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, 2006 **[   ]**
      **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF 1934**For the transition period from ____________
        to ____________ Commission
    file number 1-13810 **SOCKET COMMUNICATIONS, INC.** (Exact name of registrant as specified in its charter)  **Delaware**
      **94-3155066**(State or
          other jurisdiction of incorporation or organization)
      (IRS Employer Identification
          No.)  **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 under Section 12(b) of the Exchange Act: Title
          of Each Class
      
      Name of Exchange on Which RegisteredCommon Stock, $0.001
          Par Value per Share
      
      The NASDAQ Stock
          Market LLC 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 Exchange 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 Exchange Act
    during the preceding 12 months (or for such shorter period that the registrant
    was required to file such reports), and (2) has been subject to such filing
    requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if there is no disclosure of delinquent
    filers in response to Item 405 of Regulation S-K contained herein, and no
    disclosure will be contained, to the best of registrant's knowledge, in definitive
    proxy or information statements incorporated by reference in Part III of this
    Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated
    filer, an accelerated filer, or a non-accelerated filer. See definition of
    "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange
    Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer
    [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, 2006, the aggregate market value of the registrant's
    common stock ($0.001 par value) held by non-affiliates of the registrant was
    $35,844,005 based on the closing sale price as reported on the National Association
    of Securities Dealers Automated Quotation Global Market System. Number of shares of common stock ($0.001 par value) outstanding
    as of February 28, 2007: 31,883,886 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 18, 2007. 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
      15Item
        1B.
      Unresolved Staff
        Comments
      24Item
        2.
      Properties
      24Item
        3.
      Legal
        Proceedings
      25Item
        4.
      Submission
        of Matters to a Vote of Security Holders
      25PART
        IIItem
        5.
      Market for Registrant's Common Equity, Related Stockholder
        Matters, and Issuer Purchases of Equity Securities
      25Item
        6.
      Selected Financial Data
      27Item
        7.
      Management's
        Discussion and Analysis of Financial Condition and Results of Operations
      28Item
        7A.
      Quantitative
        and Qualitative Disclosures about Market Risk
      42Item
        8.
      Financial
        Statements and Supplementary Data
      43Item
        9.
      Changes
        in and Disagreements with Accountants on Accounting and Financial Disclosure
      66Item
        9A.
      Controls
        and Procedures
      66Item
        9B.
      Other
        Information
      66PART
        IIIItem
        10.
      Directors, Executive Officers and Corporate Governance
      67Item
        11.
      Executive Compensation
      67Item
        12.
      Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters
      67Item
        13.
      Certain
        Relationships and Related Transactions, and Director Independence
      68Item
        14.
      Principal
        Accounting Fees and Services
      68PART
        IVItem
        15.
      Exhibits and Financial Statement Schedules
      68SIGNATURES
      69 Index
        to Exhibits
      70


PART
  I

This Annual Report contains forward-looking statements within the meaning
  of Section 27A of the Securities Act of 1933, as emended, and Section 21E of
  the Securities Exchange Act of 1934, as amended. These statements include statements
  forecasting future financial results and operating activities, market acceptance
  of our products, expectations for general market growth of handheld computers
  and other mobile computing devices, growth in demand for our products, expansion
  of the markets that we serve, expansion of the distribution channels for our
  products, adoption of our embedded products by third-party manufacturers of
  electronic devices, and the timing of the introduction and availability of new
  products, as well as other forecasts discussed under "Management's Discussion
  and Analysis of Financial Condition and Results of Operations." Words such as
  "may," "will," "predicts," "anticipates," "expects," "intends," "plans," believes,"
  "seeks," "estimates," variations of such words, and similar expressions are
  intended to identify such forward-looking statements. Such forward-looking statements
  are based on current expectations, estimates, and projections about our industry,
  management's beliefs, and assumptions made by management. These forward-looking
  statements are not guarantees of future performance and are subject to certain
  risks, uncertainties, and assumptions that are difficult to predict; therefore,
  actual results and outcomes may differ materially from what is expressed or
  forecasted in any such forward looking statements. Factors that could cause
  actual results and outcomes to differ materially include, but are not limited
  to: the risk of delays in the availability of our products due to technological,
  market or financial factors including the availability of necessary working
  capital; our ability to successfully 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 and data collection 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 systems serving the business market. Mobile systems
  solutions typically consist of a handheld computer, data collection and connectivity
  peripherals, and third-party vertical applications software. We have historically
  offered a wide range of data collection and connectivity peripheral products
  and embedded products for use with mobile computing devices offered by third-parties.
  We have announced plans to offer a family of handheld computers with the first
  product scheduled to ship in the second quarter of 2007. See "Products" for
  a description of the products that we offer or plan to offer. We work with more
  than 100 software integration companies that are offering or developing vertical
  application software for use with handheld computers. Examples of these vertical
  applications include patient medication administration within the health care
  industry, retail merchandising such as managing inventory on retail store shelves,
  sales and field force automation involving the collection and processing of
  orders or service information from remote locations by sales and service personnel,
  asset management and inventory control for assets having bar codes or RFID tags,
  and mobile point of sale applications. These mobile solutions are designed to
  improve the productivity of business enterprises by automating manual tasks,
  improving the quality of information collected, and enhancing mobile productivity
  by processing and transferring information from remote locations and mobile
  devices to the business enterprise, and then if required, back to the remote
  locations and mobile devices.



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We believe that growth in the mobile workforce, technical advances and cost
  reductions in mobile devices and networking technologies, and the pervasive
  use of the Internet are driving broader adoption of mobile data communications.
  Our products are designed to address the growing need for mobile workforce connectivity
  by enabling the use of handheld computers to extend data communications capabilities
  beyond location-dependent wired networks or telephone lines, thereby enabling
  handheld computer users to enhance their productivity, exploit time sensitive
  opportunities and improve customer satisfaction. Overall, our products enable
  the integration of hardware, software and applications into complete mobile
  data collection and connectivity solutions.

Total employee headcount on December 31, 2006 was 83 people. We subcontract
  the manufacturing of substantially all of our products to independent third-party
  contract manufacturers who are located in the U.S., China and Taiwan and who
  have the equipment, know-how and capacity to manufacture products to our specifications.
  We market our products through a worldwide network of distributors and resellers,
  as well as through original equipment manufacturers (OEMs), Vertical Industry
  Partners and value added resellers. See "Personnel", "Sales and Marketing" and
  "Manufacturing" for additional information about our personnel, sales and marketing
  and manufacturing operations.

We have financed our operations since inception primarily from the sale of
  equity capital and have no long term debt. We also have a receivables based
  working capital line of credit with a bank that we use to generate additional
  cash, and we typically draw on this line of credit at the end of each quarter.
  Our data collection, connectivity and serial products are offered as standard
  products through general distribution channels and can be supplied within a
  few weeks of being ordered, so we do not have a large order backlog. Our order
  backlog at December 31, 2006 was $1.2 million.

Socket Communications, Inc. was founded in March 1992 and reincorporated in
  Delaware in 1995. We began doing business as Socket Mobile, Inc. in January
  2007 to better reflect our market focus on the mobile business market. Our common
  stock trades on the NASDAQ Global 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 (SEC).

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Products

Our products may be classified into four broad product families:

- Mobile peripheral products;
- Handheld computer products;
- OEM embedded products; and
- Serial card products.

Our mobile peripheral products consist of data collection products and connectivity
  products, which together represented approximately 69 percent of our revenue
  for the year ended December 31, 2006.



Our data collection products enable the electronic collection of data
  from bar codes, RFID tags, or magnetic stripes and consist of:

- bar code scanning products that plug into or connect wirelessly to handheld
    computers, tablet computers, notebook computers and smartphones that use Windows
    Mobile, Windows XP, Windows Tablet, J2ME, or Symbian 60 or Symbian 80 operating
    systems, and turn these devices into portable bar code scanners that can be
    used in various retail and industrial workplaces;
- Radio Frequency Identification (RFID) plug-in products that read RFID tags;
- a combination plug-in bar code scanner and RFID reader; and
- a plug-in magnetic stripe reader.

We have developed extensive bar code scanning software called SocketScan that
  supports all of our data collection products, and have software developer kits
  that assist third-party developers in integrating our SocketScan software and
  our hardware products into their applications and solutions. Our bar code scanning
  products include CompactFlash and SDIO plug-in bar code scanners for linear
  and two-dimensional bar code scanning, along with a cordless handheld bar code
  scanner and a ring scanner worn on the index finger, both of which connect to
  computing systems using the Bluetooth standard for short-range wireless connectivity.
  Data collection products represented approximately 42 percent, 39 percent, and
  40 percent of our revenue for the years ended December 31, 2006, 2005 and 2004,
  respectively.

Our connectivity products are connection devices that can either be
  plugged into standard expansion slots in handheld computers, tablet computers,
  notebook computers and smartphones that use Windows Mobile, Windows XP, Windows
  Tablet, or Palm operating systems, or connect to these devices over wireless
  and wired connections. These products allow users to connect their devices to
  the Internet via mobile or wired phone services, or to private networks, or
  to communicate with other electronic devices such as desktop computers, other
  handheld, tablet and notebook computers, smartphones and printers. Our connectivity
  products include:

- plug-in cards using the Bluetooth standard for short-range wireless connectivity,
    along with extensive communications software enabling the use of these products;
- plug-in cards for connecting to local wireless networks using the Wireless
    LAN 802.11b/g (or Wi-Fi) standards along with extensive communications software
    enabling the use of these products.
- Modems for telephone connections that connect over a cable, and cordless
    modems that utilize Bluetooth wireless technology to connect a telephone to
    a Bluetooth-enabled computer or other device; and
- Ethernet cards for local area network connections that connect over a cable.



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Bluetooth and wireless LAN connection functions are being built into many third-party
  mobile devices, which may reduce the demand for these categories of our plug-in
  products but may increase the demand for our stand-alone Bluetooth products
  that work with other Bluetooth-enabled devices. Connectivity products represented
  approximately 27 percent, 34 percent and 32 percent of our revenue for the years
  ended December 31, 2006, 2005 and 2004, respectively.

Our handheld computer has been designed to address the market for a
  handheld computer that is neither a consumer-oriented PDA nor a heavy duty industrial
  device. It features the Microsoft Windows Mobile 5.0 professional operating
  system to ensure a high level of mobile application compatibility and to give
  workers a familiar computing environment. The computer is easy to customize
  and integrate with peripherals and information systems and has an expected product
  life cycle of three to five years to align with the needs of businesses for
  longer deployments than have been available with consumer-oriented PDAs. The
  handheld computer's features include Wireless LAN and Bluetooth, a fast processor,
  a large, bright screen display, large amounts of SDRAM and flash memory, extended
  battery life, programmable action buttons to activate peripheral devices, reinforced
  CompactFlash and SDIO card slots, and a durable case. The first customer shipments
  are expected to start during the quarter ended June 30, 2007, and additional
  versions are planned for later in the year and beyond.

Our OEM embedded products consist of Bluetooth and Wireless LAN modules
  and plug-in cards used by Original Equipment Manufacturers (OEMs) of handheld
  computers and other devices to build wireless connection functions into their
  products using the Bluetooth and Wireless LAN standards for wireless connectivity.
  OEM embedded products represented approximately 21 percent, 14 percent and 14
  percent of our revenue for the years ended December 31, 2006, 2005 and 2004,
  respectively.

Our serial card products enable the connection of a mobile computer
  to another electronic device either as a plug-in card connecting over cables
  or wirelessly over a Bluetooth network. Serial card products represented approximately
  10 percent, 13 percent and 14 percent of our revenue for the years ended December
  31, 2006, 2005 and 2004, respectively.

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

Market Dynamics

Handheld computers have evolved over the past several years from simple devices
  used mainly to hold personal information into small portable units with functionality
  similar to desktop PCs. Many handheld computers, such as the Pocket PC and Palm
  Treo, have built-in expansion capabilities in standard form factors, typically
  CompactFlash, Secure Digital Input/Output or Bluetooth, to allow for transfer
  of data in and out of the handheld computer. Many handheld computers, such as
  the Palm Treo, Research-In-Motion's Blackberry and Pocket PC phone editions,
  also include an integrated phone to facilitate the transfer of data over mobile
  phone networks. Notebooks and tablet computers also have expansion capabilities
  to enable their use in mobile environments. Certain models of mobile phones
  called smartphones, which use the Windows Mobile and Symbian System 60 and 80
  operating systems and have limited physical size and computing capabilities,
  are designed to process and store personal information and facilitate messaging
  over the mobile phone networks. The addition of Bluetooth wireless technology
  to these smartphones and to the Blackberry handheld computer from Research-In-Motion
  facilitates the transfer of data between these devices and networks or other
  devices.



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Advances in mobile network access and transfer speeds are enabling mobile computing
  device users to access the Internet, send and receive email, access corporate
  data files, and exchange instant messages anywhere and at any time through wireless
  local area networks, mobile phone networks or phone land lines, and to transfer
  data directly with other nearby mobile devices using Bluetooth wireless technology,
  cables or wireless local area networks. Our connectivity products and our serial
  products are designed to enable these connections by adding connections to devices
  that do not have them built-in, or by connecting to devices that have one or
  more of the wireless connection technologies built in. In addition, mobile devices
  with standard expansion capabilities are effective at collecting data. Our data
  collection products are designed to facilitate the collection of bar code and
  RFID information on these devices.

Handheld computers have traditionally been classified into consumer and industrial.
  Consumer devices such as those offered by Hewlett-Packard, Dell, Siemens or
  Acer are designed for personal use and fit in a pocket or purse. Industrial
  devices such as those offered by Symbol Technologies (now part of Motorola),
  Intermec and Hand Held Products are designed for rugged environments such as
  outdoors or 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 was an ideal fit for business needs. Our first
  handheld computer model, scheduled for introduction in the quarter ending June
  30, 2007, is a standard Windows Mobile handheld device without telephony technology
  and is designed specifically to address essential business requirements to improve
  mobile worker productivity. Compared to consumer devices, it is similar in size
  and weight but is more durable, has programmable buttons to activate functions
  such as SocketScan, our data collection software, adds features such as seamless
  roaming to improve the worker experience in using wireless LAN, incorporates
  Socket's Connect!Agent to improve users short range cordless Bluetooth technology,
  has faster processors, larger memory and extended battery life. Compared to
  industrial devices, it is smaller in size and weight, less rugged, and less
  expensive. Pricing is set at the high end of the consumer class of handheld
  computers. We plan to introduce additional models over the next several years
  to provide more choices to businesses that are deploying mobile computing solutions.

Growth in the mobile workforce and increasing reliance on the Internet and
  on access to corporate databases and email are increasing the demand for mobile
  data communications. The capability of a mobile workforce to enter data in the
  field and to transfer it electronically generally improves the timeliness and
  accuracy of information such as order entry, process management or transaction
  reporting. Advances in connection technologies, local area networking and wide
  area networking are being commercialized to allow handheld computers to interact
  with nearby computers and with a wide array of electronic appliances, including
  mobile phones, printers, digital cameras, local area network access points,
  Global Positioning System receivers, automobile communications systems, bar
  code scanners, radio frequency identification tags, home entertainment and security
  systems, public kiosks, public Internet access locations and vending machines.



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Current market dynamics driving adoption of mobile data communications include:

Functionality of today's mobile computing devices is extensive and improving.
  Unlike early models, most mobile computing devices now offer bright outdoor
  color screens and longer battery life, have software allowing their use as business
  messaging devices with capacity to store personal information, and have standard
  expansion capabilities or use Bluetooth or wireless local or wide area network
  connections to transfer data in and out of the device. Popular desktop programs
  such as Word and Excel are available for today's handheld, tablet and notebook
  computers, enabling users to send and receive emails with full attachments,
  run popular personal information management and business programs, run entertainment
  and education software for games, music or books, view and interact with the
  Internet with enhanced and feature-rich graphics, have direct access to corporate
  data files (subject to business security arrangements), and use instant messaging
  over mobile networks. Mobile devices also can become lightweight mobile bar
  code and RFID scanning devices when used with our bar code scanning or RFID
  products, enabling the capture and processing of bar code or RFID information
  in a mobile environment.

