of 2009 the Company performed additional impairment testing with
  the assistance of a third party valuation specialist. The Company used the two
  step test as required to assess goodwill for impairment. The first step of the
  goodwill impairment test consisted of comparing the carrying value of the reporting
  unit to its fair value. Management estimated the fair value of the Company using
  various methods and compared the fair value to the carrying amount (net book
  value) to ascertain if potential goodwill impairment existed. The Company utilized
  methods that focused on its ability to produce income ("Income Approach")
  and the estimated consideration it would receive if there were a sale of the
  Company ("Market Approach"). Key assumptions utilized in the determination
  of fair value in step one of the test included the following: the Company's
  market capitalization; market multiples of comparable companies within its industry;
  revenue and expense forecasts used in the evaluation were based on trends of
  historical performance and management's estimate of future performance; cash
  flows utilized in the discounted cash flow analysis were estimated using a weighted
  average cost of capital determined to be appropriate for the Company.





57

---

(Table
  of Contents)

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

Based on the fair value estimated in step one, the Company determined
  a step one failure occurred which indicated a goodwill impairment may exist.
  The Company is currently performing a step two analyses which includes estimating
  the fair value of its assets and liabilities, including previously unrecognized
  intangible assets. The Income Approach is being utilized to value the Company's
  identified intangible assets, including developed technology, trade name, patents,
  and internally developed software. As a result of a preliminary step two test,
  the estimated fair value of the Company's goodwill is $4,427,000 which exceeds
  the carrying value by $5,370,946. As a result, the Company has recorded an estimated
  $5,370,946 goodwill impairment as of December 31, 2009. The Company is currently
  finalizing the identification and valuation of the intangible assets with the
  assistance of a third party specialist and any adjustment to the estimated impairment
  based on the completion of the step two analyses shall be recognized in the
  quarter ending March 31, 2010.

Concentration of Credit RiskFinancial 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. To the extent of the amounts recorded on the balance
  sheet, cash is concentrated at the Company's bank to the extent needed to comply
  with the minimum cash balance covenant of the bank line agreement. This exposure
  from an event of default by the bank is offset in part by amounts drawn against
  the bank line. 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.
  At December 31, 2009, there were two customers with material amounts outstanding
  totaling 31% of the Company's accounts receivable balances. At December 31,
  2008, there were three customers with material amounts outstanding totaling
  46% of the Company's accounts receivable balances.

Concentration of SuppliersSeveral 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.
  At December 31, 2009 and 2008, 33% and 36%, respectively, of the Company's accounts
  payable balances were concentrated in a single supplier. For the years ended
  December 31, 2009 and 2008, two suppliers and four suppliers, respectively,
  accounted for 63% and 68%, respectively, of the inventory purchases.

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 or determinable, title has transferred, collection of resulting receivables
  is reasonably assured, there are no customer acceptance requirements, and there
  are no remaining significant obligations. 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 the Company's balance sheet. At December 31, 2009 and 2008, deferred income
  on shipments to distributors represented deferred revenues totaling $1,805,648
  and $3,735,435, respectively, net of related costs of those revenues of $887,892
  and $1,733,694, respectively.





58

---

(Table of Contents)

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

The Company also earns revenue from its SocketCare Extended Warranty service
  program which offers extended warranty coverage of up to three years in duration
  on select products. Revenues from the SocketCare Extended Warranty service program
  are recognized ratably over the life of the extended warranty contract. The
  amount of unrecognized warranty service revenue is classified as deferred service
  revenue and presented on the Company's balance sheet in its short and long term
  components. 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.

Research and Development
  Research and development expenditures are charged to operations as incurred.
  The accounting for the costs of computer software to be sold, leased or otherwise
  marketed, requires the capitalization of certain software development costs
  subsequent to the establishment of technological feasibility. Based on the Company's
  product development process, technological feasibility is established upon the
  completion of a working model. Costs incurred by the Company between the completion
  of the working model and the point at which the product is ready for general
  release have been insignificant. Accordingly, the Company has charged all such
  costs to research and development expenses in the accompanying statements of
  operations.

Advertising Costs
  Advertising costs are charged to sales and marketing as incurred. The Company
  incurred $426,923, $491,595, and $388,629, in advertising costs during 2009,
  2008, and 2007, respectively.

Income Taxes
  Deferred tax assets and liabilities are determined based on differences between
  financial reporting and tax bases of assets and liabilities and are measured
  using enacted tax rates and laws that will be in effect when the differences
  are expected to reverse. The Company records a valuation allowance against deferred
  tax assets when it is more likely than not that such assets will not be realized.

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



59

---

(Table of Contents)

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

Net Loss Per Share
  The following table sets forth the computation of basic and diluted net loss
  per share:

|                                                                                               |  | Years
        Ended December 31,
|---------------------------------------------------------------------------------------------- |  | --------------------------------
|                                                                                               |  | 2009                            
|Numerator:                                                                                     |  |                                 
|Net
      loss                                                                                 |  | $                               
|                                                                                           |  |                                 
|Denominator:                                                                                   |  |                                 
|Weighted
      average common shares outstanding used in computing net loss per share:
      * |  |                                 
|Basic                                                                                          |  |                             
|Diluted                                                                                        |  |                             
|                                                                                           |  |                                 
|Net
        loss per share applicable to common stockholders:                                  |  |                                 
|Basic                                                                                          |  | $                               
|Diluted                                                                                        |  | $                               

|* 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 for the period prior to the reverse split has been restated to reflect
      the effects of the reverse split. See "Note 8 - Reverse Stock Split"
      for additional information.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the 2009, 2008, and 2007 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 and warrants to purchase 1,298,501 shares of
  Common Stock in 2009, options to purchase 1,027,504 shares of Common Stock in
  2008, and options and warrants to purchase 1,091,405 shares of Common Stock
  in 2007 have been omitted from the loss per share calculation as their effect
  is anti-dilutive.

