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, 2010 **[   ]**
      **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, 2010, the aggregate market value of the registrant's
    Common Stock ($0.001 par value) held by non-affiliates of the registrant was
    $8,544,879 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 10, 2011: 4,084,476 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 27, 2011. 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
      46Item
        8.
      Financial
        Statements and Supplementary Data
      46Item
        9.
      Changes
        in and Disagreements with Accountants on Accounting and Financial Disclosure
      74Item
        9A.
      Controls
        and Procedures
      74Item
        9B.
      Other
        Information
      75PART
        IIIItem
        10.
      Directors, Executive Officers and Corporate Governance
      75Item
        11.
      Executive Compensation
      75Item
        12.
      Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters
      75Item
        13.
      Certain
        Relationships and Related Transactions, and Director Independence
      76Item
        14.
      Principal
        Accounting Fees and Services
      76PART
        IVItem
        15.
      Exhibits, Financial Statement Schedules
      76SIGNATURES
      77 Index
        to Exhibits
      78


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 product components and 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 handheld computers and data collection products
  serving the business mobility markets. We offer a family of handheld computer
  products designed for business enterprise use and a wide range of data collection
  products including two dimensional (2D) and linear (1D) bar code scanners, Radio
  Frequency Identification (RFID) readers, and magnetic stripe readers. We also
  offer wearable ring scanners, customized versions of our handheld computers,
  embedded wireless LAN cards and Bluetooth modules as OEM products to third party
  companies. Our data collection products work with our handheld computers and
  our cordless hand scanners work with many third-party mobile handheld devices
  including smartphones, tablet computers, ultra-mobile personal computers (UMPCs),
  notebooks and desktop systems, adding data collection 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 using management software we developed for ease of use. See "Products"
  for more information on the products that we produce.



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We work closely with software application developers offering or developing
  vertical software applications for use with our handheld computers and for use
  with Smartphones, including phones running Apple iOS4, Google Android, RIM BlackBerry
  and Microsoft Windows operating systems for use with our cordless hand scanners.
  Healthcare and hospitality are two of the primary areas of focus for software
  application developers who have developed applications for use on our handheld
  computers, and a significant portion of our handheld computer sales now come
  from organizations within these two market segments. Other vertical markets
  benefiting from 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 the application developers who have developed applications
  for the mobile enterprise.

We believe growth in the mobile workforce along with technical advances and
  cost reductions in mobile devices, Smartphones and networking technologies along
  with the pervasive use of the Internet are driving broader adoption of mobile
  computing solutions. 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 wearable ring scanners, customized versions of our handheld computers, component
  Bluetooth and wireless LAN technologies. We customize these products and components
  for our use in our own products and leverage that investment through the sale
  of modified versions or 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, 2010 was 64 people. We subcontract
  the manufacturing of all of our products to independent third-party contract
  manufacturers located in the U.S., China and Taiwan who have the equipment,
  know-how and capacity to manufacture products to our specifications. Our handheld
  computers and data collection 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.



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We have financed our operations since inception primarily from the sale of
  equity capital. In November 2010 we issued $1 million in 18 month convertible
  notes convertible into common stock at the option of the holder to provide additional
  working capital. In February 2011 we issued $500,000 in common stock to our
  primary contract manufacturer in exchange for an equal reduction in our trade
  payables balance.

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 primary products are classified into three broad product families:

- Mobile handheld computer products;
- Data collection products; and
- OEM embedded products.

In addition, we continue to carry legacy plug-in connectivity products consisting
  of Ethernet cards and adapters which represented less than 4% of our revenue
  in 2010. These revenues in 2009 and 2008 included serial products, modems and
  other plug-in connectivity products that have been discontinued. Legacy products
  represented 10% of our revenue in 2009 and 12% of our revenue in 2008.

Our mobile handheld computer products are designed to be durable,
  lightweight and dependable devices which meet the requirements of the healthcare,
  hospitality and other markets we serve. Mobile handheld computer products and
  accessories represented approximately 44 percent, 38 percent and 18 percent
  of our revenue for the years ended December 31, 2010, 2009 and 2008, respectively.

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 operating system,
  Version 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 are designed with 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 upgrade SoMo technology components from time to time without impacting
  form, fit or function. We expect our SoMo650 product to continue to be offered
  into 2014, approximately seven years from its introduction.



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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 tableside ordering in the
  hospitality market, most 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, printers and smartcard
  readers.

Our data collection products are designed to enable the electronic
  collection of data from barcodes, radio frequency identification (RFID) tags
  or magnetic stripes. The products have been designed as durable devices for
  commercial use enabling a wide variety of accurate and rapid scans over a full
  work shift. All of the products come with SocketScan software that allows data
  to be edited when scanned and provides an easy-to-use interface for developers
  to build barcode scanning into their applications. Products are available in
  both standard and antimicrobial cases.

Our data collection products consist of:

- Cordless Hand Scanners: two dimensional (2D) and linear (1D) scanning used
    primarily with Smartphones and Tablet computers
- Plug-in barcode scanners: 2D and 1D in a CompactFlash form factor used primarily
    with our SoMo handheld computers
- Plug-in RFID products that read radio frequency identification tags used
    primarily with our SoMo handheld computers
- Combination plug-in barcode scanner
    and RFID reader/writer used primarily with our SoMo handheld computers
- Plug-in magnetic stripe reader used primarily with our SoMo handheld computers
- Wearable cordless ring scanner for industrial applications needing two hands



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Our plug-in barcode scanning products plug into handheld computers and our
  cordless hand scanners connect wirelessly over Bluetooth to tablet computers,
  ultra-mobile personal computers, notebook computers and smartphones 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 connect using Bluetooth technology.

Our Cordless Hand Scanners use Bluetooth technology as the connection
  interface. The scanners are available with two dimensional (2D) imagers and
  laser (1D) linear scanning engines. The scanners are available in standard cases
  or antimicrobial cases. The Cordless Hand Scanners are lightweight, ergonomically
  designed for ease of use and rapid repetitive scanning and are durable, lightweight
  and compact. During 2010, we redesigned our SocketScan software to enable the
  use of our Cordless Hand Scanners with a wide variety of smartphones, and we
  intend to add additional smartphone models as they are released by the smartphone
  manufacturers to provide wide ranging support for this fast emerging category
  of mobile devices. Currently SocketScan10 supports smartphones that use Windows
  Mobile, Windows CE, RIM Blackberry, and Google Android operating systems. The
  Human Interface Device (HID) Bluetooth protocol also allows the use of our Cordless
  Hand Scanners with HID-enabled devices including the iPad, iPhone, and iPod
  touch using the Apple iOS4 operating system. The HID protocol enters scanned
  data as if it was entered through the keyboard. During 2011, we intend to extend
  the benefits of SocketScan 10 software to Apple devices running the iOS operating
  system.

Our plug-in barcode scanners use the industry standard CompactFlash
  form factor and are available with two dimensional 2D and laser linear 1D scanning
  engines. When plugged into a mobile computing device with a CompactFlash slot
  and SocketScan loaded onto the device, the combination of device and plug-in
  barcode scanner can be used as a one handed barcode scanner operated from programmable
  buttons on the mobile computing device.

Our ring scanneris an industrial strength barcode scanner that is worn
  on the index finger and connects via Bluetooth to mobile or fixed data collection
  computing devices. The device enables a worker to scan while having two hands
  available and is designed for applications such as warehousing and pick-and-pack
  operations.

Our Radio Frequency Identification (RFID) products enable RFID tags
  to be read. We also offer an RFID/laser barcode scanner combination product
  that enables RFID tags to be read or written to and linear (1D) barcodes to
  be scanned with the same device.

Our Magnetic Stripe Reader is a plug-in device in a CompactFlash form
  factor for use with devices having a CompactFlash slot. The Reader enables magnetic
  card stripes such as on credit cards to be swiped and read electronically from
  a mobile location and is ideal for applications such as tableside ordering.

Data collection product revenues represented approximately 35 percent, 32 percent
  and 35 percent of our revenues for the three years ended December 31, 2010,
  2009 and 2008, respectively.

Our OEM embedded products consist of Bluetooth and wireless LAN
  plug-in cards used primarily by Original Equipment Manufacturers (OEMs) of electronic
  products to build wireless connection functions into their products using the
  Bluetooth and wireless LAN standards for wireless connectivity. Our Bluetooth
  products use the Bluetooth 2.1 + EDR standard. 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
  10 percent, 19 percent and 35 percent of our revenue for the years ended December
  31, 2010, 2009 and 2008, respectively.



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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 approximately
  $0.8 million or 6 percent of our revenue in 2010 and approximately $0.3 million
  or 2 percent of our revenue in 2009. Service revenues were insignificant for
  2008.

Vertical Market Applications
  Our products provide a mobile platform for use 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 an Authorized
  Reseller Program enabling application developers to offer vertical market solutions
  using our products. The Authorized Reseller Program includes pricing discounts
  on our products, an online partner portal, tailored sales resources, and inclusion
  of resellers in our marketing programs and communications tools including a
  listing on our 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.



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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.

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

Digital Dining offers tableside ordering capabilities for restaurants
  with their MenuSoft system using our handheld computer and a magnetic stripe
  reader;

MiniBar uses our handheld computer and a barcode scanner to service
  room refreshment centers in hotel rooms;

RedTech, an events management company in the U.K., offers a cashless
  mobile transaction processing system for events using our handheld computer
  and a third party smartcard reader.

Retail MerchandisingCardinal 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.

AutomotiveManheim 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.





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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.

Government, Education and Other3M Corporation offers mobile extensions to its library management system
  to enable the mobile inventory and processing of library materials.

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 Centerof the U.S. Army
  efficiently inventories blood supplies in combat zones, reducing blood spoilage
  and increasing availability.

Zerion Software creates mobile applications for businesses of all sizes
  on emerging platforms including the iPhone, iPod touch, Android, and iPad. Zerion
  Software's SAAS based mobile business applications help businesses reduce costs,
  increase productivity, and improve customer satisfaction. Zerion Software's
  flagship product, iFormBuilder, is an award-winning, patent-pending mobile platform
  that is being used across the globe in many different industries. It is currently
  utilized by 3 of the top 10 hotel brands in the world, the largest hospital
  in the US, the US Government, top franchises, amusement parks, and hundreds
  of small/mid-size businesses.

Market Dynamics
  Mobile electronic computing devices 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. These devices include smartphones,
  handheld computers, tablet computers, ultra-mobile personal computers (UMPCs),
  and notebooks. Many handheld computers, tablets and notebooks, such as those
  using the Windows or Windows Mobile operating system including our SoMo line
  of mobile handheld computers, have built-in expansion capabilities in standard
  form factors such as CompactFlash Input/Output plug-in slots or Bluetooth wireless
  connection capabilities to allow for transfer of data over Bluetooth, Wireless
  LAN or plug-in connections. Smartphones and tablet computers use a variety of
  operating systems from Apple (iOS4), Google (Android), RIM (BlackBerry) and
  Hewlett-Packard (WebOS). Advances in mobile phone technology have facilitated
  rapid data transfers and internet access creating a dynamic, rapidly growing
  smartphone market. Although smartphone applications are focused on consumer
  applications, smartphones have the capability to support many business applications
  and our data collection products are designed to work with smartphones from
  the major smartphone manufacturers where repetitive or robust bar code scanning
  requirements exceed the limited scanning capabilities of a phone camera (See
  Products - Data Collection Products - Cordless Hand Scanners).

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.



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Handheld computers have traditionally been classified into consumer
  and industrial categories. Consumer devices such as those offered by Hewlett-Packard
  are designed for personal use and fit in a pocket or purse. Industrial devices
  such as those offered by Motorola 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 between consumer and
  industrial devices. Our 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 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, and multiple language support. Other features needed by businesses
  include fast processors, large memory and extended battery life. Included in
  our mobile handheld computer family of products are handheld computer and barcode
  scanner models made with antimicrobial materials added to the case plastics
  to provide an extra layer of protection to the devices to aid against the multiplication
  and spread of potentially harmful bacteria and microbes found in healthcare
  environments. Compared to industrial devices, our handheld 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.
  We work to extend this life by replacing or upgrading components as they are
  discontinued by their manufacturers without changing the form, fit or function
  of the product. We expect to continue to offer the SoMo650 for sale into 2014,
  approximately seven years from its introduction.

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.



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

Functionality of today's handheld computing devices is extensive and improving.
  Most handheld 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. Handheld 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
  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 connectivity
  and deployment of handheld computers by corporations to their mobile workforce
  are expected to be major factors driving growth in mobile data applications
  for businesses over the next several years.