Manufacturers continue to develop and expand product lines of mobile computing
  devices. Marketing efforts by mobile computing device manufactures will
  assist in educating the market on the capabilities of these devices using our
  connection products. One of the largest manufacturers of handheld computers
  using the Microsoft Windows Mobile operating system is Hewlett-Packard. Some
  models integrate phones into the handheld computer and others do not. Hewlett-Packard
  along with other computer manufacturers such as Siemens, Toshiba and Fujitsu
  offer tablet or notebook computers with standard expansion capabilities. Manufacturers
  of industrial versions of Pocket PCs include Symbol Technologies, Intermec,
  Hand Held Products, Casio, Itronix, TopCon and Tripod Data Systems. Palm's Tungsten
  series of handheld computer and its Treo, a smartphone, have expansion slots
  and Bluetooth connectivity to facilitate data transfer. Palm also introduced
  in early 2006 a version of their Treo smartphone that uses the Windows Mobile
  operating system. Smartphones are also becoming widely available from mobile
  phone manufacturers using the Symbian 60 and Symbian 80 operating systems, including
  Nokia, LG, Lenova, Panasonic, Samsung, Sendo and Siemens, or the Windows Mobile
  operating system, such as Motorola. These phones use Bluetooth and, in some
  Windows Mobile smartphones, SDIO slots to facilitate the transfer or the collection
  of data. Increased competition among manufacturers is expected to result in
  increased availability and greater promotion of mobile computing devices that
  can be used with our products during 2007 and beyond.

Mobile phone networks continue to be upgraded to provide faster data speeds
  and connections at reduced cost. Mobile phone service providers are making
  substantial investments to upgrade their networks to support high-speed data
  transfer applications. The introduction of new networking equipment and technologies
  has substantially increased data transfer speeds over regular digital cellular
  phone networks. Available data rates today can exceed the speeds experienced
  on a desktop computer connected over a phone line with a dial-up modem. These
  higher speeds are making mobile data applications more attractive to users and
  driving demand for connection products to facilitate data transfer over digital
  cellular mobile phone networks.



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The mobile workforce is growing and is increasingly reliant on email and
  the Internet. The worldwide mobile workforce has been estimated at more
  than 20 percent of the global workforce. Before recent advancements in handheld
  computers and wireless networks over mobile phones and through wireless local
  area network access points, the mobile workforce had been unable to effectively
  stay connected with email, the Internet or corporate data except through telephone
  lines. With the growth in the use of the Internet and email for business and
  personal applications, workers and consumers are increasingly dependent on access
  to the Internet and email for managing their business and personal lives. Recent
  improvements in mobile phone and wireless LAN connectivity and deployment of
  mobile computers by corporations to their mobile workforce are expected to be
  major factors driving growth in mobile data applications over the next several
  years.

Third-party applications for enterprises are becoming available in increasing
  numbers. Third-party software applications are becoming available for the
  collection, processing and transfer of information by a mobile workforce. Mobile
  computing devices are being used for such diverse applications as checking patient
  medications when administering them in a hospital, capturing lot numbers of
  drug samples given to a doctor, managing the stocking of shelves in retail establishments,
  or entering sales orders from the field. Larger enterprise software companies
  such as Oracle Corporation have written applications for the Pocket PC that
  use our bar code scanning products. SAP has enabled our SDIO form factor scanning
  card in all mobile applications developed by SAP and by other vendors that interface
  with SAP solutions through SAP's NetWeaver Mobile program. We have supported
  the development and deployment of our products in third-party applications through
  our Vertical Industry Partners (VIP) Program and more than 100 companies are
  participants in this program. Our VIP Program is described more fully under
  "Sales and Marketing." 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 capitalize on our strategic relationships,
  expand and improve our product offerings to differentiate our products, build
  a stronger brand name, support the development of third-party software applications
  and integrator solutions, introduce our products into new markets by increasing
  the number of mobile device platforms that our products support, and encourage
  device manufacturers to build our technology directly into their products. With
  the introduction of our mobile handheld computer, we will also offer a complete
  hardware solution consisting of a mobile handheld computer and peripherals which
  will allow value added resellers and integrators to offer a one-stop solution
  in combination with their own or third-party vertical software applications
  for the mobile workforce.

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 (VIP), distributors, and end-user customers.
  We actively promote third-parties to integrate our products into their solutions
  through our VIP Program. We have a team of employees that manages each strategic
  relationship, and we provide software developer kits and technical support to
  our software and hardware developers. We have built close working relationships
  with a number of companies that help us expand and market our products, as new
  standards, technologies and markets emerge, including Microsoft, the general
  purpose Windows Mobile handheld device manufacturers (Hewlett-Packard being
  one of the largest) and Symbol Technologies, recently acquired by Motorola.
  We coordinate our product development efforts with Microsoft on an ongoing basis,
  with the goal of ensuring that our current and future products are compatible
  with new releases of Microsoft's operating systems. We spend extensive engineering
  time and resources to ensure compatibility with a wide variety of handheld computers
  including Pocket PCs, the Palm Treo, the Blackberry from Research-In-Motion,
  and smartphones using the Symbian 60 and 80 operating system. Dell is a direct
  reseller of our products. We work closely with the sales teams of Dell and Hewlett-Packard
  to assist them in offering mobile device solutions that include our products.



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Expand and improve our product offerings to differentiate our
  products. We offer a wide range of data collection and connectivity products
  that are used with mobile devices, and we encourage our distributors to carry
  the full range of our products. The goal is for customers to view Socket as
  a single source for their connection needs, instead of having to rely on individual
  product offerings from a number of different companies. During the past three
  years, we have introduced a number of hardware and software products, including
  a Cordless Hand Scanner using Bluetooth wireless technology, a cordless 56K
  modem using Bluetooth wireless technology, a 56K plug-in modem in SDIO form
  factor, an RFID reader, a combination RFID reader and laser bar code scanner,
  a cordless ring bar code scanner designed to be worn on the index finger for
  use in package handling, an 802.11g upgrade to our CompactFlash 802.11b wireless
  LAN card, a wireless LAN module to add embedded Wireless LAN to our OEM product
  offerings and a mobile power pack. We continue to add features to our Bluetooth
  software for Windows notebooks and tablets, our wireless local area network
  software and SocketScan, our bar code scanning and RFID software. During 2006,
  we upgraded our products to comply with the Reduction of Hazardous Substances
  (RoHS) rules being implemented in Europe and around the world by changing the
  solder used in our products to be lead-free, which increased our engineering
  expense during the first half of the year. The addition of a mobile handheld
  computer to our product line in 2007 will, we believe, make it easier for our
  customers to build mobile computing solutions, both because our handheld computer
  has been designed specifically for business use, and because it will enable
  the purchase of the entire hardware solution from one vendor, simplifying the
  processes of integration and support.

Build a Stronger Brand Name. We are building a brand image of "Increasing
  Mobile Productivity." This image emphasizes quality and standards-based connectivity
  and data collection products that are "Mobility Friendly," which means products
  that are compact, low power, and easy to use. Our focus is to work with our
  partners to develop productivity enhancing solutions for the mobile workforce.
  In January 2007, we began doing business as Socket Mobile, Inc. to emphasize
  our commitment to mobile computing. Our overall company, brand identity and
  positioning, is to become "the leading provider of easy-to-deploy business mobility
  systems and peripherals."

Support the development of third-party software applications and integrator
  solutions. We have created software developer kits for many of our products,
  including bar code scanning, RFID, Bluetooth and Wireless LAN. In addition,
  we have several employees dedicated to assisting developers and integrators
  with integrating our products into their solutions. Our VIP Program includes
  over 100 companies that offer or are developing software solutions which incorporate
  Socket products. These solutions primarily involve data collection and address
  improving productivity of the mobile workforce in a number of categories including
  field force automation, asset management, retail merchandising, automotive/transportation
  and health care.



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Introduce our products into new markets by increasing the number of mobile
  device platforms that our products support. Our focus during the past several
  years has been to develop connectivity and data collection products for handheld
  computers, with an emphasis on the Pocket PC. We support mobile devices that
  have the following characteristics: truly portable devices that are easily carried
  and used while mobile; open software architectures such as Windows, Palm and
  Symbian; and a standard expansion mechanism such as CompactFlash, Secure Digital
  Input/Output or Bluetooth. We enable the use of our cordless and SDIO data collection
  products to work with smartphones that use the Symbian 60 and Symbian 80 operating
  systems and enable our Cordless data collection products to work with Bluetooth-enabled
  Blackberry handheld computers from Research-In-Motion.

Encourage device manufacturers to build our technology directly
  into their products. To capture embedded connection business, we have built
  relationships with certain mobile device manufacturers and work with them to
  integrate our Bluetooth software and modules into their own product designs.
  The majority of these manufacturers are building vertical application devices
  for special purpose markets. We have recently added to our OEM products Wireless
  LAN software and modules to enable our customers to embed our Wireless LAN technology
  into their devices. We have an internal team of employees that manages our embedded
  products business. We also provide developer support to our mobile device manufacturer
  customers to assist them as needed to integrate our embedded products into their
  mobile devices.

Competition and Competitive
  Risks

The overall market for data collection and connectivity products is both complex
  and competitive, and we expect competition in our market areas to intensify,
  particularly for our connectivity products, which compete with similar products
  that are manufactured by companies in Asia and offered to the market at lower
  costs. However, our longtime focus on creating data collection and connectivity
  products for mobile devices has resulted in good brand name recognition and
  reputation. In addition, we continue to innovate and intend to be early to market
  in a number of product categories. We also believe that our brand name identifies
  our products as robust, dependable, small form factor, low power and easy to
  use, and the breadth of our product offerings, including the extensive features
  of our software, will continue to differentiate us relative to our competitors.
  Finally, the addition of a handheld computer in 2007 will enable us to better
  control the handheld computing environment for our peripheral products and offer
  one-stop shopping for the hardware portion of mobile business solutions. The
  competition in each of our product families is discussed in more detail below.

Data Collection Products. Our laser and CMOS imager bar code scanning
  products face competition from ruggedized integrated bar code scanning devices
  from Symbol Technologies (recently acquired by Motorola), Intermec, Hand Held
  Products, Casio, Itronix and others. Many of these companies have been expanding
  their product lines to offer less expensive devices designed for enterprise
  use, which is narrowing the gap between the cost of consumer devices using our
  peripheral data collection products and industrial devices. We purchase laser
  engines from Motorola (formerly Symbol Technologies) and are licensed by Motorola
  to use these engines in our bar code scanning products. We also purchase imagers
  from Motorola and from other companies for use in our products. We face competition
  outside of the United States from a product similar to our In-Hand Scan Card
  from BeInteractive, from products similar to our Cordless Hand Scanner from
  Baracoda, and from other competitive laser scanning products from Grabba (Australia)
  and Opticon (Japan).



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Motorola's patent position for laser bar code scanning tends to
  limit the sale of laser scanning bar code 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. In addition, companies such as Intermec have improved
  imager technology making it a more viable alternative to laser scanning, and
  we expect to face more competition over time from devices deploying imaging
  technology. Our laser scanning products are targeted to address specific market
  segments, such as patient medication administration within the health care industry,
  retail merchandising such as managing inventory on retail store shelves, sales
  and field force automation involving the collection and processing of orders
  or service information from remote locations by sales and service personnel,
  asset management and inventory control for assets having bar codes or RFID tags,
  and mobile point of sale applications. We produce our laser bar code scanning
  products under a license from Motorola (Symbol), which, to date, has not licensed
  these technologies to potential competitors. Motorola (Symbol) has historically
  been selective in licensing their technologies to third-parties, and we have
  no reason to anticipate that their practices will change. Nonetheless, the continued
  availability of our licenses from Motorola and the continued absence of other
  licensees are dependent upon future licensing decisions by Motorola.

Connectivity Products - Wireless Connections. Our Wireless
  LAN cards face competition in the market today principally from other manufacturers
  of low power Wireless LAN 802.11g cards, including Ambicom and Linksys for CF
  cards, and AmbiCom, Spectec and Mobis for SDIO cards. We compete based on our
  brand name, distribution and customer support infrastructure, as well as software
  enhancements that provide ease-of-use, security features, and monitoring and
  troubleshooting tools. Our Wireless LAN cards also support Wi-Fi Protected Access
  (WPA) on Windows Mobile 2003/5.0. WPA is an industry standard method for securing
  wireless LANs for corporate and small office/home office environments established
  by the Wi-Fi Alliance, an industry trade association and standards setting body.
  The market for Bluetooth wireless communications technology is highly competitive.
  A number of companies offer competing CompactFlash Bluetooth cards including
  Ambicom, Brainboxes and Billionton. Our Bluetooth CompactFlash plug-in card
  is the only card in the market that has an integrated antenna, allowing it to
  fit completely within a CompactFlash Type 1 slot. Our Bluetooth software, which
  continues to be improved, provides a functional, easy-to-use Bluetooth solution
  and has been enabled to work on Windows Mobile 5.0 devices, on selected handheld
  computers from Motorola (formerly Symbol Technologies) and on devices manufactured
  by our OEM customers. There are also a number of competitors that offer Bluetooth
  modems. These companies include Billionton Systems, ENR Technologies, Motorola,
  PSI, SiteCom, Sony, Typhoon, Trust, X Micro and Zoom.

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

Handheld computer. Historically we have worked closely with handheld computer
  manufacturers to allow our peripheral products to work with their handheld computers,
  and we will continue to do so following the introduction of our own handheld
  computer scheduled for the quarter ending June 30, 2007. Our handheld computer's
  features and pricing are positioned between the consumer grade handheld computers
  offered by Hewlett-Packard, Dell, Acer, Siemens and others and the industrial
  ruggedized grade of handheld computers offered by Symbol Technologies (acquired
  by Motorola), Intermec and Hand Held Products with features designed specifically
  for business use and our peripheral products are used with many of these handheld
  computers. These companies have offered handheld computers for many years and
  have an established market presence, and although we differentiate our product,
  their handheld computers are likely to be competitive alternatives to our handheld
  computer.

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Embedded Products. Competition for our embedded products is primarily
  the same competition we face for the applicable plug-in product in one or more
  of our other product families, as plug-in connection cards are an alternative
  to embedded connections. Our Bluetooth and WLAN software works well with our
  hardware, providing us a complete solution for embedding Bluetooth and WLAN
  wireless connections into third-party devices. However, manufacturers in Asia
  selling primarily hardware, such as Alps, Murata, and TaiyoYuden, along with
  integrators such as Bluesoft and Stonestreet One, are able to produce all or
  part of embedded solutions which may compete with our products and services.

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

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.

One of our most important chip hardware building blocks is our proprietary
  mobility integrated circuit, which is a highly flexible interface for PC Cards
  and CompactFlash cards that enables our products to work with all major handheld
  and notebook computers that have PC Card or CompactFlash slots, regardless of
  their design. We have incorporated our mobility integrated circuit into a broad
  range of our peripheral products to control signal transmission between these
  products and the handheld or notebook computer's PC Card or CompactFlash slot.

Another area of intellectual property is our expertise in embedded radio-dependent
  firmware. Within our Bluetooth cordless products are software and firmware that
  include a wide variety of functions to enable efficient radio control and overall
  systems functionality. For cordless bar code 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 various Windows and third-party operating systems.
  We have been awarded eight U.S. Patents and one UK patent covering our design
  for cards combining connectivity and removable memory. 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 bar code scanners, bar code 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 bar code scanning products to scan a
  variety of bar codes and to route the scanned data to many different types of
  data files. Our Bluetooth software used in conjunction with our Bluetooth hardware
  provides a completely functional Bluetooth solution enabling connections and
  data transfers between Bluetooth-enabled devices. Our wireless local area network
  software that is integrated with our wireless local area network management
  software (which we call Wi-Fi Companion) and 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. Our Wi-Fi Companion software is also
  designed to work with built-in wireless local area network hardware from other
  manufacturers.