Stock-Based Compensation
  The Company accounts for share-based awards to employees, including grants of
  employee stock options, based on the fair values of the share-based awards.
  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 Company uses 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, 2009, 2008, and 2007 are
  shown as follows:





60

---

(Table
  of Contents)

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

|                                     | Years
        Ended December 31.
|------------------------------------ | --------------------------------
|                                     | 2009                            
|Risk-free interest rate (%)          | 3.05                            
|Dividend
        yield               | ---                             
|Volatility factor                    | 1.0                             
|Expected
        option life (years) | 3.9                             

Total stock-based compensation expenses recognized in our statement of operations
  for the years ended December 31, 2009, 2008, and 2007 are as follows:

|                                        |  | Years
        Ended December 31, |        
|--------------------------------------- |  | -------------------------------- | -------
|Income
        Statement Classification |  |    
        2009             |        
|Cost
        of revenues                |  | $                                | 62,320 
|Research
        and development        |  |                                  | 161,406
|Sales
        and marketing             |  |                                  | 263,428
|General
        and administrative      |  |                              | 227,932
|Total                                   |  | $                                | 715,086

At December 31, 2009, the fair value of unamortized stock-based compensation
  expense was $922,922, and will be amortized over a weighted average period of
  2.18 years.

Segment 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, 2009, 2008,
  and 2007 are as follows:

|                                 |  |                                  |        |  |      |       |        |      |  |       |       
|-------------------------------- |  | -------------------------------- | ------ |  | ---- | ----- | ------ | ---- |  | ----- | ------
|                                 |  | Years
        Ended December 31,
|Revenues:
        (in thousands) |  | 2009                             |        |  | 2008 |       |        | 2007
|United
        States            |  | $                                | 9,930  |  |      | $     | 16,847 |      |  | $     | 15,634
|Europe                           |  |                                  | 5,386  |  |      |       | 6,470  |      |  |       | 6,610 
|Asia
        and rest of world   |  |                              | 1,811  |  |      |   | 3,240  |      |  |   | 1,874 
|                                 |  | $                                | 17,127 |  |      | $     | 26,557 |      |  | $     | 24,118

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





61

---

(Table
  of Contents)

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

Information regarding product families for the years ended December 31, 2009,
  2008, and 2007 is as follows:

|                                          |  |                                  |        |  |      |       |        |      |  |       |       
|----------------------------------------- |  | -------------------------------- | ------ |  | ---- | ----- | ------ | ---- |  | ----- | ------
|                                          |  | Years
        Ended December 31,
|Revenues:
        (in thousands)          |  | 2009                             |        |  | 2008 |       |        | 2007
|Mobile
        handheld computer products |  | $                                | 6,336  |  |      | $     | 4,730  |      |  | $     | 1,342 
|                                          |  |                                  |        |  |      |       |        |      |  |       |       
|Mobile
        peripheral products:       |  |                                  |        |  |      |       |        |      |  |       |       
|Data
      collection                     |  |                                  | 5,762  |  |      |       | 9,296  |      |  |       | 11,989
|Connectivity                              |  |                                  | 815    |  |      |       | 1,617  |      |  |       | 2,470 
|Serial
      interface *                  |  |                              | 896    |  |      |   | 1,608  |      |  |   | 1,776 
|                                          |  |                                  | 7,473  |  |      |       | 12,521 |      |  |       | 16,235
|                                          |  |                                  |        |  |      |       |        |      |  |       |       
|OEM
        embedded products             |  |                              | 3,318  |  |      |   | 9,306  |      |  |   | 6,541 
|                                          |  | $                                | 17,127 |  |      | $     | 26,557 |      |  | $     | 24,118

|*Note: On September 30, 2009, the Company sold its serial product line assets
      to Quatech, Inc. (see "Note 6 - Sale of Product Line Assets" for
      more information).
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Major Customers
  Customers who accounted for at least 10% of total revenues for the years ended
  December 31, 2009, 2008, and 2007 were as follows:

|                                                                         |  |                                  |    |      |  |      |    |   |  |  |    |  
|------------------------------------------------------------------------ |  | -------------------------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                                                         |  | Years
        Ended December 31,
|                                                                         |  | 2009                             |    | 2008 |  | 2007
|Ingram
      Micro, Inc.                                                 |  |                                  | 18 | %    |  |      | 16 | % |  |  | 13 | %
|Tech
      Data Corp.                                                    |  |                                  | 17 | %    |  |      | 15 | % |  |  | 23 | %
|Intermec
      Technologies Corp.                                        |  |                                  | *  |      |  |      | 14 | % |  |  | *  |  
|* Customer accounted for less than 10% of total revenues for the period.