Third-party applications for enterprises are becoming available in increasing
  numbers. Third-party software applications are becoming increasingly available
  for the collection, processing and transfer of information by a mobile workforce.
  In healthcare markets, handheld computers 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, alerting on-call personnel to
  needs for their services, collecting community and clinical health data, delivery
  of healthcare information to practitioners and researchers and patients, real-time
  monitoring of patient vital signs, and direct provision of care via mobile telemedicine
  applications. Other mobile applications include 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 Authorized Reseller Program. Our Authorized Reseller 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 be a systems supplier to the Business Mobility
  markets which today consists of two segments, the handheld computing market
  and the mobile device centric market. For the handheld computing market segment,
  we 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, and support
  the development of third-party software applications and integrator solutions.
  For the mobile device centric market, we 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,
  expand the number of smartphone platforms that we serve to include smartphones
  using all popular operating systems, and market the strengths of our wireless
  driver and management software to other equipment manufacturers of mobile devices.
  Our cordless data collection products offer commercial-grade rapid and robust
  barcode scanning capabilities to the large and growing mobile device marketplace.

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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 with third party handheld computers
  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,
  since the introduction of our mobile handheld computer we offer a complete hardware
  solution consisting of a mobile handheld computer and data collection 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 to work closely with
  third-party application providers, value added resellers, systems integrators
  and end users for software applications created in-house. Since the introduction
  of our SoMo family of handheld computers in 2007, we have sold more than 36,000
  units around the world (See Products - Mobile Handheld Computer Products).

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 Authorized Reseller Program. We have employees that manage each
  strategic relationship, and we provide software developer kits, training and
  technical support to our software and hardware developers. We coordinate our
  handheld computer 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 products are compatible
  with a wide variety of computers and smartphones. We adhere to standards of
  a number of standards setting bodies whose technologies are used in our products
  such as the Bluetooth SIG (Special Interest Group).

Expand and improve our product offerings. We offer a wide range of products
  under a modular concept that enables customers to design their mobile systems
  to meet their specific requirements, 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've upgraded the operating system and management software
  on our mobile handheld computer including adding many operating system features
  such as multiple language support, upgrading to later versions of the Windows
  Mobile operating system while continuing to support earlier versions, and upgrading
  our Bluetooth and wireless LAN management software. We have expanded our data
  collection product offerings with 2D imaging technology to add to our 1D linear
  barcode scanning capabilities. We design our products to comply with the regulations
  of the many worldwide agencies that regulate the safety, performance and use
  of electronic products.



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Build a Strong Brand Name. We are building a brand image of "Business
  Mobility Now!" This image closely associates us with business 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 handheld
  computing 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 application developers 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, and wireless LAN. In addition, we
  have employees dedicated to assisting developers and integrators with integrating
  our products into their solutions. Our Authorized Reseller Program supports
  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.

Expand awareness within the business community of the data collection capabilities
  of all of the mobile device 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 (supported operating systems include
  RIM BlackBerry, Windows Mobile, Android from Google, and in 2011, Apple iOS),
  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
  wireless LAN cards and value-add software into their own product designs. Our
  value-add is the extensive driver and management software for 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 rather than developing and maintaining such software themselves. We have
  employees that manage 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.



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Competition and Competitive Risks
  The overall market for handheld 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 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 36,000 units shipped since its introduction in June 2007. The competition
  in each of our product families is discussed in more detail below.

Handheld computers. Our SoMo handheld computers address the price/performance
  market gap between consumer handheld computers and industrial grade handheld
  computers. Consumer-oriented handheld computers are less durable and offer fewer
  features at a lower cost than industrial handheld computers. Industrial grade
  handheld computers are larger and more difficult to carry throughout the workday
  and are several times more expensive than consumer-oriented units. Our SoMo
  mobile handheld computer offers improved features over a consumer-oriented unit
  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
  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. The
  SoMo mobile handheld computers are addressing specific needs of our healthcare
  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
  without phones are offered by Hewlett-Packard, currently the largest supplier
  of this category of device, and others but the trend has been for them to offer
  more phone integrated units. Hewlett-Packard commencing late in 2010 began to
  discontinue the availability of their consumer grade handheld computers without
  phones in selected international locations. 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.

Data Collection Products. Our 2D/1D imager and 1D laser barcode scanning
  products face competition from ruggedized integrated barcode scanning devices
  from Motorola, Intermec, Honeywell, Datalogic, LXE, KoamTac, Infinite Peripherals,
  Wasp Barcode Technologies 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 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. 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.



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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.

OEM Embedded Products - Wireless Connections. We offer our wireless
  connection wireless LAN technologies in the form of SDIO plug-in cards. 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 wireless LAN software works well with our hardware,
  providing us a complete solution for embedding 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 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.

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.

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 and in smartphones
  running operating systems from Apple (iOS4 - HID interface only at the end of
  2010), Google (Android), Research In Motion (BlackBerry), Microsoft (Windows
  Mobile) and Hewlett-Packard (WebOS - HID interface only at the end of 2010).
  We have been awarded twenty-one 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.



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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, 2010 was 64 people. Our employees are not represented by a union, and we
  consider our employee relationships to be good.



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Sales and Marketing
  We target business customers 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.

During the year ended December 31, 2010, 76 percent of our sales were in North
  America, 20 percent in Europe, and 4 percent in Asia and Pacific Rim countries.
  In 2009, 58 percent of our sales were in North America, 31 percent in Europe,
  and 11 percent were in Asia and Pacific Rim countries. In 2008, 64 percent of
  our sales were in North America, 24 percent in Europe and 8 percent in Asia
  and Pacific Rim countries. Export sales are subject to the complications of
  complying with laws of various countries and the risk of import/export restrictions
  and tariff regulations.

We market our products through a worldwide network of distributors and resellers,
  as well as through original equipment manufacturers and value added resellers.
  In addition, we market our products through participants in our Authorized Reseller
  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, 2010, we had 21 people in sales, marketing and customer
  support.

Sales to customers in 2010 representing 10 percent or more of our revenue consisted
  of distributors Ingram Micro (14 percent), Tech Data Corporation (13 percent)
  and Blue Star Corporation (11 percent) and our customer Epocal accounted for
  10 percent. In 2009, Ingram Micro accounted for 18 percent of our revenue and
  Tech Data accounted for 17 percent of our revenue. In 2008, Ingram Micro accounted
  for 16 percent of our revenue and Tech Data accounted for 15 percent of our
  revenue and our customer Intermec accounted for 14 percent of our revenue.

Consistent with industry practice, we provide our distributors with stock balancing
  and price protection rights which permit these distributors to return slow-moving
  products to us for credit, and to receive price adjustments for inventories
  of our products held by the distributors if we lower the price of those products.
  The immediate effect of returns and adjustments on our quarterly operating results
  is limited, since we recognize revenues on products shipped to distributors
  only at the time the merchandise is sold by the distributor.

We rely significantly on our distributors and resellers for distribution of
  our products. Our agreements with our distributors and resellers generally are
  nonexclusive and may be terminated on short notice by either party without cause.
  Furthermore, our distributors and resellers are not within our control, are
  not obligated to purchase products from us, and may represent other lines of
  products, including those of our competitors. If any distributors or resellers
  reduce or discontinue efforts to sell our products, our revenues and operating
  results could be materially adversely affected.



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Manufacturing
    We subcontract the manufacturing of substantially all of our products to independent
    third-party contract manufacturers located in the U.S., China, and Taiwan
    and who have the equipment, know-how and capacity to manufacture products
    to our specifications. We perform final product testing and package our products
    at our Newark, California facility for most of our sales. As of December 31,
    2010, we had 23 people employed in manufacturing operations, including planning,
    buying, manufacturing engineering, quality control, product assembly, shipping
    and receiving, and product support. Certain of our products or product components are available from only one
    vendor. These sole sourced products or components include the interface chip
    that controls the signal transmission between all of our plug-in CompactFlash
    products (except our Ethernet and wireless LAN cards) and the card slot on
    the mobile computer, our Ethernet, 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. With the
    exception of recent worldwide supply shortages of LCD screens for our handheld
    computer (See Management's Discussion and Analysis), 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 $2.4 million in 2010,
    $2.9 million in 2008, and $4.5 million in 2007. The amount of expense is determined
    in part by the number of development projects. As of December 31, 2010, 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, 2010, we had 10 people responsible for our financial and
    administrative activities including accounting and finance, personnel, internal
    computer systems and administrative support.


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Item 1A. Risk Factors There is substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared on a going concern basis. During
    the years ended December 31, 2010, 2009, and 2008, we incurred net losses
    of $4.0 million, $7.9 million, and $2.8 million, respectively. As of December
    31, 2010, we have an accumulated deficit of $54.8 million and a working capital
    deficit of $1.6 million. The report of our Independent Registered Public Accounting
    Firm on our financial statements for the year ended December 31, 2010 and
    2009, contains an explanatory paragraph noting that certain conditions raise
    substantial doubt about our ability to continue as a going concern. Our continued
    operating losses and declines in our working capital balances are conditions
    that raise doubt about the Company's ability to continue as a going concern.
    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, and raising additional
    capital as needed, including development funding from development partners
    and the issuance of additional equity securities. Nonetheless, 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 would 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. We have a history of operating losses and may not achieve ongoing profitability. We have been unprofitable in every quarter except one during the past three
    fiscal years. 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 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.


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We may require additional capital in the future, but that capital may
    not be available on reasonable terms, if at all, or on terms that would not
    cause substantial dilution to your stock holdings. 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, deployments
    by businesses of applications that use our handheld computers and our data
    collection products, and supply delays in key components such as we experienced
    in the fourth quarter of 2010. 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. We may require additional capital in the future to repay our outstanding
    convertible note, but that capital may not be available on reasonable terms,
    if at all, or available only on terms that result in substantial dilution
    to your stock holdings. Although the convertible note that we issued in November 2010 is priced to
    facilitate its conversion into equity over the eighteen-month term of the
    convertible note, such conversion is at the option of the noteholder and the
    note, including interest, if outstanding at the end of the eighteen-month
    period, would require repayment by the Company. Our failure to repay the convertible
    note including interest if outstanding at the end of its term, would be an
    event of default. In addition, the convertible note contains other events
    of default, including in the event the Company is unable to maintain the minimum
    cash and accounts receivables balance and the minimum current ratio required
    by the convertible note. There can be no assurance that capital to refinance
    the convertible note at the end of its eighteen-month term or upon an event
    of default would be available on terms acceptable to the Company, if at all.
    The terms of our November 2010 convertible note financing contain certain
    anti-dilution provisions. Should we need to raise additional capital in the
    future at prices below the conversion price of the convertible note, if outstanding
    at such future time, substantial dilution could result from such a financing. 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 or in the manufacture of products
    relating to orders received, may adversely affect our quarterly operating
    results. Our operating results may also fluctuate due to factors such as:  19  (Table
    of Contents) 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;
    delays in supplies of key components
      used in the manufacturing of our products; and
    general economic conditions and conditions specific to our customers'
      industries. 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. Goodwill comprises a significant portion of our assets and may be subject
    to impairment write-downs in future periods which would substantially increase
    our losses, make it more difficult to achieve profitability, and cause our
    stock price to decline. We review our goodwill for impairment at least annually and more often if
    factors suggest potential impairment. Many factors are considered in evaluating
    goodwill including our market capitalization, comparable companies within
    our industry, our estimates of our future performance, and discounted cash
    flow analysis. Many of these factors are highly subjective and may be negatively
    impacted by our financial results and market conditions in the future. We
    recorded goodwill impairment charges in 2009 of $5.4 million. We may incur
    goodwill impairment charges in the future and any future write-downs of our
    goodwill would increase our net losses, make it more difficult to achieve
    profitability, and as a result the market price of our Common Stock could
    be adversely affected. 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 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. In particular, shipments of our mobile
    handheld computers in the fourth quarter 2010 were adversely affected by a
    worldwide supply chain LCD screen shortage, due to increased demand for LCD
    screens by tablet and smart phone manufacturers. If we are unable to procure
    certain component parts such as we experienced in the fourth quarter of 2010,
    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.  20  (Table
    of Contents) 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
    Nokia, Blackberry, Google, Hewlett-Packard and Apple, 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 Windows Mobile devices, or experience difficulties
    with new product transitions that cause delays in the market, or if these
    products fail to achieve or maintain market acceptance, the number of our
    potential new customers could be reduced and we may 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 three 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
    Corporation and Ingram Micro Inc., which together represented approximately
    27%, 35%, and 31% of our worldwide revenues in fiscal years 2010, 2009, and
    2008, respectively. We expect that a significant portion of our revenue will
    continue to depend on sales to Tech Data Corporation and Ingram Micro Inc.
    Additionally, 11% of our revenues in fiscal 2010 came from our distributor
    BlueStar, Inc., and 10% of our revenue in fiscal 2010 came from Epocal, Inc.,
    an OEM customer. We do not have long-term commitments from Tech Data Corporation,
    Ingram Micro Inc., or BlueStar, Inc. to carry our products. Any 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 Corporation, Ingram Micro Inc., or BlueStar, 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:




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- 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 manufacturers 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.