We have registered trademarks with the U.S. Patent and Trademark Office for
  "Socket", our logo, and the term "Battery Friendly" and we have applied for
  trademarks for more recent products including "Go-WiFi" for our Wireless LAN
  products and "SoMo" for our 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, 2006 was 83 people. Our employees are not represented by a union, and we
  consider our employee relationships to be good.

Sales and Marketing

During the year ended December 31, 2006, 68 percent of our sales were in North
  America, 24 percent in Europe, and 8 percent in Asia and Pacific Rim countries.
  During the year ended December 31, 2005, 65 percent of our sales were in North
  America, 24 percent in Europe and 11 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.



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We market our products through a worldwide network of distributors and resellers,
  as well as through original equipment manufacturers (OEMs) and value added resellers.
  In addition, we have more than 100 companies that are participants in our Vertical
  Industry Partners (VIP) program. Participants offer or intend to offer third-party
  software applications that utilize our products in their software solutions.
  Vertical market segments addressed by participants include field force automation,
  retail merchandising, healthcare, government, automotive/transportation, and
  asset management. Applications include checking patient medications when administering
  them in a hospital, capturing lot numbers of drug samples given to a doctor,
  managing the stocking of shelves in retail establishments, entering sales orders
  from the field, taking inventory of bar coded items, and entering and updating
  information in an enterprise data base. We support our distributors, resellers
  and integrators with software developer kits and by providing 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, 2006,
  we had 32 people in sales, marketing and customer and developer services support.

Our United States distributor Tech Data Corp. accounted for 26 percent of our
  revenue in 2006 and 28 percent of our revenue in each of 2005 and 2004. Our
  United States distributor Ingram Micro, Inc. accounted for 14 percent of our
  revenue in each of 2006 and 2005 and 15 percent of our revenue in 2004. We intend
  to increase our sales and marketing effort during 2007 by adding personnel and
  increasing promotional activities, particularly in support of our distributors
  and Vertical Industry Partners.

Consistent with industry practice, we provide our distributors with stock balancing
  and price protection rights which permit these distributors to return slow-moving
  products to us for credit, and to receive price adjustments for inventories
  of our products held by the distributors if we lower the price of those products.
  The immediate effect of returns and adjustments on our quarterly operating results
  is limited, since we recognize revenues on products shipped to distributors
  only at the time the merchandise is sold by the distributor. To date, we have
  not experienced any significant returns or price protection adjustments.

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

Manufacturing

We subcontract the manufacturing of substantially all of our products to independent
  third-party contract manufacturers who are located in the U.S., China, and Taiwan
  and who have the equipment, know-how and capacity to manufacture products to
  our specifications. We perform final product testing and package our products
  at our Newark, California facility for most of our sales. As of December 31,
  2006, we had 28 people employed in manufacturing operations, including planning,
  buying, manufacturing engineering, quality control, product assembly, shipping
  and receiving, MIS and customer support. We augment this workforce with temporary
  employees on an as-needed basis.



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Certain of our product components are available from only one vendor. These
  sole sourced components include the interface chip that controls the signal
  transmission between all of our plug-in CompactFlash products (except our Ethernet
  and Wireless LAN cards) and the card slot on the mobile computer, our Ethernet
  and Wireless LAN chips, our laser scanning engines, our SDIO plug-in cards,
  certain cable and connector components and, beginning in 2007, our handheld
  computer. Although to date we have generally been able to obtain adequate supplies
  of these components, these components are generally purchased on a purchase
  order basis under standard commercial terms and conditions, and we do not have
  long-term supply contracts for these components. Accordingly, the manufacturers
  could stop providing these components to us at any time. Alternatively, although
  our suppliers are generally large, well-financed organizations, they could encounter
  financial difficulties that interfere with our product supplies. In such an
  event, we could experience a decline in revenues until we establish sufficient
  manufacturing supply through an alternative source. Locating and qualifying
  alternative suppliers, and commencing new manufacturing operations, could take
  a significant period of time, although we believe that we can relocate manufacturing
  or find alternative suppliers for sole sourced components should it become necessary.
  We generally stock higher inventory quantities of sole sourced components as
  safety stocks to mitigate the risk of supply disruption.

Research and Development

Since our inception, we have made substantial investments in research and development.
  Research and development expenditures were $5.1 million in 2006 compared to
  $3.5 million and $3.6 million in 2005 and 2004, respectively. The increased
  expenditures in 2006 were in part due to an increase in the number of development
  projects including the removal of lead from our products as required by the
  Reduction in Hazardous Substances Act and new product development costs for
  our cordless ring scanner and our handheld computer. We believe that our future
  performance will depend in large part on our ability to develop significant
  enhancements to our existing products and to develop successful new products
  for emerging and existing markets.

As of December 31, 2006, we had fourteen 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, 2006,
  we had nine people responsible for our financial and administrative activities
  including accounting and finance, personnel, and administrative support.



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Item 1A. Risk Factors

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

We were unprofitable in each of the quarters in fiscal 2006. We were profitable
  in two quarters in 2005, but unprofitable for fiscal year 2005. Fiscal year
  2004 was the first profitable year in our history, but only to the extent of
  $288,000. Prior to 2004, we incurred significant operating losses in each financial
  period since our inception. To achieve ongoing profitability, we must accomplish
  numerous objectives, including growth in our business and the development of
  successful new products. We cannot foresee with any certainty whether we will
  be able to achieve these objectives in the future. Accordingly, we may not generate
  sufficient net revenue to achieve ongoing profitability. If we cannot achieve
  ongoing profitability, we will not be able to support our operations from positive
  cash flows, and we would use our existing cash to support operating losses.
  If we are unable to secure the necessary capital to replace that cash, we may
  need to suspend some or all of our current operations.

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

Although we do not anticipate the need to raise additional capital during the
  next twelve months to fund our operations, we may incur operating losses in
  future quarters and may need to raise capital to fund these losses. Our forecasts
  are highly dependent on factors beyond our control, including market acceptance
  of our products and sales of handheld computers. If capital requirements vary
  materially from those currently planned, we may require additional capital sooner
  than expected. There can be no assurance that such capital will be available
  in sufficient amounts or on terms acceptable to us, if at all. In addition,
  the availability of our bank line is dependent upon our meeting certain covenants,
  including a tangible net worth covenant. Future operating losses could cause
  us to lose the availability of our bank line as a result of becoming non-compliant
  with these covenants.

If third-parties do not produce and sell innovative products with which
  our products are compatible, or if our line of handheld computers is not successful,
  we may not achieve our sales projections.

Our success has been dependent upon the ability of third-parties in the mobile
  personal computer industry to complete development of 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 handheld computers, our ability to generate increased revenue depends significantly
  on the commercial success of Windows-mobile handheld devices, particularly the
  Pocket PC and other devices such as the line of handhelds with expansion options
  offered by Palm, and the adoption of handheld computers for business use. If
  manufacturers are unable or choose not to ship new products such as Pocket PC
  and other Windows-mobile devices or Palm devices on schedule, or experience
  difficulties with new product transitions that cause delays in the market as
  we experienced in 2005 and 2006, or if these products fail, including our new
  line of handheld computers, to achieve or maintain market acceptance, the number
  of our potential new customers would be reduced and we would not be able to
  meet our sales expectations.



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

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

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

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

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

Beginning January 1, 2006 we began to expense options granted under our
  employee stock plans as compensation, and as a result our net income and earnings
  per share were negatively affected, we may continue to have net losses as a
  result of the requirement to expense options, and may find it necessary to change
  our business practices to attract and retain employees.

Historically, we have used stock options as a key component of our employee
  compensation packages. We believe that stock options provide an incentive to
  our employees to maximize long-term stockholder value and, through the use of
  vesting, encourage valued employees to remain with us. The expensing of employee
  stock options adversely affected our net income and earnings per share in fiscal
  2006, will continue to adversely affect future quarters, and will make profitability
  harder to achieve or make our net losses worse. In addition, we may decide in
  response to the effects of expensing stock options on our operating results
  to reduce the number of stock options granted to employees or to grant options
  to fewer employees. This could adversely affect our ability to retain existing
  employees and attract qualified candidates, and also could increase the cash
  compensation we would have to pay to them.

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

A significant portion of our revenue comes from two distributors, Tech Data
  Corp. and Ingram Micro, Inc., which together represented approximately 40 percent,
  42 percent, and 43 percent of our worldwide revenue in fiscal years 2006, 2005,
  and 2004, respectively. We expect that a significant portion of our revenue
  will continue to depend on sales to Tech Data Corp. and Ingram Micro, Inc. We
  do not have long-term commitments from Tech Data Corp. or Ingram Micro, Inc.
  to carry our products. Either could choose to stop selling some or all of our
  products at any time, and each of these companies also carries our competitors'
  products. If we lose our relationship with Tech Data Corp. or Ingram Micro,
  Inc., we would experience disruption and delays in marketing our products. Revenues
  related to these two major distributors fell markedly in the third quarter 2006
  to 32 percent, due primarily to a reduction in the level of corporate handheld
  deployments by one of our key North American channel partners.



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

Substantially all of our products are designed for use with mobile personal
  computers, including handhelds, notebook computers, tablets and smartphones.
  If the mobile personal computer industry does not grow, if its growth slows,
  or if product or operating system changeovers by mobile computer manufacturers
  and partners cause delays in the market, as we experienced in 2006 and 2005,
  or if the markets for our mobile handheld computers do not grow, we will not
  achieve our sales projections.

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

Many of our products use new technologies, such as 2D bar code scanning and
  RFID, 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 handheld computers in which we operate is very competitive.
  Our future financial performance is contingent on a number of unpredictable
  factors, including that:

- some of our competitors have greater financial, marketing, and technical
    resources than we do;
- we periodically face intense price competition, particularly when our competitors
    have excess inventories and discount their prices to clear their inventories;
    and
- certain original equipment manufacturers of personal computers, mobile phones
    and handheld computers offer built-in functions, such as Bluetooth wireless
    technology, Wi-Fi, or bar code scanning, that compete with our products.

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



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

The demand for our products depends on many factors and is difficult to forecast.
  We expect that it will become more difficult to forecast demand as we introduce
  and support more products and as competition in the market for our products
  intensifies. If demand increases beyond forecasted levels, we would have to
  rapidly increase production at our third-party manufacturers. We depend on suppliers
  to provide additional volumes of components, and suppliers might not be able
  to increase production rapidly enough to meet unexpected demand. Even if we
  were able to procure enough components, our third-party manufacturers might
  not be able to produce enough of our devices to meet our customer demand. In
  addition, rapid increases in production levels to meet unanticipated demand
  could result in higher costs for manufacturing and supply of components and
  other expenses. These higher costs could lower our profit margins. Further,
  if production is increased rapidly, manufacturing yields could decline, which
  may also lower operating results.

If demand is lower than forecasted levels, we could have excess production
  resulting in higher inventories of finished products and components, which could
  lead to write-downs or write-offs of some or all of the excess inventories.
  Lower than forecasted demand could also result in excess manufacturing capacity
  at our third-party manufacturers and in our failure to meet minimum purchase
  commitments, each of which may lower our operating results.

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

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

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

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



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

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

We have devoted significant research and development resources to design activities
  for Windows-mobile products, Palm devices, smartphones using Windows Mobile
  and Symbian System 60 and 80 operating systems, handheld computers from Research-in-Motion,
  and more recently, to developing our own family of handheld mobile 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, Palm, Symbian or Research-in-Motion
  is obligated to continue the collaboration or to support the products produced
  from the collaboration. Consequently, these organizations may terminate their
  collaborations with us for a variety of reasons, including our failure to meet
  agreed-upon standards or for reasons beyond our control, such as changing market
  conditions, increased competition, discontinued product lines, and product obsolescence.

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

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

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

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



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

In the course of operating our business, we may receive claims of intellectual
  property infringement or otherwise become aware of potentially relevant patents
  or other intellectual property rights held by other parties. Many of our competitors
  have large intellectual property portfolios, including patents that may cover
  technologies that are relevant to our business. In addition, many smaller companies,
  universities, and individuals have obtained or applied for patents in areas
  of technology that may relate to our business. The industry is moving towards
  aggressive assertion, licensing, and litigation of patents and other intellectual
  property rights. For example, in January 2007, the Washington Research Foundation
  filed a patent lawsuit against Nokia, Samsung, and Panasonic, alleging these
  wireless device makers of using infringing Bluetooth microprocessors in their
  products. Socket has not been named in the lawsuit, and we do not plan to make
  any changes to our current business at this time. The outcome of this lawsuit
  may result in future changes to our business.

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

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

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

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



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

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

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

We expect to experience quarterly fluctuations in operating results in the
  future. We generally ship orders as received, and as a result we may have little
  backlog. Quarterly revenue and operating results therefore depend on the volume
  and timing of orders received during the quarter, which are difficult to forecast.
  Historically, we have often recognized a substantial portion of our revenue
  in the last month of the quarter. This subjects us to the risk that even modest
  delays in orders may adversely affect our quarterly operating results. Our operating
  results may also fluctuate due to factors such as:

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

Because we base our staffing and other operating expenses on anticipated revenue,
  delays in the receipt of orders can cause significant variations in operating
  results from quarter to quarter. As a result of any of the foregoing factors,
  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.

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

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

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

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

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

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

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

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



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

Export sales (sales to customers outside the United States) accounted for approximately
  32 percent, 35 percent, and 37 percent, of our revenues in fiscal years 2006,
  2005, and 2004, 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.

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 are located near an earthquake fault. The potential
  impact of a major earthquake on our facilities, infrastructure, and overall
  business is unknown. Additionally, we may experience electrical power blackouts
  or natural disasters that could interrupt our business. Should a disaster be
  widespread, such as a major earthquake, or result in the loss of key personnel,
  we may not be able to implement our disaster recovery plan in a timely manner.
  Any losses or damages incurred by us as a result of these events could have
  a material adverse effect on our business.

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

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



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

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

As of February 28, 2007, we had 31,883,886 shares of common stock outstanding.
  Substantially all of these shares are freely tradable in the public market,
  either without restriction or subject, in some cases, only to S-3 prospectus
  delivery requirements and, in other cases, only to manner of sale, volume, and
  notice requirements of Rule 144 under the Securities Act.

As of February 28, 2007, we had 9,440,364 shares subject to outstanding options
  under our stock option plans, and 1,484,994 shares were available for future
  issuance under the plans. We have registered the shares of common stock subject
  to outstanding options and reserved for issuance under our stock option plans.
  Accordingly, shares underlying vested options will be eligible for resale in
  the public market as soon as the options are exercised.

As of February 28, 2007, we had warrants outstanding to purchase a total of
  989,712 shares of our common stock at exercise prices ranging from $0.722 to
  $2.73. All such warrants may be exercised at any time, and the shares issuable
  upon exercise may be resold, either without restrictions or subject, in some
  cases, only to S-3 prospectus delivery requirements, and, in some cases, only
  to manner of sale, volume, and notice requirements of Rule 144.

Volatility in the trading price of our common stock could negatively impact
  the price of our common stock.

During the period from January 1, 2005 through February 28, 2007, our common
  stock price fluctuated between a high of $2.04 and a low of $0.72. The trading
  price of our common stock could be subject to wide fluctuations in response
  to many factors, some of which are beyond our control, including general economic
  conditions and the outlook of securities analysts and investors on our industry.
  In addition, the stock markets in general, and the markets for high technology
  stocks in particular, have experienced high volatility that has often been unrelated
  to the operating performance of particular companies. These broad market fluctuations
  may adversely affect the trading price of our common stock.