Recent Accounting Standards
  In January 2009, the Securities and Exchange Commission ("SEC") issued
  Release No. 33-9002, "Interactive Data to Improve Financial Reporting."
  The final rule requires companies to provide their financial statements and
  financial statement schedules to the SEC and on their corporate websites in
  interactive data format using the eXtensible Business Reporting Language ("XBRL").
  The rule was adopted by the SEC to improve the ability of financial statement
  users to access and analyze financial data. The SEC adopted a phase-in schedule
  indicating when registrants must furnish interactive data. Under this schedule,
  the Company will be required to submit filings with financial statement information
  using XBRL commencing with its June 30, 2011 quarterly report on Form 10-Q.
  The Company is currently evaluating the impact of XBRL reporting on its financial
  reporting process.

Effective July 1, 2009, the Company adopted "The FASB Accounting Standards
  Codification and the Hierarchy of Generally Accepted Accounting Principles"
  (formerly SFAS No. 168, "The FASB Accounting Standards Codification and
  the Hierarchy of Generally Accepted Accounting Principles - a replacement of
  FASB Statement No. 162"). This standard establishes only two levels of
  U.S. generally accepted accounting principles ("GAAP"), authoritative
  and nonauthoritative. The Financial Accounting Standard Board ("FASB")
  Accounting Standards Codification (the "Codification") became the
  source of authoritative, nongovernmental GAAP, except for rules and interpretive
  releases of the SEC, which are sources of authoritative GAAP for SEC registrants.
  All other non-grandfathered, non-SEC accounting literature not included in the
  Codification became nonauthoritative. The Company began using the new guidelines
  and numbering system prescribed by the Codification when referring to GAAP in
  the third quarter of fiscal 2009. As the Codification was not intended to change
  or alter existing GAAP, adoption did not have any impact on the Company's financial
  condition, results of operations or cash flows.





62

---

(Table
  of Contents)

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

In October 2009, the FASB amended revenue recognition guidance for arrangements
  with multiple deliverables. The guidance eliminates the residual method of revenue
  recognition and allows the use of management's best estimate of selling price
  for individual elements of an arrangement when vendor specific objective evidence
  ("VSOE"), vendor objective evidence ("VOE") or third-party
  evidence ("TPE") is unavailable. This guidance should be applied on
  a prospective basis for revenue arrangements entered into or materially modified
  in fiscal years beginning on or after June 15, 2010, with early adoption permitted.
  Full retrospective application of the guidance is optional. The Company is currently
  evaluating the impact of adopting this guidance on its financial statements.

In October 2009, the FASB issued guidance which amends the scope of existing
  software revenue recognition accounting. Tangible products containing software
  components and non-software components that function together to deliver the
  product's essential functionality would be scoped out of the accounting guidance
  on software and accounted for based on other appropriate revenue recognition
  guidance. This guidance should be applied on a prospective basis for revenue
  arrangements entered into or materially modified in fiscal years beginning on
  or after June 15, 2010, with early adoption permitted. Full retrospective application
  of the new guidance is optional. This guidance must be adopted in the same period
  that the Company adopts the amended accounting for arrangements with multiple
  deliverables described in the preceding paragraph. The Company is currently
  evaluating the impact of adopting this guidance on its financial statements.

In January 2010, the FASB issued guidance which clarifies and provides additional
  disclosure requirements related to recurring and non-recurring fair value measurements.
  The Company must implement these new requirements in its first quarter of fiscal
  2010. Certain additional disclosures about purchases, sales, issuances and settlements
  in the roll forward of activity in Level 3 fair value measures are not effective
  until fiscal years beginning after December 15, 2010. Other than requiring additional
  disclosures, implementation of this new guidance will not have a material impact
  on the Company's financial statements.

NOTE 2 - Common Stock Financing

On May 26, 2009, the Company completed the sale of 556,786 shares of its Common
  Stock in a private placement with certain investors, including certain officers
  and directors of the Company and beneficial holders of more than five percent
  of the Company's outstanding capital stock. Of the shares sold, the Company
  issued 306,786 shares to non-management investors at $1.80 per share, 90 percent
  of the closing bid price of the Common Stock on the Nasdaq Capital Market one
  day prior to the execution of the Securities Purchase Agreement. Kevin J. Mills,
  President, Chief Executive Officer and a director of the Company, and Charlie
  Bass, Chairman of the Board of Directors of the Company, participated in the
  private placement for a total of 250,000 shares at $2.00 per share, the closing
  bid price of the Common Stock on the Nasdaq Capital Market one day prior to
  the execution of the Securities Purchase Agreement. In conjunction with the
  private placement, the Company issued to non-management investors five-year
  warrants to acquire an additional 61,356 shares of Common Stock at $1.80 per
  share, and issued to the placement agent a five-year warrant to acquire 27,839
  shares of Common Stock at $1.80 per share. The aggregate amount raised in the
  private placement was $1,052,215, and net proceeds after costs and expenses
  were $884,728. The aggregate number of shares of Common Stock issued and reserved
  for the exercise of warrants issued in or in connection with the private placement
  was 645,981. Using a binomial lattice valuation formula with the following assumptions:
  0.0% dividend yield rate, 2.30% risk free interest rate, $3.00 fair value of
  Common Stock, $1.80 exercise price, a life of five years, and a volatility of
  109.63%, $73,627 of the proceeds were attributed to the warrants issued to non-management
  investors, and the warrant issued to the placement agent was valued at $33,407
  which was included in the cost of the financing. The proceeds from the private
  placement were used to increase the Company's working capital balances.