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.



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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 products
  to work with a number of operating systems used in mobile devices including
  Windows Mobile, Windows CE, Windows 7/Vista/XP, RIM Blackberry, Apple, Google's
  Android, and 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, Apple, or Google 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.



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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.

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

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





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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 sixteen
  to nineteen 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.

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. Furthermore, on July
  1, 2010, we completed a stockholder approved exchange offer for certain of our
  outstanding options. As a result, the total remaining unrecognized compensation
  costs related to unvested stock options increased by $0.74 million, which is
  being amortized over the weighted average remaining requisite period of 2.4
  years. The expensing of employee stock options adversely affected our net income
  and earnings per share in each of the quarters in fiscal 2010, 2009, and 2008,
  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.



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

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
  24%, 42%, and 37% of our revenue in fiscal years 2010, 2009, and 2008, respectively.
  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.





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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.

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 10, 2011, we had 4,084,476 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.





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As of March 10, 2011, we had 1,394,673 shares of Common Stock subject to outstanding
  options under our stock option plans, and 129,439 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 10, 2011, we had 86,585 shares of Common Stock subject to outstanding
  warrants issued in our 2009 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.

As of March 10, 2011, we had 666,666 shares of Common Stock subject to the
  conversion of a note issued in our November 2010 senior convertible note financing.
  The conversion price of this note is subject to one additional conversion price
  reset one year from date of issuance of the note, and, depending upon the market
  price of our Common Stock at the time of such reset, can result in an increase
  in the number of shares we are obligated to issue upon conversion of the note
  up to an additional 97,732 shares in aggregate. As of March 10, 2011, we had
  550,000 shares of Common Stock subject to outstanding warrants issued in connection
  with the convertible note financing in November 2010. The warrants are not exercisable
  until May 20, 2011. We have registered the resale of all shares of Common Stock
  subject to the note conversion and warrants. Accordingly, the shares of Common
  Stock underlying the note and warrants will be eligible for resale in the public
  market as soon as the note is converted and the warrants are eligible and exercised,
  subject to S-3 prospectus delivery requirements.

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

During the period from January 1, 2010 through March 10, 2011, our Common Stock
  price fluctuated between a high of $5.44 and a low of $1.51. 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.











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(Table of
  Contents)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 2018. 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











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PART
  II

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

Common Stock

The Company's Common Stock is traded on the NASDAQ Capital Market under the
  symbol "SCKT."

The quarterly high and low sales prices of our Common Stock, as reported on
  the NASDAQ Capital Market through March 10, 2011 and for the last two fiscal
  years are as shown below:

|                                        |  | Common
        Stock
|--------------------------------------- |  | --------------------
|Quarter
          Ended                 |  |                 
|2009                                    |  |                     
|March 31, 2009                          |  | $                   
|June 30, 2009                           |  | $                   
|September 30, 2009                      |  | $                   
|December 31, 2009                       |  | $                   
|2010                                    |  |                     
|March 31, 2010                          |  | $                   
|June 30, 2010                           |  | $                   
|September 30, 2010                      |  | $                   
|December 31, 2010                       |  | $                   
|2011                                    |  |                     
|March 31, 2011 (through March 10, 2011) |  | $                   

|_____________________________________________________________________________________________________________________________________________________________________________________________________________
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On March 10, 2011, the closing sales price for our Common Stock as reported
  on the NASDAQ Capital Market was $1.77. We had approximately 4,300 beneficial
  stockholders of record as of February 28, 2011. We have not paid dividends on
  our Common Stock, and we currrently intend to retain future earnings for use
  in our business and do not anticipate paying dividends in the foreseeable future.

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



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Performance Graph

The performance graph shown below shall not be deemed "filed" for
  purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
  otherwise subject to the liabilities under that section, and shall not be deemed
  to be incorporated by reference into any filing of Socket Mobile, Inc. under
  the Securities Act of 1933, as amended, or the Exchange Act. The performance
  graph below shows a five-year comparison of cumulative total stockholder return,
  calculated on a dividend reinvestment basis and based on a $100 investment,
  from December 31, 2005 through December 31, 2010 comparing the return on the
  Company's Common Stock with the Russell 2000 Index and the NASDAQ Computer &
  Data Processing Index. No dividends have been declared or paid on the Common
  Stock during such period. Historical stock price performance is not necessarily
  indicative of future stock price performance.









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Item 6. Selected Financial
  Data

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

|                                                     |                               | Years
      Ended December 31
|---------------------------------------------------- | ----------------------------- | -----------------------------
|(Amounts
      in thousands except per share)        |                               |                          
|Income
      Statement Data:                         |                               |                              
|Revenue                                              |                               | $                            
|Gross profit                                         |                               | $                            
|Operating expenses                                   |                               | $                            
|Net loss                                             |                               | $                            
|Net loss per common share:                           |                               |                              
|                                                 | Basic
        and diluted (b) |                              
|Weighted average shares outstanding:                 |                               |                              
|                                                 | Basic
        and diluted (b) |                              
|                                                     |                               |                              
|                                                     |                               |                              
|Balance
      Sheet Data:                            |                               |                              
|Cash and cash equivalents                            |                               | $                            
|Restricted cash (c)                                  |                               | $                            
|Total assets                                         |                               | $                            
|                                                     |                               |                              
|Bank line of credit                                  |                               | $                            
|Senior convertible note (c)                          |                               | $                            
|Capital leases and deferred rent - long term portion |                               | $                            
|                                                     |                               |                              
|Total stockholders' equity                           |                               | $                            

|(a) 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."                                                                                                                                                                                                                                 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
      9 - Reverse Stock Split" for additional information.                                                                                                                                                                                                                  
|(c) Under the terms of the senior convertible note financing closed in November
      2010, the Company is required to set aside cash collateral to the extent
      qualified accounts receivables are less than the note plus interest. At
      December 31, 2010, the cash collateral requirement was $0.7 million. At
      December 31, 2010 the amount shown as the Company's senior convertible note,
      represents the $1.0 million face value of the note net of debt discount
      of $0.67 million. See "Note 2 - Senior Convertible Note Financing"
      for additional information.





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

Critical Accounting
  Policies

Our significant accounting policies are described in Note 1 to our financial
  statements for the year ended December 31, 2010. 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.



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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.

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.



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Revenues

Our revenues have been classified into three primary product families for the
  years ended December 31, 2010, 2009, and 2008. Additionally, we continue to
  carry legacy plug-in connectivity products, and up through 2009 carried serial
  products until the sale of our serial product line in the third quarter of 2009.
  Our product revenues are presented in the following table:

|(revenues
      in thousands)     |  | Years
        ended December 31, |        | %
        Increase (Decrease)
|--------------------------------- |  | -------------------------------- | ------ | -----------------------------
|                                  |  | 2010                             |        | 2009                         
|Product
      family:             |  |                              | $'s    |                              
|Mobile handheld computer products |  | $                                | 6,622  |                              
|Data collection products          |  |                                  | 4,956  |                              
|OEM embedded products             |  |                                  | 1,414  |                              
|                                  |  |                              |        |                              
|Other:                            |  |                                  |        |                              
|Connectivity                      |  |                                  | 506    |                              
|Serial interface                  |  |                              | ---    |                              
|                                  |  |                                  |        |                              
|Total                             |  | $                                | 13,498 |                              

Our mobile handheld computer product revenues in 2010 increased by 2%,
  or $155,000 from mobile handheld computer product revenues in 2009. Sales of
  our mobile handheld computer through the first nine months of 2010 increased
  by 12% compared to the same period in 2009, due to an increase in the volume
  of mobile handheld computer sales combined with an increase in related service
  revenues as a result of an increased percentage of customers opting to purchase
  our SocketCare extended warranty and accidental breakage coverage in conjunction
  with their deployments. However, in the fourth quarter 2010, sales of our mobile
  handheld computer products were reduced as a result of shortages in the availability
  of LCD touch screens used in the manufacture of our mobile handheld computer.
  Beginning in late 2010, major tablet and smartphone manufacturers secured a
  majority of the LCD touch screen manufacturing capacity causing short term supply
  disruptions as LCD touch screen manufacturers reprioritized their capacity commitments.
  Our mobile handheld product revenues in the fourth quarter 2010 declined to
  $1.2 million from $1.9 million in the third quarter 2010 as a consequence of
  the supply delays and our inability to ship our customer orders scheduled for
  shipment in the fourth quarter.

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 compared to 2008. Although the annual revenues in 2009 indicate
  growth in our mobile handheld computer revenues, we believe this growth was
  slowed by the worldwide economic slowdown beginning in late 2008, as our customers
  took 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.



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Our data collection product revenues in 2010 decreased by $0.7 million
  from data collection revenues in 2009. Revenue decreases in 2010 were primarily
  from declines of $0.6 million in sales of our SDIO In-Hand Scan card due to
  reduced sales volumes of this product. Remaining declines in 2010 were from
  reduced sales of our Cordless Hand Scanner and Cordless Ring Scanner. Sales
  of our CompactFlash In-Hand Scan card were flat in 2010 compared to 2009. Our
  data collection product revenues continue to be affected by the worldwide economic
  slowdown as customers defer their deployment decisions. A significant sales
  volume of our plug-in scan cards are sold in conjunction with our mobile handheld
  computer. In the fourth quarter 2010 in particular, supply delays in our mobile
  handheld computer mentioned previously, adversely impacted our mobile handheld
  computer sales and consequently the companion plug-in scan card revenues as
  we were forced to defer shipments beyond year end.

In 2009, our data collection product revenues 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
  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.

Service revenues from our SocketCare extended warranty program were $0.8 million
  or 6 % of our revenue in 2010 and approximately $0.3 million or 2 percent of
  our revenue in 2009. Service revenues were insignificant for 2008. Increases
  in SocketCare service revenues are due to an increased percentage of customers
  opting to purchase our SocketCare extended warranty and accidental breakage
  coverage in conjunction with their mobile handheld computer and data collection
  deployments. Revenues related to our SocketCare services have been allocated
  to the respective mobile handheld computer and data collection revenues for
  each of the years presented in the table above.

Our OEM embedded product revenues declined in 2010 by $1.9 million from
  revenues in 2009. Approximately half of the revenue decrease was due to reduced
  sales of Bluetooth products. Sales of our Bluetooth modules to our OEM customers
  declined as a result of phasing out older Bluetooth technology and a last-buy
  purchase program through 2009. Sales of Bluetooth plug-in products declined
  as a result of last-buys of these products as we completed the phase out of
  these products in 2010. Remaining declines in the 2010 were from reductions
  in sales of our wireless LAN plug-in cards.

In 2009, our OEM embedded product revenues declined by $6.0 million from revenues
  in 2008. 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 mentioned previously. 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 customers 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.



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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 2010 decreased by $0.3 million from connectivity product revenues in 2009,
  and connectivity revenues in 2009 decreased by $0.8 million from connectivity
  product revenues in 2008. The decrease in 2010 was primarily due to declines
  in sales of our modem plug-in products with remaining declines from reduced
  sales of our Ethernet plug-in products. The decrease in 2009 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.
  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 as most users of mobile computing devices now
  connect to networks wirelessly.

As a result of the sale of our serial product technology and business on September
  30, 2009, there are no revenues from serial interface products recognized beyond
  fiscal 2009. Our serial interface product revenues declined in 2009 by
  $0.7 million from revenues in 2008. 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 8 - 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.
  Overall serial product revenues have declined in the periods presented through
  the date of sale of the product line, continuing a trend reflecting the gradual
  replacement of serial technology with USB and other newer connection technologies.

Gross Margins
  Gross margins for 2010 were 40% of revenues compared to gross margins of 43%
  in 2009 and 47% in 2008. We generally price our products as a markup from our
  cost, and we offer discount pricing for higher volume purchases. Declines in
  overall margins in 2010 compared to 2009 were due to declines in sales of above
  average margin products combined with fixed overhead costs which comprised a
  greater portion of the overall cost of goods sold due to lower revenues in 2010
  compared to 2009. Partially offsetting these margin declines in 2010 were increases
  in sales of our mobile handheld computer which comprised a greater portion of
  our overall revenues combined with improved margins on this particular product
  in 2010 compared to one year ago. Reductions in overall margins in 2009 compared
  to 2008 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 were below our average product margins, and
  combined with a greater proportion of our revenues in 2009, resulted in overall
  margin reductions compared to 2008. Additional margin declines in 2009 were
  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.