Item 1B. Unresolved Staff Comments

None.



Item 2. Properties

We lease a 37,000 square
  foot office facility in Newark, California under a lease expiring in May 2011.
  This facility houses our headquarters and manufacturing operations. We believe
  that our current facilities are sufficient and adequate to meet our needs for
  the foreseeable future.



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Item 3. Legal Proceedings

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

No matters were submitted for vote by security holders during the fourth quarter
  of 2006.



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 Global Market under the
  symbol "SCKT."

The quarterly high and low sales prices of our Common Stock, as reported on
  the Nasdaq Global Market through February 28, 2007 and for the last two fiscal
  years are as shown below:

|                                           |  | Common Stock
|------------------------------------------ |  | ------------
|Quarter Ended                              |  |         
|2005                                       |  |             
|March 31, 2005                             |  | $           
|June 30, 2005                              |  | $           
|September 30, 2005                         |  | $           
|December 31, 2005                          |  | $           
|2006                                       |  |             
|March 31, 2006                             |  | $           
|June 30, 2006                              |  | $           
|September 30, 2006                         |  | $           
|December 31, 2006                          |  | $           
|2007                                       |  |             
|March 31, 2007 (through February 28, 2007) |  | $           

On February 28, 2007, the closing sales price for our common stock as reported
  on the Nasdaq Global Market was $1.02. We had 538 stockholders of record as
  of February 20, 2007, and approximately an additional 6,884 beneficial stockholders.
  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 Communications, 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, 2001 through December 31, 2006 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 Consolidated
  Financial Data

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Years Ended December 31,
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------
|(Amounts in thousands except per share)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                         
|Income Statement Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                         
|Revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                         
|Gross profit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                         
|Operating expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                         
|Net income (loss) applicable
        to common stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                         
|Net income (loss) per
        share applicable to common stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                         
|Weighted average shares
        outstanding:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Basic                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Diluted                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         
|Balance
      Sheet Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                         
|Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                         
|Bank line of credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                         
|Capital lease obligations
        - long term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                         
|Preferred stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                         
|Total stockholders'
        equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                         
|Dividends and preferred
        stock accretion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(a) Operating expenses and the net loss applicable to common stockholders
        in 2006 includes stock compensation expense of $1.1 million and $1.2 million,
        respectively. On January 1, 2006, we adopted Financial Accounting Standard
        SFAS 123R, "Share-Based Payment." SFAS 123R requires the valuation of
        compensatory stock option grants and the expensing of the fair market
        value of these grants over the vesting period of the grants. Previous
        to fiscal 2006, we accounted for stock option grants to our employees
        and directors in accordance with Accounting Principles Board Opinion No.
        25, "Accounting for Stock Issued to Employees" (APB 25), and reported
        in accordance with the disclosure-only alternative described in SFAS 123,
        "Accounting for Stock-Based Compensation."



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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 consolidated
  financial statements for the year ended December 31, 2006. 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, Valuation of Goodwill and Other Intangible
  Assets, and beginning on January 1, 2006, Valuation of Compensatory Stock Option
  Grants.

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 revenues from services performed in connection with consulting
  arrangements. For those contracts that include contract milestones or acceptance
  criteria, we recognize revenues as such milestones are achieved or as such acceptance
  occurs. In some instances the acceptance criteria in the contract defers acceptance
  until all services are complete and all other elements have been delivered.
  In these cases, 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.

Goodwill
  and Other Intangible Assets

Our acquisition of the CompactFlash Bluetooth card business, including a product
  line and technology license, from Nokia Corporation in March 2002 and our acquisition
  of 3rd Rail Engineering in October 2000 added goodwill and intangible assets
  to our balance sheet. We allocated the purchase price of each based on an analysis
  of the fair market value of the assets we acquired. Beginning with the first
  quarter of 2002, in accordance with Statement of Financial Accounting Standards
  No. 142, "Goodwill and Other Intangible Assets," we ceased amortizing goodwill,
  and began to periodically evaluate whether the value of the goodwill was impaired,
  at which time any impaired balances would be written down. We periodically evaluate
  intangible and other long lived assets for potential impairment indicators.
  Our judgments regarding the existence of impairment indicators are based on
  legal factors, market conditions and operational performance of our acquired
  businesses. In addition, we also review the market capitalization of the Company
  in conjunction with our analysis of goodwill impairment. As of December 31,
  2006, in our judgment, there is no impairment of goodwill or intangible assets.
  Future events could cause us to conclude that impairment indicators exist and
  that goodwill and intangible assets associated with our acquired businesses
  are impaired. Any resulting impairment loss could have a material adverse impact
  on our financial condition and results of operations.

Valuation of Compensatory Stock Option Grants

On January 1, 2006, we adopted Financial Accounting Standard SFAS 123R, "Share-Based
  Payment," for the fiscal year ended December 31, 2006. SFAS 123R requires all
  share-based awards to employees, including grants of employee stock options,
  to be recognized in the financial statements based on their fair values. Previously,
  we accounted for stock option grants to our employees and directors in accordance
  with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
  to Employees" (APB 25) using a Black-Scholes formula, and reported in accordance
  with the disclosure-only alternative described in SFAS 123, "Accounting for
  Stock-Based Compensation." The valuation provisions of SFAS 123R apply to new
  grants and to grants that were outstanding as of the effective date. Under SFAS
  123R, the Company uses a binomial lattice valuation model to estimate fair value
  of stock option grants made on or after January 1, 2006. The binomial lattice
  model incorporates estimates for expected volatility, risk-free interest rates,
  employee exercise patterns and post-vesting employment termination behavior,
  and these estimates will affect the calculation of the fair value of the Company's
  stock option grants. The fair value of stock option grants outstanding as of
  the effective date is estimated using the Black-Scholes option pricing model
  used under SFAS 123. The Company adopted the modified prospective recognition
  method and implemented the provisions of SFAS 123R beginning with the first
  quarter of 2006.



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Overview of our Business

We are a producer of mobile systems serving the business market. Mobile systems
  solutions typically consist of a handheld computer, data collection and connectivity
  peripherals, and third-party vertical applications software. We have historically
  offered a wide range of data collection and connectivity peripheral products
  and embedded products for use with mobile computing devices offered by third-parties.
  We have announced plans to offer a family of handheld computers with the first
  product scheduled to ship in the second quarter of 2007. Our data collection
  and connectivity peripheral products are used with handheld computers, tablet
  computers, notebook computers and smartphones that use Windows Mobile, Windows
  XP, Windows Tablet, Palm, J2ME, or Symbian 60 or 80 operating systems. The guiding
  principles that we follow in developing products for the mobile computing market
  are standard form factors, low battery power consumption, ease of use, interoperability
  and quality. We sell both Socket-branded and OEM products. We distribute our
  Socket-branded products through worldwide general distribution channels, and
  sell our OEM products directly to OEMs. Sixty-eight percent of our products
  were sold in the United States and thirty-two percent sold in Europe and Asia
  during 2006.

Our focus has been on developing products for the enterprise market that drive
  operational efficiency and increase mobile workforce productivity. Our products
  are usually part of an enterprise solution created by third-parties incorporating
  a handheld device and applications software, and thus our sales have been dependent
  upon customers selecting a handheld device, choosing or developing their applications,
  and testing the solutions. Overall revenues in 2006 were negatively affected
  by several events in our marketplace. The introduction of an operating system
  upgrade, Windows Mobile 5.0, announced in September 2005 by the major PDA manufacturers,
  slowed customer deployments through 2006, as third-party applications were modified
  and tested with the new operating system. In addition, the transition to lead-free
  products in the second quarter of 2006 to comply with the Reduction of Hazardous
  Substances (RoHS) rules implemented in Europe and around the world, limited
  the availability of units by the major PDA manufacturers until late in the second
  quarter of 2006. Lastly, we experienced a marked reduction in handheld computer
  deployments by a key North American channel partner, which affected sales levels
  of our products in the third and fourth quarters of 2006. These types of transitions
  have affected our business from time to time and will continue to do so in the
  future. In response to these market conditions, we have announced our plans
  to offer a family of mobile handheld computers with the first product scheduled
  to ship in the second quarter of 2007.

We work closely with handheld computing device manufacturers to ensure interoperability
  between our products and their handheld devices, and we have developed software
  developer kits to aid and encourage applications software developers to integrate
  our products into their applications. Our software developer kits cover data
  collection, RFID, Bluetooth and wireless local area networks (referred to as
  Wi-Fi or wireless LAN). We further support applications development through
  our Vertical Industry Partners (VIP) Program. VIPs include value added resellers
  or third-party software application developers who integrate our products into
  their software solutions. We are currently working with more than 100 software
  integration companies that are offering vertical application software for use
  with our products, addressing vertical markets such as patient medication administration,
  retail merchandising, field and sales force automation, and asset management.



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Our products include data collection products and connectivity products, which
  together comprise our mobile peripheral products category. Additional product
  categories include our OEM embedded products, and our serial products. Beginning
  in 2007 we have added a handheld computer products category.

Our data collection products, which accounted for 42 percent of our revenues
  in 2006, includes plug-in bar code scanners, cordless bar code scanners, plug-in
  Radio Frequency Identification (RFID) reader-writers, combination plug-in bar
  code scanner and RFID reader, and a plug-in magnetic stripe reader. Our bar
  code scanning products include CompactFlash and SDIO plug-in bar code scanners
  for linear and two-dimensional bar code scanning, along with a cordless handheld
  bar code scanner and a ring scanner worn on the index finger, both of which
  connect to computing systems using the Bluetooth standard for short-range wireless
  connectivity. We have developed extensive bar code scanning software called
  SocketScan that supports all of our data collection products, and have software
  developer kits that assist third-party developers in integrating our SocketScan
  software and our hardware products into their applications and solutions. Our
  products incorporate laser and imager technology using bar code scanning engines
  primarily from Motorola (formerly Symbol Technologies) and Hand Held Products.
  Most of the vertical applications being developed by our VIPs are for mobile
  data collection solutions using bar code scanning or RFID.

Our connectivity products, which accounted for 27 percent of our revenues in
  2006, consists of plug-in and cordless products that enable users to connect
  their devices to the Internet via mobile or wired phone services, or to private
  networks, or to communicate with other electronic devices such as desktop computers,
  other handheld, tablet and notebook computers, smartphones and printers. The
  principle products in this category include plug-in cards using Bluetooth technology,
  plug-in Wireless LAN cards, plug-in modem cards and cordless modems enabled
  with Bluetooth technology, and plug in Ethernet cards. We differentiate our
  products through features in our Bluetooth and Wireless LAN software, including
  extensive communications software enabling the use of these products.

Our OEM products, which accounted for 21 percent of our revenues in 2006, consists
  of Bluetooth modules and plug-in cards used by Original Equipment Manufacturers
  (OEMs). Beginning in late 2006 we began offering our Wireless LAN modules. Our
  Bluetooth and Wireless LAN modules allow manufacturers of handheld computers
  and other devices to build wireless connection functions into their products
  using the Bluetooth and Wireless LAN standards for wireless connectivity. Historically,
  we offered for sale our proprietary ASIC interface chips, that we use in our
  own products, which allowed manufacturers of wide area network cards and other
  devices to transfer information to and from handheld or notebook computers.

Our serial product family, which accounted for 10 percent of our revenues in
  2006, is a legacy business that we introduced in 1993 and is primarily focused
  on connecting notebook computers to networks and to other systems. We extended
  our serial product family life several years ago by adding a Bluetooth-enabled
  serial product. We expect serial product family revenue to continue to decline
  as a percentage of our revenue, as the use of alternative connection technologies
  such as USB increase.



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We have a leveraged business model in both manufacturing and distribution that
  is designed to allow the benefits of revenue growth to benefit our operating
  results. Most of our major product components are manufactured to our specifications
  by third-party contract manufacturers, and we handle final product assembly,
  testing and distribution. This arrangement allows us to expand volume production
  without a corresponding need to invest in additional manufacturing equipment
  or manufacturing personnel, and increases in the volumes of products we have
  our suppliers manufacture tends to reduce the unit costs they charge us, as
  the costs of production startup are spread over more units. We distributed 77
  percent of our products (all but our OEM products) during 2006 through worldwide
  general distribution channels. We have in place the infrastructure to manage
  our distribution channels and are capable of increasing the volume of business
  in these channels with our current resources.

We price our products towards the customer who is looking for a dependable,
  robust product, not necessarily the most inexpensive, and we have typically
  achieved gross margins around 50 percent. We believe that our products that
  face the most competition are our connectivity products, which tend to have
  lower product margins than our data collection, OEM and serial products. As
  a result, our margins are affected by product sales mix. We will also provide
  customer discounts for volume orders; thus order size can affect our margins.
  Inventory charges such as reserves for excess and obsolete inventory are also
  charged to cost of sales and can impact our margins.

Our largest operating cost, more than 50 percent of our operating costs in
  2006, was the cost of our personnel. We adopted SFAS 123R beginning January
  1, 2006 and began recognizing stock-based compensation expense, which added
  $1.2 million of personnel expense in 2006. Additional increases in personnel
  costs in 2006 were primarily related to research and development and operations
  to support product development programs. Most of our senior employees have a
  variable portion of their compensation based on achieving financial and operating
  goals and objectives. In 2006, our revenues were below our financial goals,
  which reduced the total variable personnel compensation we paid, partially offsetting
  other increases in personnel expenses. Total personnel costs, including the
  costs of personnel in operations that are charged to cost of sales, increased
  by 25 percent in 2006 over 2005, and of this increase 16 percent was related
  to stock-based compensation. Research and development expenses from the purchases
  of equipment, tooling, outside services, and consulting and professional fees,
  were related to product development programs including our new family of handheld
  computers, resulting in an increase of $1.1 million of research and development
  expenses in 2006 compared to 2005. Advertising, promotional, and sales and marketing
  travel expense was approximately 11 percent of our operating costs in 2006,
  compared to 13 percent in 2005. As a result, our total operating expenses in
  2006 were approximately $2.3 million, or 18 percent, higher in 2006 compared
  to 2005.

Our balance sheet at December 31, 2006 included $6.1 million in cash, a current
  ratio (current assets divided by current liabilities) of 1.6 to 1.0, and no
  long-term debt. We used $0.4 million in cash from operations in 2006, of which
  $0.4 million in cash provided was related to working capital changes, including
  reductions in receivables and increases in deferred income. We managed our inventory
  levels in 2006, keeping increases at December 31, 2006 to less than $0.2 million
  from the preceding year-end. Beginning in the third quarter of 2006, we experienced
  a reduction in handheld computer deployments by a key North American channel
  partner, which affected sales levels of our products in the third and fourth
  quarters of fiscal 2006. In the fourth quarter of 2006 sales of our Bluetooth
  modules declined due to our customers experiencing increased competition in
  the industrial ruggedized PDA market segment. The slow down of enterprise deployments
  combined with lower sales of our Bluetooth modules in the fourth quarter reduced
  end-of-quarter sales and related receivables, the result of which was our receivables
  at December 31, 2006 were $0.3 million lower than at the preceding year-end.
  Additionally, warrants and options exercised in 2006 resulted in a source of
  cash of $0.6 million.



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We have an experienced management team with five of our eight officers having
  served the Company for more than twelve years, and the remaining officers having
  served at least four years. We believe we comply with the standards for good
  corporate governance. In the three years ended December 31, 2006, we were subject
  to the audit requirement of our internal controls over financial reporting for
  the 2005 and 2004 years only, and we received an unqualified opinion on our
  internal controls in each of those years. In 2006 we were not subject to an
  audit requirement of our internal controls over financial reporting.