63

---

(Table
  of Contents)

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 allowed 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. 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, 2009 and 2008 was 6%. The borrowings under the credit facility
  are secured by a first priority security interest in the assets of the Company.
  Under the agreement the Company was required to 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. The outstanding
  amounts borrowed under the domestic and international lines at December 31,
  2008, were $603,872 and $401,919, respectively. In conjunction with this agreement
  the Company was required to repay the outstanding balance on its term loan with
  Silicon Valley bank, the advance of which was originally completed in June 2007
  in a principal amount of $500,000 with a fixed interest rate of 9.75%, equal
  to the prime rate plus 1.5% at the time of the advance, and which was being
  repaid in 36 monthly installments prior to the accelerated repayment in December
  2008. Payments of principal and interest for the years ending December 31, 2008
  and 2007 were $460,796 and $95,940, respectively.

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.
  On July 7, 2009, the Company agreed with Silicon Valley Bank to amend the terms
  of the credit facility. Silicon Valley Bank agreed to replace the adjusted quick
  ratio covenant with a requirement that beginning June 1, 2009, the Company (i)
  maintain at all times a minimum balance of unrestricted cash and cash equivalents
  of no less than $1,000,000; and (ii) maintain minimum revenues of $4,068,000
  during the fiscal quarter ended June 30, 2009, $4,500,000 during the fiscal
  quarter ending September 30, 2009, and $5,355,000 during the fiscal quarter
  ending December 31, 2009 and thereafter. The advance rate for receivables from
  distributors was reduced from 60% to 50% and from 80% to 70% for all other receivables.
  The amendment also specified a change in the collateral handling fee from 0.7%
  to 0.62% per month. The applicable interest and fees are calculated based on
  the full amount of the accounts receivable provided as collateral, rather than
  on the actual amounts borrowed. The outstanding amounts borrowed under the domestic
  and international lines at December 31, 2009 were $649,905 and $352,183, respectively,
  and the full amounts of accounts receivable provided as collateral were $1,124,770,
  and $678,794, respectively. The Company was out of compliance with the minimum
  revenue covenant for the quarter ended December 31, 2009. Silicon Valley Bank
  agreed to forbear any actions relating to the event of default through March
  24, 2010.





64

---

(Table
  of Contents)

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

On March 3, 2010, the Company agreed with Silicon Valley Bank to extend the
  term of the existing credit facility to March 23, 2011 and to amend the terms
  of the credit facility. Under the terms of the amendment the Company is required
  to (i) maintain at all times a minimum balance of unrestricted cash and cash
  equivalents of no less than $1,000,000; and (ii) achieve minimum revenues of
  at least $4,565,000 for the quarter ending March 31, 2010; $5,495,000 for the
  quarter ending June 30, 2010; $6,115,000 for the quarter ending September 30,
  2010; and $6,265,000 for the quarter ending December 31, 2010. The terms of
  the amendment extend the period that Silicon Valley Bank has agreed to forbear
  from enforcing its rights and remedies under the credit facility through April
  30, 2010, and provide that Silicon Valley Bank will waive the existing event
  of default under the credit facility if the Company meets the requisite financial
  covenants for the quarter ending March 31, 2010. Should the Company fail to
  meet any of the financial covenants specified in the credit facility agreement,
  such failure would constitute an event of default under the terms of the credit
  agreement, and Silicon Valley Bank may, among its remedies, declare all obligations
  under the credit facility immediately due and payable and terminate its forbearance.

NOTE 4 - Intangible Assets

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. 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
  was fully amortized in the quarter ended June 30, 2009.

Amortization of all intangible assets for the years ended December 31, 2009,
  2008, and 2007, was $76,787, $127,147, and $134,557, respectively. Intangible
  assets as of December 31, 2009 consisted of the following:

|                               |  |        |           |  |              |       |         |     |  |       |         | 
|------------------------------ |  | ------ | --------- |  | ------------ | ----- | ------- | --- |  | ----- | ------- | 
|                               |  | Gross  |           |  | Accumulated  |       |         |     | 
|                               |  | Assets |           |  | Amortization |       |         | Net | 
|Patent                         |  | $      | 600,000   |  |              | $     | 330,000 |     |  | $     | 270,000 | 
|Project
      management tools |  |    | 570,750   |  |              |   | 570,750 |     |  |   | ---     | 
|Total intangible
      assets  |  | $      | 1,170,750 |  |              | $     | 900,750 |     |  | $     | 270,000 | 

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 | 





65

---

(Table
  of Contents)

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

Based on identified intangible assets recorded at December 31, 2009 and assuming
  no subsequent impairment of the underlying assets, the annual amortization expense
  is expected to be as follows:

|Year |  | Amount
|---- |  | ------
|2010 |  | $     
|2011 |  |       
|2012 |  |       
|2013 |  |       
|2014 |  |   
|     |  | $     



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, 2009 and 2008,
  property and equipment with a cost of $49,962 and $47,446, respectively, were
  subject to such financing arrangements. Related accumulated amortization at
  December 31, 2009 and 2008 amounted to $21,605 and $21,250, respectively. Future
  minimum payments under capital lease and equipment financing arrangements as
  of December 31, 2009, are as follows:

|Annual
        minimum payments               | Amount
|--------------------------------------------- | ------
|2010                                          | $     
|2011                                          |       
|2012                                          |       
|2013                                          |       
|Total
        minimum payments                |       
|Less
        amount representing interest     |       
|Present
        value of net minimum payments |       
|Less
        current portion                  |       
|Long-term
        portion                     | $     