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Research and Development Expense
  Research and development expense in 2010 was $2.4 million, a decrease of 16%
  from research and development expense in 2009 of $2.9 million. Research and
  development expense in 2009 decreased by 37% from research and development expense
  in 2008 of $4.5 million. In 2010 we continued the implementation of cost reduction
  programs in response to the economic climate. Approximately 31% if the reduction
  in research and development expense in 2010 compared to 2009 was due to lower
  personnel costs primarily from salary reductions. Remaining reductions in research
  and development expense in 2010 were primarily from reduced development costs
  due to a reduction in product development activities, and reduced equipment
  costs related to the reductions in product development activities. 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.

Sales and Marketing Expense
  Sales and marketing expense in 2010 was $4.1 million, a decrease of 21% compared
  to sales and marketing expense in 2009 of $5.2 million. Sales and marketing
  expense in 2009 decreased by 34% compared to sales and marketing expense in
  2008 of $7.8 million. Approximately half of the reduction in sales and marketing
  expense in 2010 was from reduced personnel costs due to salary reductions and
  realignment of the sales force to emphasize inside sales personnel located at
  the Company's Newark, CA headquarters to better serve our customer base. Additional
  declines in 2010 were primarily from reduced advertising and promotion expense
  and travel costs. 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.

General and Administrative Expense
  General and administrative expense in 2010 was $2.5 million, an increase of
  14% compared to general and administrative expense of $2.2 million in 2009.
  General and administrative expense in 2009 decreased 16 % compared to general
  and administrative expense of $2.7 million in 2008. In the fourth quarter 2010,
  non-recurring expenses totaling $0.4 million related to the closing of our senior
  convertible note financing in November 2010, were charged to general and administrative
  expense. Excluding this fourth quarter non-recurring financing cost, remaining
  general and administrative expenses in 2010 decreased 10% from comparable expenses
  in 2009. Reductions in comparable general and administrative expense in 2010
  were primarily from salary reductions, reduced occupancy costs and lower consulting
  and professional fees. Partially offsetting these reductions in 2010 in comparable
  expenses were increases in fees associated with our bank line of credit (through
  the date of termination on November 2, 2010) and an increase in stock compensation
  expense related to the stock option exchange completed on July 1, 2010. In 2009,
  over half of the reduction in expense was due to decreases in payroll costs
  primarily from reductions in employee compensation expense for the year. Additional
  reductions in general and administrative expense in 2009 compared to 2008,were
  primarily from decreases in consulting and professional fees and reduced investor
  relations expense.



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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 was fully amortized
  by mid 2009. Total amortization charges in 2010 for all acquired intangibles
  were $60,000, compared to $77,000 in 2009, and $127,000 in 2008. 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 in June 2014.

Goodwill
  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. We performed the
  annual goodwill impairment analysis as of September 30, 2010. We 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 our reporting unit
  to its fair value. We estimated the fair value of our reporting unit 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 the Company. The fair value of our reporting unit exceeded
  its carrying value and as a result, goodwill was considered not impaired as
  of September 30, 2010, the date of our annual test for impairment. During the
  fourth quarter of 2010, we also performed an update to the goodwill impairment
  analysis. We determined goodwill was not impaired as of December 31, 2010 as
  a result of our analysis. The factors used in performing a goodwill impairment
  analysis are highly subjective and may be adversely affected by our future financial
  results and market conditions, and may result in future impairment write-downs.

In the fourth quarter 2009 indications of impairment existed subsequent to
  the annual impairment test at September 30, 2009, and as a result we performed
  additional impairment testing with the assistance of a third party valuation
  specialist. Based on the impairment analysis at December 31, 2009, we recorded
  a preliminary estimate of $5,370,946 of goodwill impairment. In the quarter
  ended March 31, 2010, we finalized the impairment analysis without adjustment
  to the estimated impairment recorded at December 31, 2009.



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Interest Income and Other, and Interest Expense
  Interest income reflects interest earned on cash balances. Interest income in
  2010 and 2009 was immaterial compared to interest income of $22,000 in 2008.
  Lower interest income in the comparable periods reflects lower average cash
  balances combined with lower average rates of return.

Interest expense was $246,000 in 2010 compared to $225,000 in 2009, and $71,000
  in 2008. Interest expense is primarily related to interest on amounts drawn
  on our bank lines of credit (through the date of termination of the credit lines
  in November 2010), and in 2008 and also included interest related to a term
  loan outstanding which was repaid in full in December 2008 in conjunction with
  a new credit line agreement at that time. Additional interest expense is related
  to interest on equipment lease financing obligations in each of the years presented,
  and beginning in November 2010, interest on our senior convertible note payable
  and the related amortization of debt discount recognized in interest expense.
  Higher overall interest expense in 2010 compared to 2009 is due to the portion
  of debt discount amortized in 2010. Higher interest expense in 2009 compared
  to 2008 was due to higher average balances outstanding on our bank lines of
  credit at higher overall interest rates.

If unconverted for the duration of fiscal 2011, the annual interest expense
  on our senior convertible note will be $100,000, and the annual amortization
  of the related debt discount to be charged to interest expense will be approximately
  $678,000 (see "NOTE 2 - Senior Convertible Note Financing" for more
  information).

Income Taxes
  Deferred tax expense of $16,000 in 2010, a deferred tax benefit of $225,000
  in 2009, and deferred tax expense of $32,000 in 2008, and the corresponding
  deferred tax liability shown on our balance sheet, is 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, it cannot
  be offset against deferred tax assets. Goodwill impairment charges recorded
  at December 31, 2009 on that portion of our goodwill being amortized for tax
  purposes resulted in the reversal of accumulated deferred tax expense in 2009
  and the related deferred tax liability, temporarily eliminating the difference
  between financial and tax reporting at December 31, 2009, and through the first
  half of 2010. Beginning in the third quarter 2010, differences between financial
  and tax reporting resulted in deferred tax expense of $16,000 and the corresponding
  deferred tax liability on our balance sheet at December 31, 2010. 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.



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Quarterly Results of Operations
  The following table sets forth summary quarterly statements of operations data
  for each of the quarters in 2009 and 2010. This unaudited quarterly information
  has been prepared on the same basis as the annual information presented elsewhere
  herein, and, in our opinion, includes all adjustments (consisting only of normal
  recurring entries) necessary for a fair presentation of the information for
  the quarters presented. The operating results for any quarter are not necessarily
  indicative of results for any future period.

|                                                       |                                               | Quarter
        Ended
|------------------------------------------------------ | --------------------------------------------- | ---------------------
|(amounts
      in thousands, except per share amounts) |                                               | Mar
        31,      
|                                                       |                                               | 2009                 
|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 |                      
|                                                      



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, manufacturing
  supply shortages, changes in the level of operating expenses, and competitive
  conditions in the industry. Because our staffing and other operating expenses
  are based on anticipated revenue, a substantial portion of which is not typically
  generated until the end of each quarter, delays in the receipt of orders can
  cause significant variations in operating results from quarter to quarter.



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Liquidity and Capital Resources
  During the years ended December 31, 2010, 2009, and 2008, we incurred net losses
  of $4.0 million, $7.9 million, $2.8 million, respectively. As of December 31,
  2010, we have an accumulated deficit of $54.8 million and a working capital
  deficit of $1.6 million. These are conditions that raise substantial doubt about
  our ability to continue as a going concern. These conditions include continuing
  operating losses and declines in our working capital balances. Our ability to
  continue as a going concern is dependent upon our ability to establish profitable
  operations and to increase our capital. 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 have the ability to reduce expenses further
  if necessary. We believe that we will be able to improve liquidity and secure
  additional sources of financing by managing our working capital balances, improving
  our operating results to cash positive levels, 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 would 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.

We have a history of operating losses and 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.

As reflected in our Statements of Cash Flows, net cash used in operating activities
  was $0.6 million in 2010 compared to $0.1 million provided from operating activities
  in 2009, and $2.0 million used in operating activities in 2008. We calculate
  net cash used in operating activities by reducing our net loss ($4.0 million,
  $7.9 million, and $2.8 million in 2010, 2009, and 2008, 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, changes in inventory reserves,
  deferred tax expense, and in 2010 in particular, the issuance of common stock
  for services and the amortization of debt discount, and in 2009 in particular,
  a reversal of deferred tax expense. These amounts totaled $1.5 million, $1.2
  million, and $1.4 million in 2010, 2009, and 2008, 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 8 - 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. Increases
  in non-cash charges in 2010 were primarily from increases in deferred tax expense,
  increases in inventory write-downs, and charges related to our senior convertible
  note financing including amortization of debt discount and common stock warrants
  issued for services. Partially offsetting these increases in non-cash charges
  in 2010 were decreases in depreciation expense due to reductions in the purchasing
  of equipment and tooling, and decreases in stock-based compensation expense
  compared to 2009. 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 and reductions in amortization
  expense due to components of our intangible assets becoming fully amortized,
  partially offset by an increase in inventory write-downs compared to 2008.



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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 2010, changes in operating assets and liabilities resulted in a net source
  of cash of $1.9 million and were primarily from increases in accounts payable
  due to the timing of payments, reductions in inventory levels as a result of
  planned reductions from year-end levels, reductions in accounts receivable due
  to lower shipments in the fourth quarter of 2010 compared to the fourth quarter
  of 2009 resulting from a supply shortage in our mobile handheld computer from
  our contract manufacturer, and increases in deferred rent as a result of four
  months of rent abatement provided for under the terms of the amendment to our
  facilities lease completed in August 2010. Partially offsetting these were decreases
  in accrued payroll and related expenses in 2010 compared to 2009 due to lower
  personnel costs as a result of salary reductions, and declines in deferred income
  on shipments to distributors due to lower levels of inventory held by our distributors
  at year-end as a result of the shipping delays in the fourth quarter 2010 mentioned
  previously compared the same quarter one year ago. 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.

Cash used in investing activities was $144,000 in 2010, compared to cash provided
  by investing activities of $164,000 in 2009, and cash used in investing activities
  of $349,000 in 2008. Reductions in investing activities in 2010 compared to
  2009 reflect reductions in equipment and tooling purchases due to fewer projects
  requiring these expenditures. In 2009, 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.

Cash provided from financing activities was $13,000 in 2010, compared to cash
  provided from financing activities of $0.9 million in 2009, and cash used in
  financing activities of $1.9 million in 2008. Financing activities in 2010 consisted
  primarily of net amounts paid of $1.0 million on our bank lines of credit through
  the date of termination in November 2010, offset by the proceeds from the issuance
  of our senior convertible note. 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.





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Our cash balances at December 31, 2010 were $1,172,000 of which $711,000 was
  designated as collateral and restricted from our use under the terms of our
  senior convertible note. Our balance sheet at December 31, 2010 has a current
  ratio (current assets divided by current liabilities) of 0.70 to 1.0, and a
  working capital deficit of $1,617,000 (current assets less current liabilities).
  In February 2011 we issued $500,000 in Common Stock to our primary contract
  manufacturer in exchange for an equal reduction in our trade payables balance.

Our contractual obligations at December 31, 2010 are outlined in the table
  shown below:

|                                                               |       | Payments
      Due by Period
|-------------------------------------------------------------- | ----- | ----------------------------
|Contractual
        Obligations                                |   | Total                       
|Capital leases                                                 |       | $                           
|Operating
        leases                                       |       |                             
|Senior convertible note (including interest)                   |       |                             
|Unconditional purchase obligations with contract manufacturers |       |                         
|Total contractual obligations                                  |       | $                           

Off-Balance Sheet Arrangements

As of December 31, 2010, we had no off-balance sheet arrangements as defined
  in Item 303 of Regulation S-K.

Recent Accounting Pronouncements

See Note 1 of "Notes to Financial Statements" of this Annual Report
  for additional information regarding the status of recent accounting pronouncements.



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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily
  to invested cash and our bank credit line facilities. 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, 2010, a decline of 1% in interest rates would
  not have had a material effect on our quarterly interest income.

On November 2, 2010, we terminated our bank credit line facility in conjunction
  with the issuance of a senior convertible note in the note financing subsequently
  closed on November 19, 2010 (see "Note 4 - Bank Financing Arrangements"
  and "Note 2 - Senior Convertible Note Financing" for more information).
  There is no interest rate risk from our credit line facility beyond the termination
  date.

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 expenses at the beginning, during and at the end of the
  quarter ended December 31, 2010, an adverse change of 10% in exchange rates
  would have resulted in an increase in our net loss for the fourth quarter 2010
  of approximately $18,000, if left unprotected. For the fourth quarter of 2010
  the total net adjustment for the effects of changes in foreign currency on cash
  balances, collections, payables, and derivatives was a net gain of $1,000. We
  will continue to monitor, assess, and mitigate through hedging activities, the
  risk associated with these exposures.



Item 8. Financial Statements and Supplementary Data

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



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REPORT OF INDEPENDENT REGISTERED
  PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
  Socket Mobile, Inc.