The challenges we face in 2006 are typical for technology companies. We are
  responding to competitive products and new and improved technologies by continuing
  to improve our products and by introducing new products, including our family
  of mobile handheld computers, in response to the needs of our VIP partners,
  the demands of the markets that we serve, and the opportunities presented by
  developing technologies. With the growing worldwide mobile workforce, advancements
  in mobile technologies and the development of vertical applications software
  by us and our VIP partners, our objective is to enable continued improvements
  and expansion in enterprise mobile workforce productivity.

Revenue

Total revenues in 2006 and 2005 were $25.0 million in each year. Revenues in
  2005 decreased four percent from 2004 revenues of $26.1 million.

Our products include data collection products and connectivity products, which
  together comprise our mobile peripheral products category. Additional product
  categories include our OEM embedded products, and our serial products. Beginning
  in 2007 we have added a handheld computer products category. Our revenues for
  the 2006, 2005, and 2004 periods presented have been classified as follows:

- Our data collection
    products enable the electronic collection of data from bar codes, RFID
    tags, or magnetic stripes and consist of:
    bar code scanning
        products that plug into or connect wirelessly to handheld computers, tablet
        computers, notebook computers and smartphones that use Windows Mobile,
        Windows XP, Windows Tablet, J2ME, or Symbian 60 or Symbian 80 operating
        systems, and turn these devices into portable bar code scanners that can
        be used in various retail and industrial workplaces;
      Radio Frequency
        Identification (RFID) plug-in products that read RFID tags;
      a combination plug-in
        bar code scanner and RFID reader; and
      a plug-in magnetic
        stripe reader.We have developed extensive bar code scanning software called SocketScan
      that supports all of our data collection products, and have software developer
      kits that assist third-party developers in integrating our SocketScan software
      and our hardware products into their applications and solutions. Our bar
      code scanning products include CompactFlash and SDIO plug-in bar code scanners
      for linear and two-dimensional bar code scanning, along with a cordless
      handheld bar code scanner and a ring scanner worn on the index finger, both
      of which connect to computing systems using the Bluetooth standard for short-range
      wireless connectivity. Data collection products represented approximately
      42 percent, 39 percent, and 40 percent of our revenue for the years ended
      December 31, 2006, 2005, and 2004, respectively.
- bar code scanning
        products that plug into or connect wirelessly to handheld computers, tablet
        computers, notebook computers and smartphones that use Windows Mobile,
        Windows XP, Windows Tablet, J2ME, or Symbian 60 or Symbian 80 operating
        systems, and turn these devices into portable bar code scanners that can
        be used in various retail and industrial workplaces;
- Radio Frequency
        Identification (RFID) plug-in products that read RFID tags;
- a combination plug-in
        bar code scanner and RFID reader; and
- a plug-in magnetic
        stripe reader.

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- Our connectivity products are connection devices that can either
    be plugged into standard expansion slots in handheld computers, tablet computers,
    notebook computers and smartphones that use Windows Mobile, Windows XP, Windows
    Tablet, or Palm operating systems, or connect to these devices over wireless
    and wired connections. These products allow users to connect their devices
    to the Internet via mobile or wired phone services, or to private networks,
    or to communicate with other electronic devices such as desktop computers,
    other handheld, tablet and notebook computers, smartphones and printers. Our
    connectivity products include:
    plug-in cards using the Bluetooth standard for short-range wireless
        connectivity, along with extensive communications software enabling the
        use of these products;
      plug-in cards for connecting to local wireless networks using the Wireless
        LAN 802.11b/g (or Wi-Fi) standards along with extensive communications
        software enabling the use of these products.
      Modems for telephone connections that connect over a cable, and cordless
        modems that utilize Bluetooth wireless technology to connect a telephone
        to a Bluetooth-enabled computer or other device; and
      Ethernet cards for local area network connections that connect over
        a cable.Bluetooth and wireless LAN connection functions are being built into many
      mobile devices which may reduce the demand for these categories of our plug-in
      products but may increase the demand for our stand-alone Bluetooth products
      that work with other Bluetooth-enabled devices. Connectivity products represented
      approximately 27 percent, 34 percent, and 32 percent of our revenue for
      the years ended December 31, 2006, 2005, and 2004, respectively.
- plug-in cards using the Bluetooth standard for short-range wireless
        connectivity, along with extensive communications software enabling the
        use of these products;
- plug-in cards for connecting to local wireless networks using the Wireless
        LAN 802.11b/g (or Wi-Fi) standards along with extensive communications
        software enabling the use of these products.
- Modems for telephone connections that connect over a cable, and cordless
        modems that utilize Bluetooth wireless technology to connect a telephone
        to a Bluetooth-enabled computer or other device; and
- Ethernet cards for local area network connections that connect over
        a cable.
- Our OEM embedded
    products consist of Bluetooth and Wireless LAN modules and plug-in cards
    used by Original Equipment Manufacturers (OEMs) of handheld computers and
    other devices to build wireless connection functions into their products using
    the Bluetooth and Wireless LAN standards for wireless connectivity. Historically,
    we offered for sale our proprietary ASIC interface chips which allowed manufacturers
    of wide area network cards and other devices to transfer information to and
    from handheld or notebook computers. Embedded products represented approximately
    21 percent, 14 percent, and 14 percent of our revenue for the years ended
    December 31, 2006, 2005, and 2004, respectively.
- Our serial card products
    enable the connection of a mobile computer to another electronic device either
    as a plug-in card connecting over cables or wirelessly over a Bluetooth network.
    Serial products represented approximately 10 percent, 13 percent, and 14 percent
    of our revenue for the years ended December 31, 2006, 2005, and 2004, respectively.



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Our data collection product revenues in 2006 were $10.4 million compared
  to revenue of $9.6 million in 2005, and $10.4 million in 2004. Revenue increases
  in 2006 of $0.8 million in sales of our Cordless Hand Scanner, and increases
  of $0.4 million in sales of our Cordless Ring Scanner which began shipping in
  the fourth quarter of 2005, were partially offset by declines in sales of our
  SDIO In-Hand Scan card, declines in our In-Hand Scan Imager card, and declines
  in our primary scanning product, the CompactFlash In-Hand Scan card. Data collection
  revenues in 2006 were slowed by the introduction of an operating system upgrade,
  Windows Mobile 5.0, announced in September 2005 by the major PDA manufacturers,
  which slowed customer deployments through 2006, as third-party applications
  were modified and tested with the operating system. Transition to lead-free
  products in the second quarter of 2006 to comply with the Reduction of Hazardous
  Substances (RoHS) rules implemented in Europe and around the world, limited
  the availability of units by the major PDA manufacturers until late in the second
  quarter of 2006. Third quarter of 2006 was adversely affected by a marked reduction
  in deployments by a key North American channel partner. Revenue declines in
  2005 of $1.0 million were from our CompactFlash In-Hand Scan card, declines
  of $0.7 million from our bar code laser scanner system, and declines of $0.5
  million in sales of our SDIO In-Hand Scan card. Partially offsetting these declines
  was growth of $1.4 million from our Cordless Hand Scanner and slight increases
  in sales of our In-Hand Scan Imager. Our data collection revenues in 2005 were
  affected by the transitions to new models by the major PDA manufacturers begun
  in the latter half of 2004, which were not fully resolved until late in the
  second quarter of 2005. In addition, the introduction of an operating system
  upgrade, Windows Mobile 5.0, announced in September 2005, slowed sales in the
  fourth quarter of 2005. Our scanning products are sold both through general
  distribution and through value added resellers who contract with customers to
  provide scanning solutions.

Our connectivity product revenues in 2006 were $6.9 million compared
  to $8.5 million in 2005, and $8.3 million in 2004. Revenue declines in 2006
  were from declines of $0.8 million in sales of Cordless GPS receiver with navigation
  kit which was discontinued, and declines of $0.2 million each in our Ethernet
  plug-in products, Bluetooth plug-in products, Modem plug-in products, and Wireless
  LAN plug-in products. Revenues from our accessory products, including our Mobile
  Power Pack, were flat in 2006 compared to 2005. Connectivity revenues in 2006
  were slowed by the introduction of an operating system upgrade, Windows Mobile
  5.0, announced in September 2005 by the major PDA manufacturers, which slowed
  customer deployments in 2006 as third-party applications were modified and tested
  with the operating system. Transition to lead-free products in the second quarter
  of 2006 to comply with the Reduction of Hazardous Substances (RoHS) rules implemented
  in Europe and around the world, limited the availability of units by the major
  PDA manufacturers until late in the second quarter of 2006. Third quarter of
  2006 was adversely affected by a marked reduction in handheld computer deployments
  by a key North American channel partner. Revenue increases in 2005 of $0.4 million
  in our Modem plug-in products, increases of $0.4 million in our Ethernet plug-in
  products, and increases of $0.2 million in our accessory products, including
  our Mobile Power Pack, were partially offset by declines of $0.3 million in
  sales of our Wireless LAN plug-in cards, declines of $0.2 million in sales of
  our Bluetooth plug-in products, and slight declines in sales of our Cordless
  GPS receiver with navigation kit. Our connectivity revenues in 2005 were negatively
  affected though the first half of 2005 by the transitions to new models by the
  major PDA manufacturers begun in the latter half of 2004, which were not fully
  resolved until late in the second quarter of 2005. In addition, the introduction
  of an operating system upgrade, Windows Mobile 5.0, announced in September 2005
  slowed sales in the fourth quarter of 2005.



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Our OEM embedded product revenues in 2006 were $5.2 million compared
  to $3.4 million in 2005, and $3.7 million in 2004. Revenue growth in 2006 of
  $1.9 million from sales of our Bluetooth modules was due to increased manufacturing
  volumes of industrial ruggedized PDAs by our customers during the first three
  quarters of 2006. In the fourth quarter of 2006 sales levels of our Bluetooth
  modules declined due to increased competition our customers experienced in the
  industrial ruggedized market segment during the fourth quarter. Partially offsetting
  the overall increased Bluetooth module sales were declines in sales of our embedded
  Bluetooth cards and declines in sales of our proprietary ASIC chip due to customers
  choosing higher speed alternative ASIC solutions beginning in the latter half
  of 2005. We do not anticipate material levels of chip sales beyond fiscal 2006.
  Revenue declines in 2005 of $0.8 million in our proprietary ASIC chip as customers
  began choosing alternative ASIC solutions, and declines of $0.1 million in engineering
  service revenues, were partially offset by increases of $0.6 million in sales
  of our Bluetooth modules due to higher order levels by customers delivering
  new products. Sales of our embedded Bluetooth cards were flat in 2005 compared
  to 2004.

Our serial product revenues in 2006 were $2.5 million compared to $3.3
  million in 2005, and $3.7 million in 2004. Revenue declines of $0.7 million
  in 2006 and $0.5 million in 2005 were from reduced sales of our standard serial
  PC Card products. Our standard peripheral connection cards are primarily sold
  to connect peripheral devices or other electronic equipment to notebook computers.
  Additional declines in 2006 were from lower sales of our CompactFlash Card product
  compared to relatively flat sales of this product in 2005. Partially offsetting
  revenue declines in 2005 were increased sales of our cordless Bluetooth serial
  adapter. Overall serial product revenues have declined in fiscal 2006 from 2005
  levels, continuing a trend reflecting the gradual replacement of serial technology
  with USB and other newer connection technologies.

Gross Margins

Gross margins for 2006 were 49 percent of revenues compared to gross margins
  of 50 percent in 2005, and 51 percent in 2004. Margin reductions in 2006 are
  due to a product mix reflecting growth in products with lower than average margins
  and reductions in products with higher than average margins. Additional impacts
  on margins in 2006 are related to higher accruals for inventory reserves compared
  to 2005, reflecting estimates for excess non-RoHS compliant inventories. We
  generally price our products as a markup from our cost, and we offer discount
  pricing for higher volume purchases. Our average target gross margin historically
  has been 50 percent, and we expect the gross margin to fluctuate within a range
  of that target.

Research and Development
  Expense

Research and development expense in 2006 was $5.1 million, an increase of 46
  percent from research and development expense in 2005 of $3.5 million. Research
  and development expense in 2005 decreased by 4 percent from research and development
  expense in 2004 of $3.7 million. Personnel costs increased by $0.6 million in
  2006, of which approximately half was related to the recognition of stock-based
  compensation expense resulting from the adoption and implementation of SFAS
  123R beginning January 1, 2006. Additional increases were from increased equipment
  costs, outside services, and consulting and professional fees reflecting increased
  development activities, of which $0.3 million is attributable to the initial
  costs of the development of our mobile handheld computer. Reductions in 2005
  were primarily attributable to reduced consulting and professional fees and
  outside services related to the timing of development projects.



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Sales and Marketing
  Expense

Sales and marketing expense in 2006 was $7.1 million, an increase of 8 percent
  compared to sales and marketing expense in 2005 of $6.6 million. Sales and marketing
  expense in 2005 increased by 11 percent compared to sales and marketing expense
  in 2004 of $5.9 million. Increases in personnel costs of $0.5 million in 2006
  were primarily from stock-based compensation expense resulting from the adoption
  and implementation of SFAS 123R beginning January 1, 2006. Slight increases
  in equipment costs and consulting and professional fees, were partially offset
  by reductions in outside services and advertising and promotion. Increases of
  $0.4 million in 2005 were from increased personnel costs related to staffing
  key sales and marketing positions, and increases of $0.3 million were from higher
  levels of advertising and promotion, and travel related expenses.

General and Administrative
  Expense

General and administrative expense in 2006 was $2.7 million, an increase of
  6 percent compared to general and administrative expense in 2005 of $2.5 million.
  General and administrative expense in 2005 decreased by 17 percent compared
  to general and administrative expense in 2004 of $3.1 million. Increases in
  personnel costs of $0.4 million in 2006 were primarily from stock-based compensation
  expense recognized in 2006 resulting from the adoption and implementation of
  SFAS 123R beginning January 1, 2006. Partially offsetting these increases were
  reduced professional fees in 2006 related to Sarbanes-Oxley compliance requirements
  incurred in 2005, and reduced business insurance costs compared to 2005. Decreases
  of $0.6 million in 2005 were due to reduced legal and professional fees related
  to the patent infringement complaint by Khyber Technologies Corporation, which
  was settled in the beginning of the third quarter of 2004. Additional decreases
  of $0.2 million from reduced facility costs and business insurance costs were
  offset by increases in professional fees related primarily to Sarbanes-Oxley
  compliance requirements completed in the first quarter of 2005.

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 RFID products. The patent was
  purchased for $600,000 and has been capitalized as an intangible asset. The
  patent is being amortized on a straight line basis over a ten year period. Intangible
  assets of $570,750 remaining from a prior acquisition in 2000 consist of developed
  software and technology with estimated lives at the time of acquisition of 8.5
  years. At December 31, 2004, a licensing agreement with a book value of $38,000
  was reclassified as an intangible asset and is being amortized over its remaining
  life of three years. During the first quarter of 2002, we acquired intangible
  assets in conjunction with the acquisition of Nokia's CompactFlash Bluetooth
  Card business and related product line technology valued at $980,000. Estimated
  useful lives of the acquired assets at the time of acquisition ranged from one
  to three years. At March 31, 2005, all components of the acquired Nokia intangibles
  were fully amortized. Total amortization charges in 2006 for all acquired intangibles
  were $140,000, compared to $203,000 in 2005, and $397,000 in 2004. The lower
  amortization charges in 2006 are due to components of intangible property becoming
  fully amortized.

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Interest Income and
  Other, and Interest Expense

Interest income reflects interest earned on cash balances. Interest income
  was $175,000 in 2006, $92,000 in 2005, and $37,000 in 2004. Higher levels of
  interest income in 2006 and 2005, compared to 2005 and 2004, respectively, reflects
  higher average levels of cash on hand combined with higher rates of return compared
  to the respective prior periods. Higher levels of cash on hand in 2006 compared
  to 2005 were primarily from the exercise of Series E and Series F warrants totaling
  $0.6 million, and changes in working capital balances resulting in a source
  of cash of $0.3 million. Higher levels of cash on hand in 2005 compared to 2004
  were primarily from changes in working capital balances resulting in a source
  of cash of $1.5 million.