NOTE 6 - Sale of Product Line Assets

On September 30, 2009, the Company entered into an asset purchase agreement
  pursuant to which the Company sold its serial product line to Quatech, Inc.,
  a wholly owned subsidiary of DPAC Technologies Corp. and manufacturer of wireless
  machine-to-machine networking and device connectivity systems. Under the terms
  of the asset purchase agreement, Quatech acquired for the sum of $500,000 all
  rights, title and interest in the Company's serial products business including
  related product designs, the SocketSerial brand name and the SocketSerial website
  under which the serial products were marketed by the Company. The products in
  the SocketSerial product line consist of a CompactFlash serial card, a PC serial
  card, a PC dual serial card, and a PC quad serial card, all with fixed and removable
  cable models. Also included are the Company's USB to Serial Adapter, USB to
  Ethernet Adapter and a license to sell the Cordless Serial Adapter. Quatech
  intends to continue to manufacture and distribute the SocketSerial product line
  and will assume existing customer support responsibilities. At the time of closing
  $450,000 of the purchase price was paid with the remaining $50,000 of the purchase
  price contingent and payable upon the attainment by Quatech of quarterly revenue
  from the sale of SocketSerial products of at least $250,000 in any quarter through
  the quarter ending December 31, 2010. The Company recognized $450,000 as a gain
  on sale of product line assets for the quarter ended September 30, 2009. The
  Company will use the proceeds from the transaction for working capital purposes.





66

---

(Table
  of Contents)

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

In connection with the sale of the serial products business, the Company and
  Quatech also entered into a supply and licensing agreement pursuant to which
  the Company (i) supplies Quatech with its proprietary HIS3 interface chip used
  in the serial products, (ii) licensed its Bluetooth software to Quatech for
  use in the Cordless Serial Adapter, and (iii) supplies a limited quantity of
  the Cordless Serial Adapter product currently held in the Company's inventory.

NOTE 7 - 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. The operating lease specifies
  annual increases in the monthly payments. Future minimum lease payments under
  all operating leases are as shown below:

|Annual
        minimum payments | Amount |        
|------------------------------- | ------ | -------
|2010                            |        | 381,711
|2011                            |        | 394,187
|2012                            |        | 198,133
|Total
        minimum payments  | $      | 974,031

Rental expense under all operating leases was $351,532, $351,532, and $352,745
  for each of the years ended December 31, 2009, 2008, and 2007, respectively.
  The amount of related deferred rent at December 31, 2009 and 2008 was $95,200
  and $112,977, 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
  $2,739,000 in 2010.

NOTE 8 - 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 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.





67

---

(Table
  of Contents)

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

NOTE 9 - 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 provided 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. The 1995
  Plan expired on April 28, 2005. 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, 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 | 
|Canceled                           |  |                   | 74,350  |        |                             |       | (74,350 | )                       |       | $ | 16.74 | 
|Transferred
      to 2004 Plan     |  |                   | (74,350 | )  |                             |       | ---     |                     |       |   |       | 
|Balance
      at December 31, 2009 |  |               | ---     |    |                             |   | 301,345 |                     |       | $ | 19.07 | 





68

---

(Table
  of Contents)

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

The outstanding and exercisable options under the 1995 Plan at December 31,
  2009 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 |    
|$7.30
        - $7.60   |  |                           | 86,660  |  |                             |  | 3.17 |                        |  | $ | 7.39              |  |  |                        | 86,660  |  |  | $ | 7.39  | 
|$9.70
        - $12.90  |  |                           | 91,016  |  |                             |  | 2.00 |                        |  | $ | 11.33             |  |  |                        | 91,016  |  |  | $ | 11.33 | 
|$23.50
        - $33.75 |  |                       | 123,669 |  |                             |  | 2.33 |                        |  | $ | 32.94             |  |  |                    | 123,669 |  |  | $ | 32.94 | 
|$7.30
        - $33.75  |  |                       | 301,345 |  |                             |  | 2.50 |                        |  | $ | 19.07             |  |  |                    | 301,345 |  |  | $ | 19.07 | 

The 1999 Plan
  The 1999 Plan provided 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. The
  1999 Plan expired on June 16, 2009.

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, 2006     |  |                   | 21,065  |        |                             |       | 107,275 |                         |       | $ | 27.81 | 
|No
      transactions                  |  |                   | ---     |    |                             |       | ---     |                     |       |   |       | 
|Balance at December
      31, 2007     |  |                   | 21,065  |        |                             |       | 107,275 |                         |       | $ | 27.81 | 
|No
      transactions                  |  |                   | 1,000   |    |                             |       | (1,000  | )                   |       | $ | 5.63  | 
|Balance at December
      31, 2008     |  |                   | 22,065  |        |                             |       | 106,275 |                         |       | $ | 28.02 | 
|Canceled                               |  |                   | 46,100  |        |                             |       | (46,100 | )                       |       | $ | 21.25 | 
|Options not granted at Plan expiration |  |                   | (68,165 | )  |                             |       | ---     |                     |       |   |       | 
|Balance
      at December 31, 2009     |  |               | ---     |    |                             |   | 60,175  |                     |       | $ | 33.20 | 