We have audited the accompanying
  balance sheets of Socket Mobile, Inc. as of December 31, 2010 and 2009, and
  the related statements of operations, stockholders' equity, and cash flows for
  each of the years in the three year period ended December 31, 2010. 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, 2010 and 2009, and the results of its operations and its cash flows
  for each of the years in the three year period ended December 31, 2010, 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
  March 15, 2011











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SOCKET
  MOBILE, INC.


BALANCE SHEETS


|                                                                                                                                                                                                     |                                                    | December 31, |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------ | -----------
|                                                                                                                                                                                                     |                                                    | 2010         |        
|ASSETS                                                                                                                                                                                              
|Current
        assets:                                                                                                                                                                              |                                                    |              |            
|Cash
          and cash equivalents                                                                                                                                                                  |                                                    | $            | 460,833    
|Restricted
          cash                                                                                                                                                                            |                                                    |              | 710,797    
|Accounts
          receivable, net                                                                                                                                                                   |                                                    |              | 813,569    
|Inventories                                                                                                                                                                                          |                                                    |              | 1,698,650  
|Prepaid
          expenses and other current assets                                                                                                                                                  |                                                    |          | 128,131    
|                                                                                                                                                                                                     | Total current assets                               |              |        
|                                                                                                                                                                                                 |                                                    |              |            
|Property
        and equipment:                                                                                                                                                                      |                                                    |              |            
|Machinery
          and office equipment                                                                                                                                                             |                                                    |              | 2,140,897  
|Computer
          equipment                                                                                                                                                                         |                                                    |          | 1,285,197  
|                                                                                                                                                                                                 |                                                    |              | 3,426,094  
|Accumulated
          depreciation                                                                                                                                                                   |                                                    |          | (2,954,757 
|                                                                                                                                                                                                     | Property and equipment, net                        |              |        
|                                                                                                                                                                                                 |                                                    |              |            
|Intangible
        assets, net                                                                                                                                                                       |                                                    |              | 210,000    
|Goodwill                                                                                                                                                                                             |                                                    |              | 4,427,000  
|Other
        assets                                                                                                                                                                                 |                                                    |          | 146,298    
|                                                                                                                                                                                                     | Total assets                                       |              | $          
|                                                                                                                                                                                                
|LIABILITIES
        AND STOCKHOLDERS EQUITY                                                                                                                                                        
|Current
        liabilities:                                                                                                                                                                         |                                                    |              |            
|Accounts
          payable                                                                                                                                                                           |                                                    | $            | 3,683,771  
|Accrued
          expenses                                                                                                                                                                           |                                                    |              | 86,554     
|Accrued
          payroll and related expenses                                                                                                                                                       |                                                    |              | 634,146    
|Bank
          line of credit                                                                                                                                                                        |                                                    |              | ---        
|Deferred
          income on shipments to distributors                                                                                                                                               |                                                    |              | 673,484    
|Short
          term portion of deferred service revenue                                                                                                                                             |                                                    |              | 324,267    
|Short
          term portion of capital leases and deferred rent                                                                                                                                     |                                                    |          | 27,080     
|                                                                                                                                                                                                     | Total
          current liabilities                |              |        
|                                                                                                                                                                                                 |                                                    |              |            
|Long
        term portion of deferred service revenue                                                                                                                                                |                                                    |              | 197,044    
|Long term portion
        of capital leases and deferred rent                                                                                                                                        |                                                    |              | 202,072    
|Senior
        convertible note payable, net of debt discount of $670,447 at December
        31, 2010                                                                                               |                                                    |              | 329,553    
|Deferred
        income taxes                                                                                                                                                                        |                                                    |          | 15,515     
|Total
          liabilities                                                                                                                                                                          |                                                    |              | 6,173,486  
|                                                                                                                                                                                                
|Commitments
        and contingencies                                                                                                                                                                |                                                    |              |            
|Stockholders'
        equity:                                                                                                                                                                        |                                                    |              |            
|Common
          stock, $0.001 par value: Authorized shares10,000,000,
                 Issued and outstanding shares
          - 3,801,991 at December 31, 2010 and 3,788,767 at December 31, 2009 |                                                    |              | 3,802      
|Additional
          paid-in capital                                                                                                                                                                 |                                                    |              | 57,671,065 
|Accumulated
          deficit                                                                                                                                                                        |                                                    |          | (54,781,738
|                                                                                                                                                                                                     | Total
          stockholders equity               |              |        
|                                                                                                                                                                                                     | Total
        liabilities and stockholders equity |              | $          

|
|



See accompanying
  notes.





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SOCKET
  MOBILE, INC.


STATEMENTS OF OPERATIONS


|                                            |                          | Years
        Ended December 31, |           
|------------------------------------------- | ------------------------ | -------------------------------- | ----------
|                                            |                          | 2010                         |           
|Revenues                                    |                          | $                                | 13,498,196
|Cost of revenues                            |                          |                              | 8,096,520 
|Gross profit                                |                          |                                  | 5,401,676 
|                                        |                          |                                  |           
|Operating expenses:                         |                          |                                  |           
|Research
          and development          |                          |                                  | 2,403,268 
|Sales
          and marketing               |                          |                                  | 4,106,260 
|General
          and administrative        |                          |                                  | 2,546,648 
|Amortization
          of intangible assets |                          |                                  | 60,000    
|Impairment
          charges                |                          |                              | ---       
|                                        | Total operating expenses |                                  |           
|                                        |                      |                                  |       
|Operating loss                              |                          |                                  | (3,714,500
|                                        |                          |                                  |           
|Interest income                             |                          |                                  | 106       
|Interest expense                            |                          |                                  | (245,928  
|Gain on sale of product line assets         |                          |                              | ---       
| 
                              |                          |                                  |           
|Net loss before deferred taxes              |                          |                                  | (3,960,322
|Deferred tax (expense) benefit              |                          |                                  | (15,515   
|Net loss                                    |                          | $                                | (3,975,837
|                                        |                          |                                  |           
|Net loss per common share:                  |                          |                                  |           
|Basic
          and diluted                 |                          | $                                | (1.05     
|                                        |                          |                                  |           
|Weighted average shares outstanding:        |                          |                                  |           
|Basic
          and diluted                 |                          |                                  | 3,795,673 

|
|



See accompanying
  notes.

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SOCKET MOBILE,
  INC.
  STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                                                        |  |                      |           |  |            |       |             |        
|--------------------------------------------------------------------------------------- |  | -------------------- | --------- |  | ---------- | ----- | ----------- | -------
|                                                                                        |  |                      |           |  | Additional |       |             |        
|                                                                                        |  | Common
        Stock |           |  | Paid-In    |       | Accumulated |        
|                                                                                        |  | Shares               |           |  | Amount     |       |             | Capital
|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 and comprehensive 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 and comprehensive loss                                                 |  |                  | ---       |  |            |   | ---         |        
|Balance
        at December 31, 2009                                                    |  |                      | 3,788,767 |  |            |       | 3,789       |        
|Exercise
        of warrants                                                            |  |                      | 273       |  |            |       | ---         |        
|Exercise
        of stock options                                                       |  |                      | 12,951    |  |            |       | 13          |        
|Stock-based
        compensation                                                        |  |                      | ---       |  |            |       | ---         |        
|Issuance
        of warrants in conjunction with senior convertible note financing      |  |                      | ---       |  |            |       | ---         |        
|Beneficial
        conversion feature associated with senior convertible note financing |  |                      | ---       |  |            |       | ---         |        
|Net
        loss and comprehensive loss                                                 |  |                  | ---       |  |            |   | ---         |        
|Balance
        at December 31, 2010                                                    |  |                      | 3,801,991 |  |            | $     | 3,802       |        

|
|



See accompanying
  notes.

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SOCKET MOBILE,
  INC.
  STATEMENTS OF CASH FLOWS



|                                                                                                  |  | Years
        Ended December 31, |           
|------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----------
|                                                                                                  |  | 2010                             |           
|Operating
        activities                                                                      |  |                                  |           
|Net loss                                                                                          |  | $                                | (3,975,837
|Adjustments to reconcile net loss to net cash provided by (used in) operating
        activities: |  |                                  |           
|Stock-based
        compensation and warrant extension                                            |  |                                  | 676,554   
|Depreciation                                                                                      |  |                                  | 459,686   
|Amortization
        of intangible assets                                                         |  |                                  | 60,000    
|Issuance
        of common stock warrant for services                                             |  |                                  | 50,500    
|Amortization
        of debt discount to interest expense                                         |  |                                  | 55,649    
|Deferred
        tax expense (benefit)                                                            |  |                                  | 15,515    
|Increase
        in inventory write-downs                                                         |  |                                  | 163,847   
|Gain
        on sale of product line assets                                                       |  |                                  | ---       
|Impairment
        charges                                                                        |  |                                  | ---       
|                                                                                              |  |                                  |           
|Changes
        in operating assets and liabilities:                                              |  |                                  |           
|Accounts
        receivable                                                                       |  |                                  | 845,814   
|Inventories                                                                                       |  |                                  | 181,622   
|Prepaid
        expenses and other current assets                                                 |  |                                  | 340,507   
|Accounts
        payable and accrued expenses                                                     |  |                                  | 868,031   
|Accrued
        payroll and related expenses                                                      |  |                                  | (172,604  
|Deferred
        income on shipments to distributors                                              |  |                                  | (244,272  
|Deferred
        service revenue                                                                  |  |                                  | (65,722   
|Change
        in deferred rent                                                                   |  |                              | 102,189   
|Net cash provided by (used in) operating activities                                               |  |                                  | (638,521  
|                                                                                              |  |                                  |           
|Investing
        activities                                                                      |  |                                  |           
|Purchase
        of equipment and tooling                                                         |  |                                  | (143,559  
|Proceeds from sale of product line assets                                                         |  |                              | ---       
|Net cash provided by (used in) investing activities                                               |  |                                  | (143,559  
|                                                                                              |  |                                  |           
|Financing
        activities                                                                      |  |                                  |           
|Payments on capital leases and equipment financing notes                                          |  |                                  | (12,313   
|Gross proceeds from borrowings under bank line of credit agreement                                |  |                                  | 5,609,560 
|Gross repayments of borrowings under bank line of credit agreement                                |  |                                  | (6,611,648
|Proceeds from stock options exercised                                                             |  |                                  | 27,816    
|Proceeds from warrants exercised                                                                  |  |                                  | ---       
|Proceeds from the issuance of common stock and warrants                                           |  |                                  | ---       
|Proceeds from issuance of senior convertible note and warrants                                    |  |                                  | 1,000,000 
|Repayments of bank term loan                                                                      |  |                              | ---       
|Net cash provided by (used in) financing activities                                               |  |                                  | 13,415    
|                                                                                              |  |                                  |           
|Net
        increase (decrease) in cash and cash equivalents                                      |  |                                  | (768,665  
|Cash
        and cash equivalents at beginning of year                                            |  |                              | 1,940,295 
|Cash
        and cash equivalents at end of year                                                  |  | $                                | 1,171,630 
|                                                                                                  |  |                                  |           
|Supplemental
        cash flow information                                                        |  |                                  |           
|Cash paid for interest                                                                            |  | $                                | 190,278   
|Warrants issued in conjunction with common stock financing                                        |  | $                                | ---       
|Non-cash investing and financing activities:                                                      |  |                                  |           
|Warrants issued in conjunction with senior convertible note                                       |  | $                                | 335,548   
|Beneficial conversion feature associated with senior convertible
        note                     |  | $                                | 390,548   
|Addition of equipment under capital lease                                                         |  | $                                | ---       





See accompanying
  notes.

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  of Contents)

SOCKET MOBILE,
  INC.
  NOTES TO FINANCIAL STATEMENTS

NOTE 1
  - Summary of Significant Accounting Policies

Organization and Business
  Socket Mobile, Inc. (the "Company"), produces mobile handheld computers
  and data collection products serving the business mobility market. The Company
  offers a family of handheld computer products designed for business enterprise
  use and a wide range of data collection products including two dimensional (2D)
  and linear (1D) bar code scanners, Radio Frequency Identification (RFID) readers,
  and magnetic stripe readers. The Company also offers wearable ring scanners,
  customized versions of our handheld computers, and embedded Bluetooth and wireless
  LAN cards and modules as OEM products to third party companies. The Company's
  data collection products work with the Company's handheld computers and the
  Company's cordless hand scanners work with many third-party mobile handheld
  devices including smartphones, tablet computers, ultra-mobile personal computers
  (UMPCs), notebooks and desktop systems, adding data collection capabilities
  to these devices. For a complete description of the Company's products see "Products"
  in "Item 1. Business." The Company works closely with software application
  developers offering or developing vertical software applications for use with
  the Company's handheld computers and for use with smartphones, including phones
  running Apple, Google's Android, RIM BlackBerry and Microsoft Windows operating
  systems for use with the Company's cordless hand scanners. Healthcare and hospitality
  are two of the primary areas of focus for software application developers who
  have developed applications for use on the Company's handheld computers, and
  a significant portion of the Company's handheld computer sales now come from
  organizations within these two market segments. Other vertical markets benefiting
  from 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 the Company's specifications. The Company's mobile handheld computers
  and data collection 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, 2010
  was 64 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.