Interest expense was $7,800 in 2006, $5,000 in 2005, and $8,200 in 2004. Interest
  expense is related to interest on amounts drawn on our bank lines of credit
  and interest on equipment lease financing obligations, and additionally in 2004
  from interest on the outstanding note payable to Nokia. We used our bank lines
  of credit only at the end of each quarter in each of the years presented. Higher
  interest expense in 2006 is due to higher interest rates on our lines of credit
  in 2006 compared to 2005. Lower interest expense in 2005 compared to 2004 reflects
  the repayment of the note payable to Nokia in April 2004.

Income Taxes

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

Preferred Stock Dividends

Preferred stock dividends of $11,000 in 2006, $48,000 in 2005 and $50,000 in
  2004, reflect dividends accrued at the rate of 8% per annum on Series F Preferred
  Stock issued in March 2003. Series F dividends were payable quarterly in cash
  or in common stock, at the option of the Company. Dividends in 2006 reflect
  dividends on Series F Preferred Stock up through the date of mandatory conversion
  in the first quarter 2006, and were paid prior to the end of the first quarter.
  On March 21, 2006 the outstanding shares of Series F Preferred Stock automatically
  converted into common stock resulting in the issuance of 823,300 shares of common
  stock. Dividends for Series F Preferred Stock were paid in cash subsequent to
  the end of each of the quarters in 2005 and 2004.



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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 2005 and 2006. 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,      
|                                                    |                                                                                         | 2005         
|Summary Quarterly
        Data:                     |                                                                                         |              
|                                                    | Revenue                                                                                 |              
|                                                    | Cost of revenue                                                                         |              
|                                                    | Gross profit                                                                            |              
|                                                    | Operating expenses:                                                                     |              
|                                                    | Research and development                                                                |              
|                                                    | Sales and marketing                                                                     |              
|                                                    | General and administrative                                                              |              
|                                                    | Amortization of intangibles                                                             |              
|                                                    | Total operating expenses                                                                |              
|Interest income (expense), net                      |                                                                                         |              
|Deferred tax expense                                |                                                                                         |              
|                                                    | Net income (loss)                                                                       |              
|                                                    | Preferred stock dividends                                                               |              
|Net income (loss) applicable to common stockholders |                                                                                         | $            
|                                                    | Basic and diluted net income (loss) per share applicable to common
        stockholders |              

We have experienced significant quarterly fluctuations in operating results,
  and we anticipate such fluctuations to continue in the future. We generally
  ship orders as received and therefore quarterly revenue and operating results
  depend on the volume and timing of orders received during the quarter, which
  are difficult to forecast. Historically, we have recognized a substantial portion
  of our revenue in the last month of the quarter. Operating results may also
  fluctuate due to factors such as the demand for our products, the size and timing
  of customer orders, the introduction of new products and product enhancements
  by ourselves or our competitors, product mix, timing of software enhancements,
  changes in the level of operating expenses, and competitive conditions in the
  industry. Because our staffing and other operating expenses are based on anticipated
  revenue, a substantial portion of which is not typically generated until the
  end of each quarter, delays in the receipt of orders can cause significant variations
  in operating results from quarter to quarter.

Liquidity
  and Capital Resources

We were unprofitable in fiscal 2006 due in part to the negative impact of the
  adoption of SFAS 123R on January 1, 2006, which does not require the use of
  cash. We were profitable in two of the quarters in fiscal year 2005, but unprofitable
  for fiscal year 2005. Fiscal year 2004 was our first profitable year in our
  history. Historically we have financed our operations through the sale of equity
  securities, equipment financing, and revolving bank lines of credit. Since our
  inception, we have raised approximately $51 million in equity capital. Prior
  to the first quarter of 2004, we incurred significant quarterly and annual operating
  losses in every fiscal period. We may continue to be unprofitable in the future.



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Cash used in operating activities was $0.4 million in 2006 compared to cash
  provided by operating activities of $2.2 million in 2005, and cash used in operating
  activities of $0.6 million in 2004. Cash used in 2006 from our net loss adjusted
  for non-cash items was $0.8 million, compared to cash provided from our net
  income adjusted for non-cash items resulting in $0.5 million in 2005 and $1.3
  million in 2004. Adjustments for non-cash items, including depreciation and
  amortization, amortization of intangibles, gains and losses on foreign currency
  transactions, changes in deferred rent, deferred tax expense, and beginning
  January 1, 2006, stock-based compensation, totaled $2.1 million in 2006, compared
  to $0.7 million in 2005, and $0.9 million in 2004. Changes in working capital
  balances resulted in a source of cash of $0.4 million in 2006 and $1.7 million
  in 2005, and a use of cash of $1.9 million in 2004. Changes in working capital
  balances in 2006 were primarily from increases in deferred revenues due to increased
  inventory levels in our distribution channel, and reductions in accounts receivables
  due to lower shipments in the fourth quarter, partially offset by decreases
  accounts payables and increases in inventory and other assets. Changes in working
  capital balances in 2005 were primarily from decreases in receivables due to
  early collections from key distributors, and reductions in levels of inventory,
  partially offset by increases in prepaid assets and decreases in payables. Changes
  in working capital balances during 2004 reflect increases in inventory stock
  and accounts receivable to meet higher overall levels of shipping and billing
  compared to 2003, and reductions in accounts payable partially offset by increases
  in deferred revenue from growth in our international distribution channel.

Cash used in investing activities was $0.8 million in 2006, $0.6 million in
  2005, and $1.0 million in 2004. Investing activities in 2006 and 2005 reflect
  the costs of new computer hardware and software, and tooling costs. Investing
  activities in 2004 primarily reflect the purchase costs of the Khyber patent
  of $0.6 million in July 2004. Additional investing activities in 2004 reflect
  the costs of new computer hardware and software, and tooling costs.

Cash provided by financing activities was $0.5 million in 2006 compared to
  cash used in financing activities of $0.6 million in 2005, and cash provided
  by financing activities of $1.0 million in 2004. Financing activities in 2006
  consisted primarily of proceeds totaling $0.6 million from the exercise of warrants
  and stock options, partially offset by a net decrease in the amounts drawn on
  our bank lines of credit, and the final dividend payments on Series F Preferred
  Stock. At the end of 2006 we drew $2.2 million in cash against our bank credit
  line, which we repaid in January 2007. Financing activities in 2005 consist
  primarily of $0.6 million used to decrease the amounts drawn on our bank line
  of credit at the end of 2005 compared to the end of 2004. Payments of cash dividends
  and payments on capital leases totaling $0.1 million were offset by proceeds
  from the exercise of stock options. At the end of 2005 we drew $2.3 million
  in cash against our bank credit line, which we repaid in January 2006. Financing
  activities in 2004 consist of $1.4 million from the net increase in the amounts
  drawn on our bank lines of credit and proceeds of $0.1 million from the exercise
  of stock options and warrants, partially offset by payments of $0.5 million
  on the note payable to Nokia. In April 2004 the Company made the final payment
  on the note payable to Nokia. At the end of 2004 we drew $2.9 million in cash
  against our bank credit line, which we repaid in January 2005.



40

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Our cash balances at December 31, 2006 were $6.1 million, including
  cash of $2.2 million drawn against our bank line of credit. In March 2006, we
  extended our bank line of credit agreement which will now expire on March 2,
  2008. We have warrants outstanding from our private placement financings and
  outstanding employee stock options that, if exercised, would further increase
  our cash and equity balances. We believe our existing cash, plus our ability
  to reduce costs, and our bank line will be sufficient to meet our funding requirements
  at least through December 31, 2007. If we can return to profitability and revenue
  growth, we anticipate requirements for cash will include funding of higher receivable
  and inventory balances, and increasing expenses, including more employees to
  support our growth and increases in salaries, benefits, and related support
  costs for employees. If we cannot return to profitability, we will not be able
  to support our operations from positive cash flows, and we would use our existing
  cash to support operating losses. Should the need arise, we cannot assure you
  that additional capital will be available on acceptable terms, if at all, and
  any such terms may be dilutive to existing stockholders. Although we do not
  anticipate the need to raise additional capital at this time to fund our operations,
  we may raise additional capital if market conditions are appropriate.

Our contractual obligations at December 31, 2006 are outlined in the table
  below:

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

Off-Balance Sheet Arrangements

As of December 31, 2006, we have no off-balance sheet arrangements as defined
  in Item 303 of Regulation S-K.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board issued Interpretation
  No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
  Statement No. 109" ("FIN 48"), to create a single model to address accounting
  for uncertainty in tax positions. FIN 48 clarifies the accounting for income
  taxes by prescribing a minimum recognition threshold a tax position is required
  to meet before being recognized in the financial statements. FIN 48 also provides
  guidance on derecognition, measurement, classification, interest and penalties,
  accounting in interim periods, disclosure and transition. FIN 48 is effective
  for fiscal years beginning after December 15, 2006. The Company adopted FIN
  48 as of January 1, 2007, as required. The cumulative effect of adopting FIN
  48 will be recorded in retained earnings and other accounts as applicable. The
  Company has determined that the adoption of FIN 48 will not have a material
  affect on the Company's financial position and consolidated results of operations
  or cash flows.



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Item 7A.
  Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily
  to invested cash. Our cash is invested in short-term money market investments
  backed by U.S. Treasury notes and other investments that mature within one year
  and whose principal is not subject to market rate fluctuations. Accordingly,
  interest rate declines would adversely affect our interest income but would
  not affect the carrying value of our cash investments. Based on a sensitivity
  analysis of our cash investments during the quarter ended December 31, 2006,
  a decline of 1% in interest rates would reduce our quarterly interest income
  by approximately $9,700.

Our bank credit line facilities of up to $4.0 million have variable interest
  rates based upon the lender's index rate plus 0.5% for both the domestic line
  (up to $2.5 million) and the international line (up to $1.5 million). Accordingly,
  interest rate increases would increase our interest expense on outstanding credit
  line balances. We utilized our credit line facility only at the end of each
  quarter in 2006 and 2005, and therefore did not subject ourselves to interest
  rate exposure. Based on a sensitivity analysis, an increase of 1% in the interest
  rate would increase our borrowing costs by $10,000 for each $1 million of borrowings,
  if outstanding for the entire year, against our bank credit facility or a maximum
  of $40,000 if we utilized our entire credit line.

Foreign Currency Risk

A substantial majority of our revenue, expense and purchasing activities are
  transacted in U.S. dollars. However, we require our European distributors to
  purchase our products in Euros, we pay the expenses of our European subsidiary
  in Euros, and we expect to enter into selected future purchase commitments with
  foreign suppliers that may be paid in the local currency of the supplier. To
  date these balances have been small, and we have not been subject to significant
  losses from material foreign currency fluctuations. Based on a sensitivity analysis
  of our net foreign currency denominated assets and subsidiary expenses at the
  beginning, during and at the end of the quarter ended December 31, 2006, an
  adverse change of 10% in exchange rates would result in a decrease in our net
  income for the fourth quarter of approximately$74,800, if left unprotected.
  For the fourth quarter of 2006 the total net adjustment for the effects of changes
  in foreign currency on cash balances, collections, payables, and derivatives
  was a net gain of $18,900. We hedge a significant portion of our European receivable
  balances denominated in Euros to reduce the foreign currency risk associated
  with these assets. We will continue to monitor and assess the risk associated
  with these exposures and may at some point in the future take additional actions
  to mitigate these risks.



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Item 8.
  Financial Statements and Supplementary Data

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

REPORT OF MOSS ADAMS LLP
  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying
  consolidated balance sheets of Socket Communications, Inc. as of December 31,
  2006 and 2005, and the related consolidated statements of operations, preferred
  stock and stockholders' equity, and cash flows for the years ended December
  31, 2006, 2005 and 2004. Socket Communications, 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 consolidated financial statements.
  An audit also includes assessing the accounting principles used and significant
  estimates made by management, as well as evaluating the overall financial statement
  presentation. We believe that our audits provide a reasonable basis for our
  opinion.

In our opinion, the consolidated financial statements referred
  to above present fairly, in all material respects, the financial position of
  Socket Communications, Inc. as of December 31, 2006 and 2005, and the consolidated
  results of its operations and its cash flows for the years ended December 31,
  2006, 2005 and 2004 in conformity with accounting principles generally accepted
  in the United States of America.

As described in Note 1 to the consolidated financial statements, the Company
  adopted a new principle of accounting for share-based payments in accordance
  with Financial Accounting Standards Board Statement No. 123(R), Share-Based
  Payment.



|        /s/
        Moss Adams LLP
|------------------------------------------------------------------



San Francisco, California
  March 16, 2007

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SOCKET
  COMMUNICATIONS, INC.


CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                                                                            |                                                    | December 31, |            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------ | -----------
|                                                                                                                                                                                                                            |                                                    | 2006         |            
|ASSETS                                                                                                                                                                                                                     
|Current
        assets:                                                                                                                                                                                                     |                                                    |              |            
|Cash
          and cash equivalents                                                                                                                                                                                         |                                                    | $            | 6,104,277  
|Accounts
          receivable, net of allowance for doubtful accounts of $118,651 at December
          31, 2006 and 2005                                                                                                   |                                                    |              | 2,699,218  
|Inventories                                                                                                                                                                                                                 |                                                    |              | 2,350,284  
|Prepaid
          expenses and other current assets                                                                                                                                                                         |                                                    |              | 193,196    
|                                                                                                                                                                                                                            | Total current assets                               |              |            
|                                                                                                                                                                                                                        |                                                    |              |            
|Property
        and equipment:                                                                                                                                                                                             |                                                    |              |            
|Machinery
          and office equipment                                                                                                                                                                                    |                                                    |              | 1,790,053  
|Computer
          equipment                                                                                                                                                                                                |                                                    |              | 1,021,720  
|                                                                                                                                                                                                                        |                                                    |              | 2,811,773  
|Accumulated
          depreciation                                                                                                                                                                                          |                                                    |              | (2,069,596 
|                                                                                                                                                                                                                            | Property and equipment, net                        |              |            
|                                                                                                                                                                                                                        |                                                    |              |            
|Intangible
        technology, net                                                                                                                                                                                          |                                                    |              | 608,491    
|Goodwill                                                                                                                                                                                                                    |                                                    |              | 9,797,946  
|Other
        assets                                                                                                                                                                                                        |                                                    |              | 291,778    
|                                                                                                                                                                                                                            | Total assets                                       |              | $          
|                                                                                                                                                                                                                       
|LIABILITIES
        AND STOCKHOLDERS EQUITY                                                                                                                                                                               
|Current
        liabilities:                                                                                                                                                                                                |                                                    |              |            
|Accounts
          payable                                                                                                                                                                                                  |                                                    | $            | 2,368,388  
|Accrued
          expenses                                                                                                                                                                                                  |                                                    |              | 72,016     
|Accrued
          payroll and related expenses                                                                                                                                                                              |                                                    |              | 751,007    
|Bank
          line of credit                                                                                                                                                                                               |                                                    |              | 2,213,261  
|Deferred
          income on shipments to distributors                                                                                                                                                                      |                                                    |              | 1,472,781  
|Current
          portion of deferred rent and capital leases                                                                                                                                                               |                                                    |              | 8,372      
|                                                                                                                                                                                                                            | Total
          current liabilities                |              |            
|                                                                                                                                                                                                                        |                                                    |              |            
|Long
        term portion of capital leases:                                                                                                                                                                                |                                                    |              | ---        
|Deferred
        income taxes                                                                                                                                                                                               |                                                    |              | 150,379    
|Total
          liabilities                                                                                                                                                                                                 |                                                    |              | 7,036,204  
|                                                                                                                                                                                                                       
|Commitments
        and contingencies                                                                                                                                                                                       |                                                    |              |            
|Stockholders'
        equity:                                                                                                                                                                                               |                                                    |              |            
|Series
          F Convertible Preferred Stock, $0.001 par value: Authorized shares276,269,
          
                 Issued and outstanding sharesnone
          at December 31, 2006 and $82,330 at December 31, 2005 |                                                    |              | ---        
|Common
          stock, $0.001 par value: Authorized shares100,000,000,
                 Issued and outstanding shares31,851,285
          at December 31, 2006 and 30,223,709 at December 31, 2005                       |                                                    |              | 31,851     
|Additional
          paid-in capital                                                                                                                                                                                        |                                                    |              | 52,531,493 
|Accumulated
          deficit                                                                                                                                                                                               |                                                    |              | (36,812,181
|                                                                                                                                                                                                                            | Total
          stockholders equity               |              |            
|                                                                                                                                                                                                                            | Total
        liabilities and stockholders equity |              | $          



See accompanying
  notes.