The outstanding and exercisable options at December 31, 2009 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 |   
|$22.80                  |  |                           | 3,000  |  |                             |  | 1.58 |                        |  | $ | 22.80             |  |  |                        | 3,000  |  |  | $ | 22.80 | 
|$33.75                  |  |                       | 57,175 |  |                             |  | 1.00 |                        |  | $ | 33.75             |  |  |                    | 57,175 |  |  | $ | 33.75 | 
|$22.80
        - $33.75 |  |                       | 60,175 |  |                             |  | 1.00 |                        |  | $ | 33.20             |  |  |                    | 60,175 |  |  | $ | 33.20 | 





69

---

(Table
  of Contents)

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, 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 | 
|Increase
      in shares authorized |  |                   | 129,196  |       |                             |       | ---      |                         |       |   |       | 
|Transferred
      from 1995 Plan    |  |                   | 74,350   |       |                             |       | ---      |                         |       |   |       | 
|Granted                             |  |                   | (492,181 | )     |                             |       | 492,181  |                         |       | $ | 2.37  | 
|Exercised                           |  |                   | ---      |       |                             |       | (1,360   | )                       |       | $ | 1.96  | 
|Canceled                            |  |               | 187,008  |   |                             |   | (187,016 | )                       |       | $ | 7.74  | 
|Balance
      at December 31, 2009  |  |               | 73,750   |   |                             |   | 849,339  |                     |       | $ | 6.27  | 

The weighted average fair value of options granted during 2009, 2008, and 2007,
  under the 2004 Plan was $1.64, $4.13, and $5.47, 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, 2010, 2009,
  and 2008, a total of 151,550, 129,196, and 127,976 shares, respectively, became
  available for grant from the 2004 Plan. As of March 12, 2010, 5,000 options
  to purchase shares have been granted from the 2004 Plan subsequent to December
  31, 2009.



70

---

(Table
  of Contents)

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

The outstanding and exercisable options at December 31, 2009 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 |    
|$1.96
        - $4.70   |  |                           | 448,397 |  |                             |  | 9.25 |                        |  | $ | 2.42              |  |  |                        | 129,213 |  |  | $ | 2.61  | 
|$6.00
        - $7.50   |  |                           | 124,380 |  |                             |  | 8.25 |                        |  | $ | 7.04              |  |  |                        | 66,418  |  |  | $ | 6.89  | 
|$8.00
        - $13.80  |  |                           | 187,547 |  |                             |  | 6.75 |                        |  | $ | 10.82             |  |  |                        | 150,189 |  |  | $ | 10.88 | 
|$15.00
        - $15.10 |  |                       | 89,015  |  |                             |  | 5.08 |                        |  | $ | 15.00             |  |  |                    | 87,512  |  |  | $ | 15.00 | 
|$1.96
        - $15.10  |  |                       | 849,339 |  |                             |  | 8.17 |                        |  | $ | 6.27              |  |  |                    | 433,332 |  |  | $ | 8.63  | 



NOTE 10 - Warrants

The Company issued warrants to purchase Common Stock in connection with certain
  financing agreements. During the year ended December 31, 2008, warrants to purchase
  Common Stock with an expiration in March 2008 were granted an extension to August
  2008. These warrants were subsequently exercised resulting in proceeds of $135,492
  in 2008. There were no warrants outstanding at December 31, 2008. In May 2009,
  warrants were issued in conjunction with a Common Stock financing (see "Note
  2 - Common Stock Financing" for more information). The Company has the
  following outstanding warrants to purchase Common Stock at December 31, 2009:

|Reason                         |  | Number
        of Shares |  |  | Price
        Per Share |  |  | Issue
        Date |  |  | Expiration
        Date
|------------------------------ |  | ------------------------ |  |  | ----------------------- |  |  | ------------------ |  |  | -----------------------
|                              
|Common
        Stock financing |  | 87,642                   |  |  | $1.80                   |  |  | May
        2009   |  |  | May 2014               



NOTE 11 - Shares Reserved

Common Stock reserved for future issuance was as follows at December 31, 2009
  and 2008:

|                                                                    |           | Number
        of shares at
        December 31,
|------------------------------------------------------------------- | --------- | ------------------------------------------------
|                                                                    | 2009      |                                                 
|Stock
        option grants outstanding (see Note 9)                | 1,210,859 |                                                 
|Reserved
        for future stock option grants (see Note 9)        | 73,750    |                                                 
|Reserved
        for exercise of outstanding warrants (see Note 10) | 87,642    |                                                 
|                                                                    | 1,372,251 |                                                 





71

---

(Table
  of Contents)

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

NOTE 12 - 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 were
  made by the Company during the years ended December 31, 2009, 2008 or 2007.
  Administrative expenses relating to the 401(k) Plan are not significant.NOTE 13 - Income
  Taxes

Deferred tax expense is related to the deferred tax liability on the portion
  of the Company's goodwill amortized for tax purposes. For the year ended December
  31, 2009 the accumulated accrued deferred tax expense, and the associated deferred
  tax liability on the Company's balance sheet, reversed due to the goodwill impairment
  charges on the portion of our goodwill being amortized for tax purposes. The
  provision for deferred tax for the periods ended December 31, 2009, 2008, and
  2007, consists of the following components:

|                                         |  | Years
        Ended December 31,
|---------------------------------------- |  | --------------------------------
|                                         |  | 2009                            
|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,
|---------------------------------------- |  | --------------------------------
|                                         |  | 2009                            
|Federal
        tax at statutory rate    |  |                                 
|State
        income tax rate            |  |                                 
|Losses
        and credits not benefited |  |                                 
|Goodwill
        impairment              |  |                             
|                                         |  |                                 
|Provision
        for taxes              |  |                             