Liquidity and Going Concern
  The Company's financial statements have been prepared on a going concern basis.
  During the years ended December 31, 2010, 2009, and 2008, the Company incurred
  net losses of $4.0 million, $7.9 million, and $2.8 million, respectively. As
  of December 31, 2010, the Company has an accumulated deficit of $54.8 million
  and a working capital deficit of $1.6 million. The Company's cash balances at
  December 31, 2010 were $1,172,000 of which $711,000 was designated as restricted
  collateral under the terms of our senior convertible note. The Company's cash
  balances at December 31, 2010, reflect net cash used in operating activities
  in 2010 of $638,000, net payments of $1,002,000 on its bank lines of credit
  as a result of terminating the lines in November 2010 in conjunction with the
  issuance of the Company's $1.0 million senior convertible note in the same month.
  The Company's balance sheet at December 31, 2010 has a current ratio (current
  assets divided by current liabilities) of 0.70 to 1.0, and a working capital
  deficit of $1,617,000 (current assets less current liabilities). These circumstances
  raise substantial doubt about the Company's ability to continue as a going concern.

52

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  of Contents)

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

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 economic conditions in response to the slow-down in
  business spending resulting from the economic downturn beginning in late 2008.
  The Company took additional actions during 2009 to reduce expenses, and the
  Company reduced expenses further in 2010. The Company has the ability to further
  reduce expenses if necessary. Additional steps by management intended to reduce
  operating losses and achieve profitability include 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. In February
  2011 the Company issued $500,000 in Common Stock to its primary contract manufacturer
  in exchange for an equal reduction in the Company's trade payables balance (see
  "NOTE 15 - Subsequent Event: Common Stock Financing" for more information).
  Management believes that it will be able to further improve the Company's liquidity
  and secure additional sources of financing by managing its working capital balances,
  and raising additional capital as needed including development funding from
  development partners and the issuance of additional equity securities. 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.

Use of Estimates
  The preparation of financial statements in conformity with U.S. generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities, and the disclosure
  of contingent assets and liabilities at the date of the financial statements
  as well as the reported amounts of revenue and expense during the reporting
  period. Actual results could differ from those estimates, and such differences
  may be material to the financial statements.



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

Cash Equivalents
  The Company considers all highly liquid investments purchased with a maturity
  date of 90 days or less at date of purchase to be cash equivalents. As of December
  31, 2010 and 2009, all of the Company's cash and cash equivalents consisted
  of amounts held in demand and money market deposits in banks.

Restricted Cash
  At December 31, 2010 all of the Company's restricted cash consisted of amounts
  held in demand deposits in banks under the terms of our senior convertible note
  issued in November 2010. Under the terms of the note the Company is required
  at all times to maintain collateralization of the convertible note with an amount
  equivalent to the unconverted principal plus accrued interest. Collateral consists
  of qualified accounts receivables of the Company, plus cash to the extent qualified
  accounts receivables are less than the unconverted principal plus accrued interest
  (see "NOTE 2 - Senior Convertible Note Financing" for more information).

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 Measurements 
  The 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.                                                                                                                                                      



There were no significant fair value measurements for the year ended December
  31, 2010. The significant fair value measurements for the year ended December
  31, 2009 were on a nonrecurring basis and related to the Company's goodwill
  impairment assessment as described below under "Goodwill and Other Intangible
  Assets Review." The Company performed an impairment test 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.



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

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 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 at December
  31, 2010. At December 31, 2010, these derivative instruments were not designated
  as hedges, and accordingly, changes in the fair value of the forward foreign
  currency contracts were recorded in earnings. At December 31, 2010, contracts
  with a notional amount of $132,900 to hedge Euros had a fair value of an immaterial
  amount based on quotations from financial institutions, and had maturity dates
  in January 2010. 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 2009.

Comprehensive Income (Loss)
  Comprehensive income (loss) consists of two components-net income (loss) and
  other comprehensive income (loss). Other comprehensive income (loss) refers
  to gains and losses that under U.S. generally accepted accounting principles
  are recorded as an element of stockholders' equity but are excluded from net
  income. As of December 31, 2010 and 2009, the Company had no material other
  comprehensive income (loss).

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, 2010,
  2009, and 2008:

|     |  | Balance
        at   |         |  | Charged
        to |   |       |                     |  |   | Balance
        at
|---- |  | -------------------- | ------- |  | ------------------ | - | ----- | ------------------- |  | - | ------------------
|     |  | Beginning
        of |         |  | Costs
        and  |   |       | Amounts             |  |   | End
        of    
|Year |  | Year                 |         |  | Expenses           |   |       | Written
        Off |  |   | Year              
|    
|2010 |  | $                    | 121,713 |  |                    | $ | ---   |                     |  | $ | 32,655            
|2009 |  | $                    | 118,651 |  |                    | $ | 3,062 |                     |  | $ | ---               
|2008 |  | $                    | 118,651 |  |                    | $ | ---   |                     |  | $ | ---               





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

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

|                                 |  | December
      31,
|-------------------------------- |  | ------------------
|                                 |  | 2010              
|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
  Goodwill is tested for impairment annually at September 30th 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. Accordingly,
  the Company also tested goodwill for impairment as of December 31, 2010. No
  impairment of goodwill was recorded in 2010.

Subsequent to the annual impairment test at September 30, 2009, indicators
  of impairment existed which resulted in the Company performing additional impairment
  testing with the assistance of a third party valuation specialist as of December
  31, 2010. 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.



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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 performed a step two analyses which included estimating the fair
  value of its assets and liabilities, including previously unrecognized intangible
  assets. The Income Approach was 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 was $4,427,000 which exceeded the carrying
  value by $5,370,946. As a result, the Company recorded an estimated $5,370,946
  goodwill impairment as of December 31, 2009. In the quarter ended March 31,
  2010, the Company finalized the impairment analysis without adjustment to the
  estimated impairment recorded at December 31, 2009.

Concentration of Credit Risk
  Financial instruments that potentially subject the Company to significant concentrations
  of credit risk consist principally of cash, cash equivalents and accounts receivable.
  The Company invests its cash in demand and money market deposit accounts in
  banks. 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, 2010, there were five customers with material amounts outstanding totaling
  62% of the Company's accounts receivable balances. At December 31, 2009, there
  were two customers with material amounts outstanding totaling 31% of the Company's
  accounts receivable balances.

Concentration of Suppliers
  Several of the Company's component parts are produced by a sole or limited number
  of suppliers. Shortages could occur in these essential materials due to an interruption
  of supply or increased demand in the industry, such as the Company experienced
  in the fourth quarter 2010 with the delays in availability of LCD touch screens
  used in the manufacture of the Company's mobile handheld computer. 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, 2010 and 2009, 32% and 33%, respectively, of the Company's accounts
  payable balances were concentrated in a single supplier. For the years ended
  December 31, 2010 and 2009, two suppliers accounted for 63% of the inventory
  purchases in each of these years.

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, 2010 and 2009, deferred income
  on shipments to distributors represented deferred revenues totaling $1,400,155
  and $1,805,648, respectively, net of related costs of those revenues of $726,671
  and $887,892, respectively.



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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 $188,600, $426,923, and $491,595, in advertising costs during 2010,
  2009, and 2008, 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.

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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,
|-------------------------------------------------------------------------------------- |  | --------------------------------
|                                                                                       |  | 2010                            
|Numerator:                                                                             |  |                                 
|Net
      loss                                                                         |  | $                               
|                                                                                   |  |                                 
|Denominator:                                                                           |  |                                 
|Weighted
      average common shares outstanding used in computing net loss per share: |  |                                 
|Basic
        and diluted                                                              |  |                             
|                                                                                   |  |                                 
|Net
      loss per share applicable to common stockholders:                            |  |                                 
|Basic
        and diluted                                                              |  | $                               

|
|

For the 2010, 2009, and 2008 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 1,829,375 and 1,298,501
  shares of Common Stock in 2010 and 2009, respectively, and options to purchase
  1,027,504 shares of Common Stock in 2008, have been omitted from the loss per
  share calculation as their effect is anti-dilutive.

Stock-Based Compensation
  The Company recognizes stock-based compensation in the financial statements
  for all share-based awards to employees, including grants of employee stock
  options, based on their fair values. The Company uses a binomial lattice valuation
  model to estimate the fair value of stock option grants. 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.

In the year ended December 30, 2010, the Company granted stock options to purchase
  858,950 shares of the Company's Common Stock at a weighted average per share
  fair value estimated at $1.92. A majority of the options granted resulted from
  an option exchange completed in the third quarter 2010. In June 2010 the Company
  offered to exchange certain outstanding stock options granted under the Company's
  equity incentive plans for new options to purchase shares of the Company's Common
  Stock under modified vesting terms. On July 1, 2010, the Company completed the
  exchange offer and cancelled stock options to purchase 703,550 shares and reissued
  new stock options to purchase an equivalent number of shares. The option exchange
  was treated as a modification for accounting purposes. The reissued stock options
  have an exercise price of $3.04 per share, a weighted average per share fair
  value estimated at $1.92, with a weighted average vesting period of 2.1 years.
  Incremental expense resulting from the modification was approximately $0.74
  million. Total unrecognized compensation costs after completion of the exchange
  offer was approximately $1.6 million, which is being amortized over the weighted
  average remaining requisite period of 2.4 years. At December 31, 2010, options
  held by employees for 1,192,790 shares were outstanding, of which options for
  413,847 shares were exercisable.



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

Weighted average assumptions for options issued and outstanding
  during the years ended December 31, 2010, 2009, and 2008 are shown as follows:

|                                     | Years
        Ended December 31.
|------------------------------------ | --------------------------------
|                                     | 2010                            
|Risk-free interest rate (%)          | 3.03                            
|Dividend
        yield               | ---                             
|Volatility factor                    | 0.9                             
|Expected
        option life (years) | 4.0                             

Total stock-based compensation expenses recognized in our statement of operations
  for the years ended December 31, 2010, 2009, and 2008 are as follows:

|                                        |  | Years
        Ended December 31,
|--------------------------------------- |  | --------------------------------
|Income
        Statement Classification |  |    
        2010            
|Cost
        of revenues                |  | $                               
|Research
        and development        |  |                                 
|Sales
        and marketing             |  |                                 
|General
        and administrative      |  |                             
|Total                                   |  | $                               

At December 31, 2010, the fair value of unamortized stock-based compensation
  expense was $1,142,834, and will be amortized over a weighted average period
  of 1.94 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, 2010, 2009,
  and 2008 are as follows:

|                                 |  |                                  |        |  |      |       |        |      |  |       |       
|-------------------------------- |  | -------------------------------- | ------ |  | ---- | ----- | ------ | ---- |  | ----- | ------
|                                 |  | Years
        Ended December 31,
|Revenues:
        (in thousands) |  | 2010                             |        |  | 2009 |       |        | 2008
|United
        States            |  | $                                | 10,205 |  |      | $     | 9,930  |      |  | $     | 16,847
|Europe                           |  |                                  | 2,742  |  |      |       | 5,386  |      |  |       | 6,470 
|Asia
        and rest of world   |  |                              | 551    |  |      |   | 1,811  |      |  |   | 3,240 
|                                 |  | $                                | 13,498 |  |      | $     | 17,127 |      |  | $     | 26,557



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

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

Information regarding product families for the years ended December 31, 2010,
  2009, and 2008 is as follows:

|                                        |  |                                  |        |  |      |       |        |      |  |       |       
|--------------------------------------- |  | -------------------------------- | ------ |  | ---- | ----- | ------ | ---- |  | ----- | ------
|                                        |  | Years
        Ended December 31,
|Revenues:
        (in thousands)        |  | 2010                             |        |  | 2009 |       |        | 2008
|Mobile handheld
      computer products |  | $                                | 6,622  |  |      | $     | 6,467  |      |  | $     | 4,730 
|                                        |  |                                  |        |  |      |       |        |      |  |       |       
|Data collection                         |  |                                  | 4,956  |  |      |       | 5,632  |      |  |       | 9,296 
|                                        |  |                                  |        |  |      |       |        |      |  |       |       
|OEM embedded products                   |  |                                  | 1,414  |  |      |       | 3,318  |      |  |       | 9,306 
|                                        |  |                                  |        |  |      |       |        |      |  |       |       
|Other:                                  |  |                                  |        |  |      |       |        |      |  |       |       
|Connectivity                            |  |                                  | 506    |  |      |       | 815    |      |  | $     | 1,617 
|Serial
        interface *              |  |                              | ---    |  |      |   | 895    |      |  |   | 1,608 
|                                        |  | $                                | 13,498 |  |      | $     | 17,127 |      |  | $     | 26,557

|*Note: On September 30, 2009, the Company sold its serial product line assets
      to Quatech, Inc. (see "Note 8 - 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, 2010, 2009, and 2008 were as follows:

|                                                                         |  |                                  |    |      |  |      |    |   |  |  |    |  
|------------------------------------------------------------------------ |  | -------------------------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                                                         |  | Years
        Ended December 31,
|                                                                         |  | 2010                             |    | 2009 |  | 2008
|Ingram
      Micro, Inc.                                                 |  |                                  | 14 | %    |  |      | 18 | % |  |  | 16 | %
|Tech
      Data Corporation                                              |  |                                  | 13 | %    |  |      | 17 | % |  |  | 15 | %
|BlueStar, Inc.                                                           |  |                                  | 11 | %    |  |      | *  |   |  |  | *  |  
|Epocal, Inc.                                                             |  |                                  | 10 | %    |  |      | *  |   |  |  | *  |  
|Intermec, Inc.                                                           |  |                                  | *  |      |  |      | *  |   |  |  | 14 | %
|* Customer accounted for less than 10% of total revenues for the period.