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SOCKET
  COMMUNICATIONS, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                              |                          | Years
        Ended December 31, |           
|------------------------------------------------------------- | ------------------------ | -------------------------------- | ----------
|                                                              |                          | 2006                             |           
|Revenues                                                      |                          | $                                | 24,981,455
|Cost of revenue                                               |                          |                                  | 12,790,062
|Gross profit                                                  |                          |                                  | 12,191,393
|                                                          |                          |                                  |           
|Operating expenses:                                           |                          |                                  |           
|Research
          and development                            |                          |                                  | 5,136,507 
|Sales
          and marketing                                 |                          |                                  | 7,144,866 
|General
          and administrative                          |                          |                                  | 2,698,051 
|Amortization
          of intangible technology               |                          |                                  | 140,446   
|                                                          | Total operating expenses |                                  |           
|                                                          |                      |                                  |           
|Operating income (loss)                                       |                          |                                  | (2,928,477
|                                                          |                          |                                  |           
|Interest income and other                                     |                          |                                  | 174,573   
|Interest expense                                              |                          |                                  | (7,813    
| 
                                                |                          |                                  |           
|Net income (loss) before deferred taxes                       |                          |                                  | (2,761,717
|Deferred tax expense                                          |                          |                                  | (150,379  
|Net income (loss)                                             |                          |                                  | (2,912,096
|Preferred stock dividends                                     |                          |                                  | (10,653   
|Net income (loss) applicable to common stockholders           |                          | $                                | (2,922,749
|                                                          |                          |                                  |           
|Net income (loss) per share applicable to common stockholders |                          |                                  |           
|Basic                                                         |                          | $                                | (0.09     
|Diluted                                                       |                          | $                                | (0.09     
|                                                          |                          |                                  |           
|Weighted average shares outstanding:                          |                          |                                  |           
|Basic                                                         |                          |                                  | 31,447,266
|Diluted                                                       |                          |                                  | 31,447,266



See accompanying
  notes.

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SOCKET COMMUNICATIONS, INC.
  CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK 
  AND STOCKHOLDERS' EQUITY

|                                                                           |  | Series
        F        |         |                      |        |   |            |        |             | 
|-------------------------------------------------------------------------- |  | ----------------------- | ------- | -------------------- | ------ | - | ---------- | ------ | ----------- | 
|                                                                           |  | Convertible             |         |                      |        |   | Additional |        |             | 
|                                                                           |  | Preferred
        Stock |         | Common
        Stock |        |   | Paid-In    |        | Accumulated | 
|                                                                           |  | Shares                  |         |                      | Amount |   |            | Shares |             | 
|Balance
        at December 31, 2003                                       |  |                         | 92,906  |                      |        | $ | 93         |        |             | 
|Exercise
        of warrants                                               |  |                         | ---     |                      |        |   | ---        |        |             | 
|Exercise
        of stock options                                          |  |                         | ---     |                      |        |   | ---        |        |             | 
|Conversion
        of Series F convertible preferred stock to common stock |  |                         | (9,083  | )                    |        |   | (9         | )      |             | 
|Dividends
        paid in cash on Series F convertible preferred stock     |  |                         | ---     |                      |        |   | ---        |        |             | 
|Net
        income                                                         |  |                         | ---     |                      |        |   | ---        |        |             | 
|Balance
        at December 31, 2004                                       |  |                         | 83,823  |                      |        |   | 84         |        |             | 
|Exercise
        of stock options                                          |  |                         | ---     |                      |        |   | ---        |        |             | 
|Charge
        for compensatory stock options                              |  |                         | ---     |                      |        |   | ---        |        |             | 
|Conversion
        of Series F convertible preferred stock to common stock |  |                         | (1,493  | )                    |        |   | (2         | )      |             | 
|Dividends
        paid in cash on Series F convertible preferred stock     |  |                         | ---     |                      |        |   | ---        |        |             | 
|Net
        loss                                                           |  |                         | ---     |                      |        |   | ---        |        |             | 
|Balance
        at December 31, 2005                                       |  |                         | 82,330  |                      |        |   | 82         |        |             | 
|Exercise
        of warrants                                               |  |                         | ---     |                      |        |   | ---        |        |             | 
|Exercise
        of stock options                                          |  |                         | ---     |                      |        |   | ---        |        |             | 
|Conversion
        of Series F convertible preferred stock to common stock |  |                         | (82,330 | )                    |        |   | (82        | )      |             | 
|Dividends
        paid in cash on Series F convertible preferred stock     |  |                         | ---     |                      |        |   | ---        |        |             | 
|Stock-based
        compensation                                           |  |                         | ---     |                      |        |   | ---        |        |             | 
|Net
        loss                                                           |  |                         | ---     |                      |        |   | ---        |        |             | 
|Balance
        at December 31, 2006                                       |  |                         | ---     |                      |        | $ | ---        |        |             | 



See accompanying
  notes.

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  of Contents)

SOCKET COMMUNICATIONS, INC.
  CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                   |  | Years
        Ended December 31, |           
|------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | ----------
|                                                                                                                   |  | 2006                             |           
|Operating
        activities                                                                                       |  |                                  |           
|Net income (loss)                                                                                                  |  | $                                | (2,912,096
|Adjustments to reconcile net income (loss) to net cash provided by (used
        in) operating activities:         |  |                                  |           
|Depreciation                                                                                                       |  |                                  | 735,278   
|Amortization                                                                                                       |  |                                  | ---       
|Net
        foreign currency transactions (gains) losses                                                           |  |                                  | (66,103   
|Amortization
        of intangible technology                                                                      |  |                                  | 140,446   
|Stock-based
        compensation                                                                                   |  |                                  | 1,214,748 
|Deferred
        tax expense                                                                                       |  |                                  | 150,379   
|Change
        in deferred rent                                                                                    |  |                                  | (33,024   
|                                                                                                               |  |                                  |           
|Changes
        in operating assets and liabilities:                                                               |  |                                  |           
|Accounts
        receivable                                                                                        |  |                                  | 321,092   
|Inventories                                                                                                        |  |                                  | (154,890  
|Prepaid
        expenses and other current assets                                                                  |  |                                  | 122,091   
|Other
        assets                                                                                               |  |                                  | (128,024  
|Accounts
        payable                                                                                           |  |                                  | (181,720  
|Accrued
        expenses                                                                                           |  |                                  | 12,700    
|Accrued
        payroll and related expenses                                                                       |  |                                  | 21,239    
|Deferred
        income on shipments to distributors                                                               |  |                              | 358,331   
|Net cash provided by (used in) operating activities                                                                |  |                                  | (399,553  
|                                                                                                               |  |                                  |           
|Investing
        activities                                                                                       |  |                                  |           
|Purchase of equipment and tooling                                                                                  |  |                                  | (849,613  
|Acquisition of Khyber patent                                                                                       |  |                              | ---       
|Net cash used in investing activities                                                                              |  |                                  | (849,613  
|                                                                                                               |  |                                  |           
|Financing
        activities                                                                                       |  |                                  |           
|Payments on capital leases and equipment financing notes                                                           |  |                                  | (9,615    
|Payments on note payable                                                                                           |  |                                  | ---       
|Gross proceeds from borrowings under bank line of credit agreement                                                 |  |                                  | 9,406,189 
|Gross repayments of borrowings under bank line of credit agreement                                                 |  |                                  | (9,501,699
|Gross proceeds from sale of foreign currency forward exchange contract                                             |  |                                  | ---       
|Stock options exercised                                                                                            |  |                                  | 60,701    
|Dividends paid on Series E redeemable convertible preferred stock and
        Series F convertible preferred stock |  |                                  | (22,682   
|Warrants exercised                                                                                                 |  |                              | 584,102   
|Net cash provided by financing activities                                                                          |  |                                  | 516,996   
|                                                                                                               |  |                                  |           
|Effect
        of exchange rate changes on cash and cash equivalents                                               |  |                              | 3,254     
|Net
        increase (decrease) in cash and cash equivalents                                                       |  |                                  | (728,916  
|Cash
        and cash equivalents at beginning of year                                                             |  |                                  | 6,833,193 
|Cash
        and cash equivalents at end of year                                                                   |  | $                                | 6,104,277 
|                                                                                                                   |  |                                  |           
|Supplemental
        cash flow information                                                                         |  |                                  |           
|Cash paid for interest                                                                                             |  | $                                | 7,813     
|Accrued dividends on preferred stock                                                                               |  | $                                | ---       



See accompanying
  notes.

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  of Contents)

SOCKET COMMUNICATIONS, INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1
  - Summary of Significant Accounting Policies

Organization and BusinessSocket Communications, Inc. ("Socket" or the "Company") produces
  mobile systems serving the business market. The Company designs, manufactures
  and sells data collection and connectivity products for mobile electronic devices.
  The Company's data collection products are designed to collect data on handheld
  computers, tablet computers, notebook computers and selected smartphones using
  bar code scanning and Radio Frequency Identification (RFID) technologies. The
  Company's connectivity products are designed to connect handheld computers,
  tablet computers, notebook computers and smartphones to the Internet, to local
  area computer networks, to wide area computer networks, and to other peripheral
  devices through both wireless and cable connections. The Company also offers
  embedded products that are designed to be installed inside third-party mobile
  electronic devices, and serial products that connect electronic devices. The
  Company has announced plans to offer a family of handheld computers beginning
  in 2007. The Company's products are designed for use with a broad range of mobile
  computing devices that support standard expansion mechanisms. The standard expansion
  mechanisms supported include slots for plug-in cards in the CompactFlash, PC
  Card, and Secure Digital Input/Output (SDIO) form factors and Bluetooth®,
  a short range wireless device connection technology, and Wireless LAN, a wireless
  network connection technology. The Company's products are designed to address
  mobile workforce connectivity needs by enabling the use of handheld devices
  to extend data communications capabilities beyond location-dependent wired networks
  or telephone lines. The Company's products integrate hardware, software and
  services into complete mobile connectivity solutions. The Company is incorporated
  in the state of Delaware.

Principles of Consolidation
  The consolidated financial statements include all of the accounts of the Company
  and those of its wholly owned subsidiary. All intercompany accounts and transactions
  have been eliminated. The expenses associated with the operations of our foreign
  offices were $380,173, $866,095, and $969,492, in 2006, 2005, and 2004, respectively.

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

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, 2006 and 2005, all of the Company's cash and cash equivalents consisted
  of amounts held in demand and money market deposits in banks.

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

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

Accounts Receivable
  Allowances
  The Company estimates the amount of uncollectible accounts receivable at the
  end of each reporting period based on the aging of the receivable balance, current
  and historical customer trends, and communications with its customers. Amounts
  are written off only after considerable collection efforts have been made and
  the amounts are determined to be uncollectible. The following describes activity
  in the allowance for doubtful accounts for the years ended December 31, 2006,
  2005, and 2004:





|     |  | Balance at   |         |  | Charged to |   |        |             |  |   | Balance at
|---- |  | ------------ | ------- |  | ---------- | - | ------ | ----------- |  | - | ----------
|     |  | Beginning of |         |  | Costs and  |   |        | Amounts     |  |   | End of    
|Year |  | Year         |         |  | Expenses   |   |        | Written Off |  |   | Year      
|    
|2006 |  | $            | 118,651 |  |            | $ | ---    |             |  | $ | ---       
|2005 |  | $            | 127,300 |  |            | $ | ---    |             |  | $ | 8,649     
|2004 |  | $            | 113,244 |  |            | $ | 47,953 |             |  | $ | 33,897    



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



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|                                 |  | December
      31,
|-------------------------------- |  | ------------------
|                                 |  | 2006              
|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
  over the shorter of the asset life or the remaining lease term.

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

Goodwill represents the excess of cost over the estimated fair value of net
  assets acquired from the acquisitions of Nokia's CompactFlash Bluetooth Card
  business in 2002 and 3rd Rail Engineering in 2000, which in accordance with
  FAS 142, is no longer being amortized. Also in accordance with FAS 142, the
  Company tests goodwill for impairment at the reporting unit level on a quarterly
  basis. The Company has determined it is appropriate to report as a single unit.
  SFAS No. 142 requires a two-step goodwill impairment test whereby the first
  step, used to identify potential impairment, compares the fair value of a reporting
  unit with its carrying amount including goodwill. If the fair value of a reporting
  unit exceeds its carrying amount, goodwill of the reporting unit is considered
  not impaired and the second test is not performed. The second step of the impairment
  test is performed when required and compares the implied fair value of the reporting
  unit goodwill with the carrying amount of that goodwill. If the carrying amount
  of the reporting unit goodwill exceeds the implied fair value of that goodwill,
  an impairment loss shall be recognized in an amount equal to that excess. Based
  on the goodwill test for impairment performed during the quarter ended December
  31, 2006, management determined that there is no impairment of goodwill.

Concentration of Credit
  Risk
  Financial instruments that potentially subject the Company to significant concentrations
  of credit risk consist principally of cash, cash equivalents and accounts receivable.
  The Company invests its cash in demand and money market deposit accounts in
  banks. The Company limits the credit exposure to any one financial institution
  or instrument and is exposed to credit risk in the event of default by these
  institutions, to the extent of the amounts recorded on the balance sheet. To
  date, the Company has not experienced losses on these investments. The Company's
  trade accounts receivables are primarily with distributors and original equipment
  manufacturers. The Company performs ongoing credit evaluations of its customers'
  financial conditions but the Company generally requires no collateral. Reserves
  are maintained for potential credit losses, and such losses have been within
  management's expectations.



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Concentration of Suppliers
  Several of the Company's component parts are produced by a sole or limited number
  of suppliers. Shortages could occur in these essential materials due to an interruption
  of supply or increased demand in the industry. If the Company were unable to
  procure certain of such materials, it would be required to reduce its operations,
  which could have a material adverse effect upon its results.

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

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

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

Advertising Costs
  Advertising costs are charged to sales and marketing as incurred. The Company
  incurred $724,553, $825,238, and $790,730, in advertising costs during 2006,
  2005, and 2004, respectively.

Income Taxes
  The Company accounts for income taxes in accordance with Statement of Financial
  Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Under
  SFAS 109, deferred tax assets and liabilities are determined based on differences
  between financial reporting and tax bases of assets and liabilities and are
  measured using enacted tax rates and laws that will be in effect when the differences
  are expected to reverse. The Company records a valuation allowance against deferred
  tax assets when it is more likely than not that such assets will not be realized.