72

---

(Table
  of Contents)

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

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:                        |  | 2009                            
|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                |  | $                               



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, 2009, the Company had net operating loss carryforwards for
  federal income tax purposes of approximately $26,500,000, which will expire
  at various dates beginning in 2010 and through 2029, and federal research and
  development tax credits of approximately $341,000, which will expire at various
  dates beginning in 2012 and through 2029. As of December 31, 2009, the Company
  had net operating loss carryforwards for state income tax purposes of approximately
  $12,660,000, which will expire at various dates in 2012 and through 2029, and
  state research and development tax credits of approximately $259,000, which
  can be carried forward indefinitely. During 2009, approximately $2,300,000 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. The deferred tax assets for the year ended December 31,
  2009 reflect estimates of Section 382 limitations.
  On January 1, 2007, the Company adopted the provision of ASC 740, "Income
  Taxes". ASC 740 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 ASC 740. As of the adoption date, the Company had an unrecognized tax benefit
  of approximately $760,000. The application of ASC 740 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.





73

---

(Table
  of Contents)

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

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, 2009                      | $      | 643,000
|Decreases
      in UTBs taken in prior years              |        | (57,000
|Increases
      in UTBs taken in current year             |        | 13,000 
|Amount
      related to settlements                       |        | ---    
|Amount
      related to lapsing of statute of limitations |    | ---    
|Ending balance at
        December 31, 2009               | $      | 599,000

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, 2009. 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 1995 to 2009
  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.





74

---

(Table
  of Contents)

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, 2009. 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, 2009, 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.



> 75

---

(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,
  2010.

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, 2010.







76

---

(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, 2010.

The following table provides information as of December 31, 2009 about our
  Common Stock that may be issued under the Company's existing equity compensation
  plans. For additional information about the equity compensation plans see Note
  9 to the Company's Financial Statements.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | (a)
        Number of
        securities to be issued
        upon exercise of
        outstanding options |           |  | (b)
        Weighted-average exercise price of outstanding options |               | (c)
        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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                            | 1,150,884 |  |                                                                    | $             | 9.64                                                                                                                                                                                                   
|Equity
      compensation plans not approved by security holders (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                        | 60,175    |  |                                                                    | $             | 28.02                                                                                                                                                                                                  
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                                                                        | 1,211,059 |  |                                                                    |  
      $ | 10.80                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(1) Includes the 1995 Stock Plan and its successor, the 2004 Equity Incentive
      Plan. The 1995 Stock Plan has expired and no new grants may be made from
      the 1995 Stock 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 151,550 shares became available for grant under the 2004 Equity
      Incentive Plan on January 1, 2010, in addition to those set forth in the
      table above.
      (2) Consists of the 1999 Stock Plan. The 1999 Stock Plan has expired and
      no new grants may be made from 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, 2010.

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, 2010.





> 

77

---

(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
>         48Balance
>           Sheets
>         49Statements
>           of Operations
>         50Statements
>           of Stockholders' Equity
>         51Statements
>           of Cash Flows
>         52Notes
>           to Financial Statements
>         53
>     
>     
>     
>     
>     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 77. 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 77. The Exhibits listed on the accompanying Index of Exhibits are filed
>     or incorporated by reference as part of this report.

78

---

(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:
      April 1, 2010 | /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)                                                   |                     | April
      1, 2010
|-- | ---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------- | -------------------
|   | Kevin
      J. Mills        
|   |                              |                                                                                                                                    |                     |                    
|By | /s/
      Charlie Bass       | Chairman
      of the Board                                                                                                        |                     | April
      1, 2010
|   | Charlie
      Bass          
|   |                              |                                                                                                                                    |                     |                    
|By | /s/
      David W. Dunlap    | Vice
      President of Finance and Administration and Chief Financial Officer 
      (Principal Financial and Accounting Officer) |                     | April
      1, 2010
|   | David
      W. Dunlap       
|   |                              |                                                                                                                                    |                     |                    
|By | /s/
      Micheal L. Gifford | Executive
      Vice President and Director                                                                                        |                     | April
      1, 2010
|   | Micheal
      L. Gifford    
|   |                              |                                                                                                                                    |                     |                    
|By | /s/
      Leon Malmed        | Director                                                                                                                           |                     | April
      1, 2010
|   | Leon
      Malmed           
|   |                              |                                                                                                                                    |                     |                    
|By | /s/
      Enzo Torresi       | Director                                                                                                                           |                     | April
      1, 2010
|   | Enzo
      Torresi          
|   |                              |                                                                                                                                    |                     |                    
|By | /s/
      Peter Sealey       | Director                                                                                                                           |                     | April
      1, 2010
|   | Peter
      Sealey           |                                                                                                                                   
|   |                              |                                                                                                                                    |                    
|By | /s/
      Thomas Miller      | Director                                                                                                                           | April
      1, 2010
|   | Tom
      Miller             |                                                                                                                                   