Recent Accounting StandardsIn 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.





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

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 did not have a material impact
  on the Company's financial statements.

NOTE 2 - Senior Convertible Note Financing

On November 19, 2010, the Company issued a senior secured convertible note
  having a principal amount of $1,000,000 in a private placement financing. The
  note is convertible all or in part at the option of the noteholder into 500,000
  shares of Common Stock, at an initial conversion price of $2.00 per share. The
  conversion price is subject to resets under certain market conditions. The convertible
  note matures eighteen months from the date of issuance, and will bear interest
  at the rate of 10% per annum, which is payable quarterly in arrears. The proceeds
  from the note financing were used for working capital purposes.

In conjunction with the convertible note, the Company issued to the investor
  a 5.5 year warrant to purchase 500,000 shares of Common Stock at $2.44 per share
  which was allocated a fair value of $335,548 from the proceeds of the convertible
  debt. In connection with the note financing, the Company issued to the private
  placement agent a 5.5 year warrant to purchase 50,000 shares of Common Stock
  with a fair value of $50,500 which was expensed in General and Administrative
  expense in the fourth quarter. The private placement agent warrants have terms
  that are substantially the same as the warrant issued to the investor, except
  that the private placement agent's warrant will allow for net exercise. The
  fair values of these warrants were derived using a binomial lattice valuation
  formula with the following assumptions: 0.0% dividend yield rate, 1.54% risk
  free interest rate, $2.11 fair value of common stock, $2.44 exercise price,
  a life of five and a half years, and a volatility of 65.32%.

The convertible note is recorded on the Company's balance sheet
  net of the associated debt discount of $726,096, which is comprised of the following:

- allocated fair value of the warrant issued to the investor of $335,548;
- beneficial conversion feature of $335,548 based on the allocation of the
    proceeds between the note and the fair value of the investor warrants; and
- in-the-money beneficial conversion feature of $55,000.

The debt discount will be amortized ratably over the life of the note, except
  in the case of conversion which may accelerate the amortization. Amortization
  of debt discount for the year ended December 31, 2010 was $55,649 and was included
  in interest expense.



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

The convertible note is secured by all of the assets of the Company. In order
  to secure the note, the Company terminated its credit line facilities with Silicon
  Valley Bank, who then released its security interest in the assets of the Company
  (see "Note 4 - Bank Financing Arrangements" for more information).
  The Company will be required at all times to maintain collateralization of the
  convertible note with an amount equivalent to the unconverted principal plus
  accrued interest. Collateral will consist of qualified accounts receivables
  of the Company, plus cash to the extent qualified accounts receivables are less
  than the unconverted principal plus accrued interest. At December 31, 2010,
  $710,797 of the note proceeds was reserved as collateral under the terms of
  the note and reflected as restricted cash on the Company's balance sheet.

On January 12, 2011, the Company completed the registration of 1,310,398 shares
  which is an amount equal to the maximum shares issuable for the conversion of
  the note and warrants. On January 20, 2011, the date of the first conversion
  price reset, 85% of the lowest reported closing bid price in the five days preceding
  the reset date resulted in a conversion price reset of $1.50 per share which
  added an additional 166,666 shares to be issued upon conversion of the note
  for a total of 666,666 shares issuable upon conversion. As a result of the reset,
  a beneficial conversion feature with a fair value of $273,904 will be added
  to debt discount in the first quarter 2011 and will be amortized ratably over
  the remaining life of the note, except in the case of conversion which may accelerate
  the amortization. The conversion price is subject to one additional price reset
  one year from date of closing subject to a conversion floor price of $1.31 per
  share and could result in an increase in the number of shares the Company is
  obligated to issue upon conversion of the note up to an additional 97,732 shares
  in aggregate. As the total debt discount is limited to the face value of the
  note, no additional debt discount will be recognized in the future.

NOTE 3 - 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.



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

NOTE 4 - Bank Financing Arrangements

For the years presented up through November 2, 2010, the Company had a credit
  facility with Silicon Valley Bank (the "Bank") which 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 $1,500,000 and $1,000,000, respectively. Borrowings
  under the lines bore 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 30, 2009 and throughout fiscal 2010 was 6%. The borrowings under
  the credit facility were secured by a first priority security interest in the
  assets of the Company. The advance rate for receivables was 50% from distributors
  and 70% for all other receivables. The agreement also specified a collateral
  handling fee of 0.62% per month. The applicable interest and fees were 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. 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 the Bank to extend the term of the
  existing credit facility to March 23, 2011 and to amend its other terms. Under
  the terms of the amendment, the Company was required to maintain at all times
  a minimum cash deposit balance at the Bank of no less than $1,000,000, and to
  achieve minimum quarterly revenue requirements for fiscal 2010. The Company
  failed to meet the minimum revenue covenant for the quarters ended March 31,
  2010, June 30, 2010, and September 30, 2010, however, the bank agreed to waive
  the events of default for the quarters ended March 31, 2010 and June 30, 2010,
  and to replace the quarterly minimum revenue requirements with quarterly net
  income targets beginning with the quarter ended June 30, 2010. On November 2,
  2010, the Company repaid in full its outstanding indebtedness to the Bank and
  terminated the lines of credit. All obligations of the Company under the credit
  facility and any other related loan and collateral security documents, except
  those which specifically survive the termination of such agreements, were terminated.
  In conjunction with this termination the Company entered into a securities purchase
  agreement in conjunction with a convertible note financing which subsequently
  closed on November 19, 2010 (see "NOTE 2 - Senior Convertible Note Financing"
  for more information).

NOTE 5 - 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.



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

Amortization of all intangible assets for the years ended December 31, 2010,
  2009, and 2008, was $60,000, $76,787, and $127,147, respectively. Intangible
  assets as of December 31, 2010 consisted of the following:

|                               |  |        |           |  |              |       |         |     |  |       |         | 
|------------------------------ |  | ------ | --------- |  | ------------ | ----- | ------- | --- |  | ----- | ------- | 
|                               |  | Gross  |           |  | Accumulated  |       |         |     | 
|                               |  | Assets |           |  | Amortization |       |         | Net | 
|Patent                         |  | $      | 600,000   |  |              | $     | 390,000 |     |  | $     | 210,000 | 
|Project
      management tools |  |    | 570,750   |  |              |   | 570,750 |     |  |   | ---     | 
|Total intangible
      assets  |  | $      | 1,170,750 |  |              | $     | 960,750 |     |  | $     | 210,000 | 

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 | 

Based on identified intangible assets recorded at December 31, 2010 and assuming
  no subsequent impairment of the underlying assets, the annual amortization expense
  is expected to be as follows:

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

NOTE 6 - Capital Lease Obligations

The Company leases certain of its equipment under capital leases. The leases
  are collateralized by the underlying assets. At December 31, 2010 and 2009,
  property and equipment with a cost of $49,962 were subject to such financing
  arrangements. Related accumulated amortization at December 31, 2010 and 2009
  amounted to $18,736 and $6,245, respectively. Future minimum payments under
  capital lease and equipment financing arrangements as of December 31, 2010,
  are as follows:

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





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

NOTE 7 - Commitments

The Company operates its headquarters under a non-cancelable operating lease
  which provides for the lease by the Company of approximately 37,100 square feet
  of space in Newark, California. On August 30, 2010, the Company amended its
  commercial building lease agreement. The amendment was effective as of August
  23, 2010 and extended the lease termination date from June 30, 2012 to June
  30, 2018. The Company's base rent under the facilities lease was abated in its
  entirety in the amount of $31,983 for each of the months of September through
  December 2010. In addition, the base rent for the months of January 2011 through
  June 2012 was reduced by $1,278 per month. The base rent under the facilities
  lease shall be $29,705 per month for the period from July 1, 2012 through June
  30, 2013. The base rent increases annually thereafter at a rate of four percent
  per year for the remaining five years under the facilities lease. Future minimum
  lease payments under all operating leases are as shown below:

|Annual
        minimum payments | Amount
|------------------------------- | ------
|2011                            |       
|2012                            |       
|2013                            |       
|2014                            |       
|2015
        to 2018            |       
|Total
        minimum payments  | $     

Rental expense under all operating leases was $347,768, $351,532, and $351,532
  for each of the years ended December 31, 2010, 2009, and 2008, respectively.
  The amount of related deferred rent at December 31, 2010 and 2009 was $197,387
  and $95,200, respectively.

As of December 31, 2010, the Company has non-cancelable purchase commitments
  for inventory to be used in the ordinary course of business of approximately
  $3,249,000.

NOTE 8 - 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 used the proceeds from the transaction for working capital purposes.
  SocketSerial product revenues in the quarters subsequent to the sale of the
  product line to Quatech through the quarter ended December 31, 2010, were below
  the minimum revenue attainment threshold required for payment of the contingent
  amount, and therefore no additional amounts from the sale of the SocketSerial
  product line were recognized in 2010.



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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 9 - 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.

NOTE 10 - Stock Option/Stock Issuance Plan

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

The 1995 Plan

The 1995 Plan 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. In 2010 the shares in the 1995 Plan were cancelled and transferred to
  the 2004 Plan.



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

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, 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 | 
|Canceled                           |  |                   | 301,345  |        |                             |       | (301,345 | )                       |       | $ | 19.07 | 
|Transferred
      to 2004 Plan     |  |                   | (301,345 | )  |                             |       | ---      |                     |       |   |       | 
|Balance
      at December 31, 2010 |  |               | ---      |    |                             |   | ---      |                     |       |   |       | 

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, 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 | 
|Canceled                               |  |                   | 60,175  |        |                             |       | (60,175 | )                       |       | $ | 33.20 | 
|Options not granted at Plan expiration |  |                   | (60,175 | )  |                             |       | ---     |                     |       |   |       | 
|Balance
      at December 31, 2010     |  |               | ---     |    |                             |   | ---     |                     |       |   |       | 





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

The 2004 Plan
  The 2004 Plan provides for the grant of incentive stock options, nonstatutory
  stock options, restricted stock, stock appreciation rights, and performance
  awards, to employees, directors, and consultants of the Company. Upon ratification
  of the 2004 Plan by the shareholders in June 2004, shares in the 1995 Plan that
  had been reserved but not issued, as well as any shares issued that would otherwise
  return to the 1995 Plan as a result of termination of options or repurchase
  of shares, were added to the shares reserved for issuance under the 2004 Plan.
  The Company grants incentive stock options and non-statutory stock options at
  an exercise price per share equal to the fair market value per share of Common
  Stock on the date of grant. The vesting and exercise provisions are determined
  by the Board of Directors, with a maximum term of ten years.

Information with respect to the 2004 Plan is summarized as follows:

|                                    |  |                   |          |       |                             |       |           |                         |       |   |       | 
|----------------------------------- |  | ----------------- | -------- | ----- | --------------------------- | ----- | --------- | ----------------------- | ----- | - | ----- | 
|                                    |  |                   |          |       | Outstanding
        Options
|                                    |  | Options           |          |       |                             |       |           | Weighted                |      
|                                    |  | Available         |          |       | Number                      |       |           | Average                 |      
|                                    |  | For
        Grant |      |       | of
        Shares           |   |           | Price
        Per Share |  
|Balance at December
      31, 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  | 
|Increase
      in shares authorized |  |                   | 151,550  |       |                             |       | ---       |                         |       |   |       | 
|Transferred
      from 1995 Plan    |  |                   | 301,345  |       |                             |       | ---       |                         |       |   |       | 
|Granted                             |  |                   | (858,950 | )     |                             |       | 858,950   |                         |       | $ | 3.00  | 
|Exercised                           |  |                   | ---      |       |                             |       | (12,951   | )                       |       | $ | 1.96  | 
|Canceled                            |  |               | 502,548  |   |                             |   | (502,548  | )                       |       | $ | 2.15  | 
|Balance
      at December 31, 2010  |  |               | 170,243  |   |                             |   | 1,192,790 |                     |       | $ | 2.88  | 

The weighted average fair value of options granted during 2010, 2009, and 2008,
  under the 2004 Plan was $1.92, $1.64, and $4.13, respectively.

The 2004 Plan provides for an annual increase in the number of shares authorized
  under the plan 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, 2011,
  2010, and 2009, a total of 152,079, 151,550, and 129,196 additional shares,
  respectively, became available for grant from the 2004 Plan. As of March 10,
  2011, 207,450 options at a weighted average grant price of $1.04 per share have
  been granted from the 2004 Plan subsequent to December 31, 2010.



69

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

The outstanding and exercisable options at December 31, 2010 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                   |  |                           | 213,930   |  |                             |  | 8.17 |                        |  | $ | 1.96              |  |  |                        | 94,571  |  |  | $ | 1.96  | 
|$2.35
        - $2.45   |  |                           | 51,900    |  |                             |  | 8.42 |                        |  | $ | 2.39              |  |  |                        | 49,500  |  |  | $ | 2.40  | 
|$2.74
        - $3.04   |  |                           | 794,530   |  |                             |  | 9.58 |                        |  | $ | 3.00              |  |  |                        | 155,041 |  |  | $ | 3.01  | 
|$3.15
        - $4.48   |  |                           | 123,590   |  |                             |  | 8.75 |                        |  | $ | 3.38              |  |  |                        | 107,440 |  |  | $ | 3.39  | 
|$6.90
        - $7.20   |  |                           | 4,000     |  |                             |  | 7.42 |                        |  | $ | 7.00              |  |  |                        | 2,563   |  |  | $ | 7.02  | 
|$10.00
        - $15.10 |  |                       | 4,840     |  |                             |  | 5.50 |                        |  | $ | 11.61             |  |  |                    | 4,732   |  |  | $ | 11.64 | 
|$1.96
        - $15.10  |  |                       | 1,192,790 |  |                             |  | 9.17 |                        |  | $ | 2.88              |  |  |                    | 413,847 |  |  | $ | 2.92  | 

NOTE 11 - Warrants

The Company issued warrants to purchase Common Stock in connection with certain
  financing agreements. In November 2010, warrants were issued in conjunction
  with the senior convertible note financing (see "Note 2 - Senior Convertible
  Note Financing" for more information). In May 2009, warrants were issued
  in conjunction with a common stock financing (see "Note 3 - Common Stock
  Financing" for more information). The Company has the following outstanding
  warrants to purchase Common Stock at December 31, 2010:



|Reason                                    |  | Number
        of Shares |  |  | Price
        Per Share |  |  | Issue
        Date |  |  | Expiration
        Date
|----------------------------------------- |  | ------------------------ |  |  | ----------------------- |  |  | ------------------ |  |  | -----------------------
|                                         
|Common
        stock financing            |  | 86,585                   |  |  | $1.80                   |  |  | May
        2009   |  |  | May 2014               
|Senior
        convertible note financing |  | 550,000                  |  |  | $2.44                   |  |  | Nov
        2010   |  |  | May 2016               
|                                          |  | 636,585                  |  |  |                         |  |  |                    |  |  |                        



NOTE 12 - Shares Reserved

Common Stock reserved for future issuance was as follows:

|                                                                    |           | Number
        of shares at
        December 31,
|------------------------------------------------------------------- | --------- | ------------------------------------------------
|                                                                    | 2010      |                                                 
|Stock
        option grants outstanding (see Note 9)                | 1,192,790 |                                                 
|Reserved
        for future stock option grants (see Note 10)       | 170,243   |                                                 
|Reserved
        for note conversion (see Note 2)                   | 760,398   |                                                 
|Reserved
        for exercise of outstanding warrants (see Note 11) | 636,585   |                                                 
|                                                                    | 2,760,016 |                                                 





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

NOTE 13 - 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, 2010, 2009 or 2008. Administrative expenses relating
  to the 401(k) Plan are not significant.

NOTE 14 - Income Taxes

Deferred tax expense is related to the deferred tax liability on the portion
  of the Company's goodwill amortized for tax purposes. Due to the indefinite
  characteristic of this deferred tax liability, it cannot be offset against deferred
  tax assets. Goodwill impairment charges recorded as of December 31, 2009 on
  that portion of the Company's goodwill being amortized for tax purposes, resulted
  in the reversal of accumulated deferred tax expense and the related deferred
  tax liability, temporarily eliminating the difference between financial and
  tax reporting at December 31, 2009 and through the first two quarters of 2010.
  The provision for deferred tax for the periods ended December 31, 2010, 2009,
  and 2008, consists of the following components:

|                                         |  | Years
        Ended December 31,
|---------------------------------------- |  | --------------------------------
|                                         |  | 2010                            
|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,
|---------------------------------------- |  | --------------------------------
|                                         |  | 2010                            
|Federal
        tax at statutory rate    |  |                                 
|State
        income tax rate            |  |                                 
|Losses
        and credits not benefited |  |                                 
|Goodwill
        impairment              |  |                             
|Provision
        for taxes              |  |                             





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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:                        |  | 2010                            
|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 valuation allowance for its
  deferred tax assets.

As of December 31, 2010, the Company had net operating loss carryforwards for
  federal income tax purposes of approximately $30,443,000, which will expire
  at various dates beginning in 2011 and through 2030, and federal research and
  development tax credits of approximately $338,000, which will expire at various
  dates beginning in 2018 and through 2030. As of December 31, 2010, the Company
  had net operating loss carryforwards for state income tax purposes of approximately
  $16,650,000, which will expire at various dates in 2012 and through 2030, and
  state research and development tax credits of approximately $259,000, which
  can be carried forward indefinitely. During 2010, approximately $2,342,000 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,
  2010 reflect estimates of Section 382 limitations.





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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, 2010                      | $      | 599,000
|Decreases
      in UTBs taken in prior years              |        | (14,000
|Increases
      in UTBs taken in current year             |        | 12,000 
|Amount
      related to settlements                       |        | ---    
|Amount
      related to lapsing of statute of limitations |    | ---    
|Ending balance at
        December 31, 2010               | $      | 597,000

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, 2010. 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 2010
  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.

NOTE 15 - Subsequent Event: Common Stock Financing

On February 23, 2011, the Company completed the sale of 282,485 shares of its
  Common Stock in a private placement with AboCom Systems, Inc., a corporation
  organized under the laws of Taiwan and a contract manufacturer of the Company's
  products. The shares were priced at the closing bid price of $1.77 per share
  as reported on February 23, 2011 for a total of $499,998 raised in the private
  placement. The proceeds will be used to reduce the Company's trade payable balance
  with AboCom Systems by the same amount.









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

Not Applicable.

Item 9A. 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, 2010. 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, 2010, 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 the Dodd-Frank Wall Street Reform
  and Consumer Protection Act, which exempts non-accelerated filers from Section
  404(b) of the Sarbanes-Oxley Act of 2002.



> 74

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(Table
  of Contents)

Changes in Internal Control Over Financial Reporting

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

Item 9B. Other Information

None.



PART
  III

Item 10. Directors,
  Executive Officers and Corporate Governance

The information required
  hereunder is incorporated by reference from our Proxy Statement to be filed
  in connection with our annual meeting of stockholders to be held on April 27,
  2011.

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 27, 2011.

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 27, 2011.

The following table provides information as of December 31, 2010 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.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Number of
        securities to be issued
        upon exercise of
        outstanding options |           |  | Weighted-average exercise price of outstanding options |   | Number of securities
        remaining available
        for future issuance
        under equity
        compensation plans
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- | --------- |  | ------------------------------------------------------ | - | ----------------------------------------------------------------------------------------------------------------------------
|Equity
      compensation plans approved by security holders (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                                                                                                | 1,192,790 |  |                                                        | $ | 2.88                                                                                                                        
|(1) Consists of the 2004 Equity Incentive Plan. Pursuant to an affirmative
      vote by security holders in June 2004, an annual increase in the number
      of shares authorized under the 2004 Equity Incentive Plan is added on the
      first day of each fiscal year equal to the least 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 152,079 shares became available for grant
      under the 2004 Equity Incentive Plan on January 1, 2011, in addition to
      those set forth in the table above.





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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 27, 2011.

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 27, 2011.





> 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
>         47Balance
>           Sheets
>         48Statements
>           of Operations
>         49Statements
>           of Stockholders' Equity
>         50Statements
>           of Cash Flows
>         51Notes
>           to Financial Statements
>         52
>     
>     
>     
>     
>     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 78. 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 78. The Exhibits listed on the accompanying
>     Index of Exhibits are filed or incorporated by reference as part of this report.

76

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SIGNATURES

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

|                           | SOCKET
      MOBILE, INC.
      Registrant                                               
|-------------------------- | -----------------------------------------------------------------------------------------
|                           |                                                                                          
|Date:
      March 11, 2011 | /s/
      Kevin J. Mills
      Kevin J. Mills
      President and Chief Executive Officer











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



|By | /s/
      Kevin J. Mills        | President
      and Chief Executive Officer 
      (Principal Executive Officer)                                                   |                      | March
      11, 2011
|-- | ------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | -------------------- | --------------------
|   | Kevin
      J. Mills           
|   |                                 |                                                                                                                                    |                      |                     
|By | /s/
      Charlie Bass          | Chairman
      of the Board                                                                                                        |                      | March
      11, 2011
|   | Charlie
      Bass             
|   |                                 |                                                                                                                                    |                      |                     
|By | /s/
      David W. Dunlap       | Vice
      President of Finance and Administration and Chief Financial Officer 
      (Principal Financial and Accounting Officer) |                      | March
      11, 2011
|   | David
      W. Dunlap          
|   |                                 |                                                                                                                                    |                      |                     
|By | /s/
      Micheal L. Gifford    | Executive
      Vice President and Director                                                                                        |                      | March
      11, 2011
|   | Micheal
      L. Gifford       
|   |                                 |                                                                                                                                    |                      |                     
|By | /s/
      Charles C. Emery, Jr. | Director                                                                                                                           |                      | March
      11, 2011
|   | Charles
      C. Emery, Jr.    
|   |                                 |                                                                                                                                    |                      |                     
|By | /s/
      Leon Malmed           | Director                                                                                                                           |                      | March
      11, 2011
|   | Leon
      Malmed              
|   |                                 |                                                                                                                                    |                      |                     
|By | /s/
      Thomas Miller         | Director                                                                                                                           |                      | March
      11, 2011
|   | Thomas
      Miller             |                                                                                                                                   
|   |                                 |                                                                                                                                    |                     
|By | /s/
      Peter Sealey          | Director                                                                                                                           | March
      11, 2011
|   | Peter
      Sealey              |                                                                                                                                   





77

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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 Management Incentive Variable Compensation
      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 Amendment to Standard Industrial/Commercial
      Multi-Lessee Lease - Net dated August 30, 2010                                                                                                         
|                       |                                                                                                                                                                                                                 
|10.10 (12)             | Amended and Restated Securities Purchase Agreement
      between the Company and the investor listed on Exhibit A attached thereto
      dated November 19, 2010.                                               

|           |                                                                                                                                                                         
|---------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.11 (12) | Registration Rights Agreement between the Company
      and the purchaser listed on Exhibit A attached thereto dated May 18, 2009.                                      
|           |                                                                                                                                                                         
|10.12 (12) | Senior Secured Convertible Note issued
      November 19, 2010 by the Company to the Investor                                                                           
|           |                                                                                                                                                                         
|10.13 (12) | Warrants for the Purchase of Shares of Common
      Stock issued November 19, 2010 to the Investor and the Placement Agent in
      connection with a private placement.





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|Exhibit
        Number | Description                                                                                                                                
|---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                            
|10.14 (13)             | Securities Purchase Agreement between the Company and the
      investor listed on Exhibit A attached thereto dated February 23, 2011.     
|                       |                                                                                                                                            
|10.15 (13)             | Registration Rights Agreement between the Company and the
      investor listed on Exhibit A attached thereto dated February 23, 2011.     
|                       |                                                                                                                                            
|11.1                   | Computation of Earnings per Share (see Statements of Operations
      in Item 8).                                                          
|                       |                                                                                                                                            
|14.1 (14)              | 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.
      (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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





79

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|(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 Appendix B filed with the Company's
        Form DEF 14A filed on March 16, 2011.
      (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 August 30, 2010.
      (12) Incorporated by reference to exhibits filed with the Company's Form
        8-K filed on November 19, 2010.
      (13) Incorporated by reference to exhibits filed with the Company's Form
        8-K filed on February 23, 2010.
      (14) Incorporated by reference to exhibits filed with the Company's
        Form 10-K filed on March 10, 2006.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





80

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