79

---










Index
  to Exhibits

|Exhibit
        Number | Description                                                                                                                                                                                                                    
|---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                                                                                                                
|3.1 (1)                | Amended and Restated Certificate of Incorporation.                                                                                                                                                                             
|                       |                                                                                                                                                                                                                                
|3.2
        (2)        | Bylaws, as amended February 17, 2008.                                                                                                                                                                                          
|                       |                                                                                                                                                                                                                                
|10.1
        (3)*      | Form of Indemnification Agreement entered into between the
      Company and its directors and officers.                                                                                                                       
|                       |                                                                                                                                                                                                                                
|10.2
        (4)*      | 1995 Stock Plan and forms of agreement thereunder.                                                                                                                                                                             
|                       |                                                                                                                                                                                                                                
|10.3 (5)*              | Form of Amendment No.1 to Stock Option Agreement between the
      Company and certain Option Holders under the 1995 Stock Option Plan.                                                                                        
|                       |                                                                                                                                                                                                                                
|10.4 (6)*              | 1999 Nonstatutory Stock Option Plan.                                                                                                                                                                                           
|                       |                                                                                                                                                                                                                                
|10.5 (7)*              | 2004 Equity Incentive Plan and forms of agreement thereunder.                                                                                                                                                                  
|                       |                                                                                                                                                                                                                                
|10.6 (8)*              | Form of Executive Management Bonus Plan between
      the Company and certain eligible participants.                                                                                                                           
|                       |                                                                                                                                                                                                                                
|10.7 (9)*              | Form of Employment Agreement dated January 21, 2009 between
      the Company and the officers of the Company.                                                                                                                 
|                       |                                                                                                                                                                                                                                
|10.8 (10)              | 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               
|                       |                                                                                                                                                                                                                                
|10.9 (11)              | 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, July 7, 2009 and March 3, 2010.                   
|                       |                                                                                                                                                                                                                                
|10.10 (11)             | 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, July 7 ,2009 and March 3, 2010.

|           |                                                                                                                                    
|---------- | -----------------------------------------------------------------------------------------------------------------------------------
|10.11 (12) | Securities Purchase Agreement between the Company
      and the purchasers listed on Exhibit A attached thereto dated May 18, 2009.





80

---



|Exhibit
        Number | Description                                                                                                                                              
|---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                                          
|10.12 (12)             | Registration Rights Agreement by and among the Company and
      the purchasers listed on Exhibit A attached thereto dated May 18, 2009.                 
|                       |                                                                                                                                                          
|10.13 (12)             | Form of Warrant for the Purchase of Shares of Common Stock
      issued May 26, 2009 to certain purchasers in connection with a private placement.       
|                       |                                                                                                                                                          
|10.14 (12)             | Form of Warrant for the Purchase of Shares of Common Stock
      issued May 26, 2009 to the placement agent in connection with a private
      placement.
|                       |                                                                                                                                                          
|10.15 (13)             | Asset Purchase Agreement by and among the Company, Development
      Capital Ventures, LP and Quatech Inc. dated September 30, 2009.                     
|                       |                                                                                                                                                          
|10.16 (13)             | Supply and Licensing Agreement Between Quatech, Inc. and Socket
      Mobile, Inc. dated September 30, 2009.                                             
|                       |                                                                                                                                                          
|10.17 (14)             | Forbearance Agreement between Socket Mobile, Inc. and Silicon
      Valley Bank, dated February 4, 2010 as amended March 3, 2010.                        
|                       |                                                                                                                                                          
|11.1                   | Computation of Earnings per Share (see Statements of Operations
      in Item 8).                                                                        
|                       |                                                                                                                                                          
|14.1 (15)              | Code of Business Conduct and Ethics.                                                                                                                     
|                       |                                                                                                                                                          
|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
        10-K filed on March 16, 2009.
      (2) Incorporated
        by reference to exhibits filed with the Company's Form 8-K filed on February
        20, 2008.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





81

---



|(3)
      Incorporated by reference to exhibits filed with the Company's Form 8-K
      filed on January 27, 2009.
      (4) Incorporated
        by reference to exhibits filed with Company's Registration Statement on
        Form SB 2 (File No. 33 91210 LA) filed on June 2, 1995 and declared effective
        on October 20, 2000.
      (5) Incorporated
        by reference to exhibits filed with the Company's Form 10-KSB filed on
        March 30, 1998.
      (6) Incorporated
        by reference to exhibits filed with the Company's Form 10-QSB filed on
        August 16, 1999.
      (7) Incorporated
        by reference to Appendix C filed with the Company's Form DEF 14A filed
        on April 29, 2004.
      (8) Incorporated
        by reference to exhibits filed with the Company's Form 10-KSB filed on
        April 2, 2001.
      (9) Incorporated
        by reference to exhibits filed with the Company's Form 8-K filed on January
        27, 2009.
      (10) Incorporated
        by reference to exhibits filed with the Company's Form 10-Q filed on November
        13, 2006.
      (11) Incorporated
        by reference to exhibits filed with the Company's Form 8-K filed on January
        7, 2009, the Company's Form 8-K filed on February 25, 2009, the Company's
        Form 8-K filed on July 7, 2009 and the Company's Form 8-K filed on March
        8, 2010.
      (12) Incorporated
        by reference to exhibits filed with the Company's Form 8-K filed on May
        20, 2009.
      (13) Incorporated
        by reference to exhibits filed with the Company's Form 8-K filed on October
        6, 2009.
      (14) Incorporated by reference to exhibits filed with the Company's Form
        8-K filed on March 8, 2010.
      (15) Incorporated by reference to exhibits filed with the Company's Form
        10-K filed on March 10, 2006.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





82

---