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

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

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

|                                                                                                  |  | Years
        Ended December 31,
|------------------------------------------------------------------------------------------------- |  | --------------------------------
|                                                                                                  |  | 2006                            
|Numerator:                                                                                        |  |                                 
|Net income (loss)                                                                                 |  | $                               
|Preferred stock dividends and accretion                                                           |  |                             
|Net income (loss) applicable to common stockholders                                               |  | $                               
|                                                                                              |  |                                 
|Denominator:                                                                                      |  |                                 
|Weighted average common shares outstanding used in computing net income
        (loss) per share: |  |                                 
|Basic                                                                                             |  |                                 
|Dilutive potential common shares                                                                  |  |                             
|Diluted                                                                                           |  |                             
|                                                                                              |  |                                 
|Net
        income (loss) per share applicable to common stockholders:                            |  |                                 
|Basic                                                                                             |  | $                               
|Diluted                                                                                           |  | $                               

For the 2006 and 2005 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 9,828,275 and 9,979,793
  shares of Common Stock in 2006 and 2005, respectively, have been omitted from
  the loss per share calculation as their effect is anti-dilutive. For the 2004
  period the diluted shares outstanding include the dilutive effect of assumed
  conversion of Series F Convertible Preferred Stock and assumed exercise of all
  in-the-money employee stock options and warrants, which is calculated based
  on the average share price for the 2004 fiscal period using the treasury stock
  method. Under the treasury stock method, the hypothetically received proceeds
  from the exercise of in-the-money options and warrants are assumed to be used
  to repurchase shares. For 2004, options and warrants to purchase 3,613,954 shares
  of the Company's Common Stock were excluded from the calculation of diluted
  earnings per share because the exercise prices were greater than or equal to
  the average price of the common shares, and therefore their inclusion would
  have been anti-dilutive.



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

At December 31, 2006, options issued to employees for 8,838,563 shares were
  outstanding, of which 6,789,249 were exercisable. The weighted average fair
  value of the individual options issued and outstanding during the year ended
  December 31, 2006 was estimated at $1.69 per share. The fair values were determined
  using a binomial lattice valuation model for options granted during fiscal 2006,
  and a Black-Scholes valuation model for options granted prior to January 1,
  2006. Weighted average assumptions for options issued and outstanding during
  the year ended December 31, 2006 are shown below:



|                                     |  | Year ended December 31, 2006
|------------------------------------ |  | ----------------------------
|Risk-free interest rate
        (%)  |  | 3.51                        
|Dividend yield                       |  | ---                         
|Volatility factor                    |  | 1.2                         
|Expected option life
        (years) |  | 4.8                         

Total stock-based compensation expense recognized in our consolidated statement
  of operations for the year ended December 31, 2006 is as follows:



|Income
      Statement Classification |  | Year ended December 31, 2006
|------------------------------------- |  | ----------------------------
|Cost of revenue                       |  |                             
|Research and development              |  |                             
|Sales and marketing                   |  |                             
|General and administrative            |  |                             
|Total                                 |  |                             

Prior to January 1, 2006 the Company accounted for employee stock options in
  accordance with Accounting Principles Board Opinion No. 25, "Accounting for
  Stock Issued to Employees" ("APB 25"), and the Company adopted the disclosure-only
  alternative described in Statement of Financial Accounting Standards No. 123,
  "Accounting for Stock-Based Compensation" ("SFAS 123"). Under APB 25, the Company
  generally did not record compensation expense, because the exercise price of
  the Company's employee stock options equaled the market price of the underlying
  stock on the date of grant. Pro forma information regarding net loss and loss
  per share available to common stockholders was required by SFAS 123, and such
  information has been determined as if the Company had accounted for its employee
  stock options under the fair value method.



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Had compensation cost for the Company's stock-based compensation plans been
  determined based on the fair value at the grant dates for awards under those
  plans consistent with the method of SFAS 123, the Company's per share results
  would have changed to the pro forma net loss amounts indicated below:

|                                                                                           |  | Years Ended December 31,
|------------------------------------------------------------------------------------------ |  | ------------------------
|                                                                                           |  | 2005                    
|Net income (loss) applicable
        to common shareholders, as reported                   |  | $                       
|Stock-based employee compensation expense determined under fair
        value based method |  |                         
|Pro forma net loss applicable
        to common shareholders                               |  | $                       
|                                                                                           |  |                         
|Basic net income (loss)
        per share, as reported                                     |  | $                       
|Diluted net income (loss) per share, as reported                                           |  | $                       
|Pro forma basic and
        diluted net loss per share                                     |  | $                       

The fair value of these options was estimated at the date of grant using the
  Black-Scholes option pricing model with the following weighted average assumptions
  for the years ended December 31:

|                                    |  |  | 2005 |   |  | 2004
|----------------------------------- |  |  | ---- | - |  | ----
|Risk-free interest rate
        (%) |  |  | 4.02 | % |  |     
|Dividend yield                      |  |  | ---  |   |  |     
|Volatility factor                   |  |  | 1.2  |   |  |     
|Expected option life (years)        |  |  | 4.6  |   |  |     

The Black-Scholes option valuation model was developed for use in estimating
  the fair value of traded options that have no vesting restrictions and are fully
  transferable. In addition, option valuation models require the input of highly
  subjective assumptions including the expected stock price volatility and expected
  option life. Because the Company's employee stock options have characteristics
  significantly different from those of traded options, and because changes in
  the subjective input assumptions can materially affect the fair value estimate,
  in management's opinion, the existing models do not necessarily provide a reliable
  single measure of the fair value of the Company's employee stock options.

Recent Accounting Standards
  In June 2006, the Financial Accounting Standards Board issued Interpretation
  No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
  Statement No. 109" ("FIN 48"), to create a single model to address accounting
  for uncertainty in tax positions. FIN 48 clarifies the accounting for income
  taxes by prescribing a minimum recognition threshold a tax position is required
  to meet before being recognized in the financial statements. FIN 48 also provides
  guidance on derecognition, measurement, classification, interest and penalties,
  accounting in interim periods, disclosure and transition. FIN 48 is effective
  for fiscal years beginning after December 15, 2006. The Company adopted FIN
  48 as of January 1, 2007, as required. The cumulative effect of adopting FIN
  48 will be recorded in retained earnings and other accounts as applicable. The
  Company has determined that the adoption of FIN 48 will not have a material
  affect on the Company's financial position and consolidated results of operations
  or cash flows.



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Segment Information
  The Company follows Statement No. 131, "Disclosures about Segments of an Enterprise
  and Related Information." Operating segments are defined as components of an
  enterprise about which separate financial information is available that is evaluated
  regularly by the chief executive officer in deciding how to allocate resources
  and in assessing performance. The Company operates in one segment, data collection
  and connection solutions for mobile electronic devices. The Company markets
  its products in the United States and foreign countries through its sales personnel
  and distributors.

Information regarding geographic areas for the years ended December 31, 2006,
  2005 and 2004 is as follows:

|                               |  |                          |        |  |      |       |        |      |  |       |       
|------------------------------ |  | ------------------------ | ------ |  | ---- | ----- | ------ | ---- |  | ----- | ------
|                               |  | Years Ended December 31,
|Revenues: (in thousands)       |  | 2006                     |        |  | 2005 |       |        | 2004
|United States                  |  | $                        | 17,073 |  |      | $     | 16,206 |      |  | $     | 16,392
|Europe                         |  |                          | 5,824  |  |      |       | 6,142  |      |  |       | 6,293 
|Asia
        and rest of world |  |                      | 2,084  |  |      |   | 2,686  |      |  |   | 3,445 
|                               |  | $                        | 24,981 |  |      | $     | 25,034 |      |  | $     | 26,130

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

Information regarding product families for the years ended December 31, 2006,
  2005 and 2004 is as follows:

|                                 |  |                          |        |  |      |       |        |      |  |   |       
|-------------------------------- |  | ------------------------ | ------ |  | ---- | ----- | ------ | ---- |  | - | ------
|                                 |  | Years Ended December 31,
|Revenues:
        (in thousands) |  | 2006                     |        |  | 2005 |       |        | 2004
|Data collection products         |  | $                        | 10,371 |  |      | $     | 9,628  |      |  | $ | 10,440
|Connectivity
        products    |  |                          | 6,854  |  |      |       | 8,692  |      |  |   | 8,292 
|Embedded products and services   |  |                          | 5,224  |  |      |       | 3,444  |      |  |   | 3,669 
|Serial
        products          |  |                          | 2,532  |  |      |   | 3,270  |      |  |   | 3,729 
|                                 |  | $                        | 24,981 |  |      | $     | 25,034 |      |  | $ | 26,130

Major Customers
  Customers who accounted for at least 10% of total revenues in fiscal 2006, 2005,
  and 2004 were as follows:

|                           |  |                          |   |  |      |    |   |      |  |    |  
|-------------------------- |  | ------------------------ | - |  | ---- | -- | - | ---- |  | -- | -
|                           |  | Years Ended December 31,
|                           |  | 2006                     |   |  | 2005 |    |   | 2004
|Tech Data Corp.            |  | 26                       | % |  |      | 28 | % |      |  | 28 | %
|Ingram
        Micro, Inc. |  | 14                       | % |  |      | 14 | % |      |  | 15 | %



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NOTE 2 - Intangible
  Technology

Intangible assets consist of a patent purchased in 2004 for $600,000 covering
  the design and functioning of plug-in bar code scanners, bar code imagers and
  RFID 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; and a licensing agreement with a book
  value of $38,000, which was reclassified as an intangible asset at December
  31, 2004 and is being amortized over its remaining life of three years.

Intangible technology as of December 31, 2006 consisted of the following:

|                                 |  |        |           |  |              |       |         |     |  |       |         | 
|-------------------------------- |  | ------ | --------- |  | ------------ | ----- | ------- | --- |  | ----- | ------- | 
|                                 |  | Gross  |           |  | Accumulated  |       |         |     | 
|                                 |  | Assets |           |  | Amortization |       |         | Net | 
|Patent                           |  | $      | 600,000   |  |              | $     | 150,000 |     |  | $     | 450,000 | 
|Project
        management tools |  |        | 570,750   |  |              |       | 419,669 |     |  |       | 151,081 | 
|Licensing
        agreement      |  |    | 114,342   |  |              |   | 106,932 |     |  |   | 7,410   | 
|Intangible technology            |  | $      | 1,285,092 |  |              | $     | 676,601 |     |  | $     | 608,491 | 

Intangible technology as of December 31, 2005 consisted of the following:

|                                 |  |        |           |  |              |       |         |     |  |       |         | 
|-------------------------------- |  | ------ | --------- |  | ------------ | ----- | ------- | --- |  | ----- | ------- | 
|                                 |  | Gross  |           |  | Accumulated  |       |         |     | 
|                                 |  | Assets |           |  | Amortization |       |         | Net | 
|Patent                           |  | $      | 600,000   |  |              | $     | 90,000  |     |  | $     | 510,000 | 
|Project
        management tools |  |        | 570,750   |  |              |       | 352,522 |     |  |       | 218,228 | 
|Licensing
        agreement      |  |    | 114,342   |  |              |   | 93,633  |     |  |   | 20,709  | 
|Intangible technology            |  | $      | 1,285,092 |  |              | $     | 536,155 |     |  | $     | 748,937 | 

Based on identified intangible assets recorded at December 31, 2006 and assuming
  no subsequent impairment of the underlying assets, the annual amortization expense
  is expected to be as follows:

|Year            |  | Amount
|--------------- |  | ------
|2007            |  | $     
|2008            |  |       
|2009            |  |       
|2010            |  |       
|2011 and beyond |  |       
|                |  | $     

NOTE 3 - Series F Convertible
  Preferred Stock

On March 21, 2003, the Company sold 276,269 units of securities at a price
  of $7.22 per unit (total of $2,000,000 gross cash proceeds) in a private equity
  placement. Each unit consisted of one share of the Company's Series F convertible
  preferred stock (the "Series F Preferred Stock") and a three-year warrant to
  purchase three shares of the Company's common stock. Two directors of the Company
  invested an aggregate of $115,000 in the financing. Each share of Series F Preferred
  Stock was convertible, in whole or in part, into 10 shares of common stock at
  the option of the holder at any time for a period of three years following the
  date of sale, with a mandatory conversion date on March 21, 2006. The holders
  of Series F Preferred Stock had voting rights equal to the number of shares
  of common stock issuable upon conversion. The originally issued Series F Preferred
  Stock was convertible into a total of 2,762,690 shares of common stock at a
  conversion price of $0.722 per share, subject to certain adjustments. An additional
  828,807 shares of common stock were issuable upon exercise of the originally
  issued warrants at an exercise price of $0.722 per share. In addition, the Company
  issued five-year warrants to the placement agent to acquire up to 718,300 shares
  of common stock at $0.722 per share.

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On March 21, 2006, the remaining outstanding shares of Series F Preferred Stock
  automatically converted into common stock, resulting in the issuance of 823,300
  shares of common stock. During the first quarter of 2006, holders elected to
  exercise the remaining outstanding three-year warrants resulting in the issuance
  of 461,022 shares of common stock. Dividends accrued on the Series F Preferred
  Stock at the rate of 8% per annum and were payable quarterly in cash or in common
  stock, at the option of the Company. Final dividends on the Series F Preferred
  Stock up through the date of mandatory conversion in the first quarter 2006
  were $10,653, and were paid in cash prior to the end of the first quarter. Dividends
  for 2005 were $48,490, and were paid in cash subsequent to each quarter. During
  the year holders of 1,493 shares of Series F Preferred Stock elected to convert
  their shares into 14,930 shares of common stock leaving 82,330 shares of Series
  F Preferred Stock outstanding at December 31, 2005. Dividends for 2004 were
  $50,105 and were paid in cash subsequent to each quarter. During the year holders
  of 9,083 shares of Series F Preferred Stock elected to convert their shares
  into 90,830 shares of common stock.

NOTE 4 - Bank Financing Arrangements

On March 3, 2006, the Company agreed with its bank to extend the term of the
  existing credit facility by an additional year, which will now expire on March
  2, 2008. The credit facility under the credit agreement allows the Company to
  borrow up to $4,000,000 based on the level of qualified domestic and international
  receivables, up to a maximum of $2,500,000 and $1,500,000, respectively, at
  the lender's index rate based on prime plus 0.5%. The rates in effect at December
  31, 2006 were 8.75% on both the domestic and international lines. At December
  31, 2006, outstanding amounts borrowed under the lines were $1,100,226 and $1,113,035,
  respectively, which were the approximate amounts available on the lines. These
  amounts outstanding at December 31, 2006 were repaid in January 2007. At December
  31, 2005, outstanding amounts borrowed under the lines were $1,358,984 and $949,787,
  respectively, which were the approximate amounts available on the lines. These
  amounts outstanding at December 31, 2005 were repaid in January 2006. The Company
  used the credit facility only at the end of the each quarter in fiscal years
  2006 and 2005. Under the credit agreement, the Company must maintain quarterly
  minimum tangible net worth equal to $5,400,000, plus 50% of quarterly net profits
  and 50% of net proceeds from equity and subordinated debt financing transactions
  beginning with the quarter ending December 31, 2006. The Company was in compliance
  with the tangible net worth requirements at the end of fiscal years 2006 and
  2005.



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NOTE 5 - Capital Lease
  Obligations and Equipment Financings

The Company leases certain of its equipment under capital leases. The leases
  are collateralized by the underlying assets. At December 31, 2006, property
  and equipment with a cost of $37,333 were subject to such financing arrangements.
  Related accumulated amortization at December 31, 2006 amounted to $28,961. Future
  minimum payments under capital lease and equipment financing arrangements as
  of December 31, 2006, are as follows:

|2007                                          |   | 8,556  |  
|--------------------------------------------- | - | ------ | -
|Total
        minimum payments                |   | 8,556  |  
|Less amount representing
        interest     |   | (184   | )
|Present
        value of net minimum payments |   | 8,372  |  
|Less current portion                          |   | (8,372 | )
|Long-term
        portion                     | $ | ---    |  

NOTE 6 - Commitments

On October 24, 2006, the Company entered into a commercial building lease agreement
  for its new headquarters. The sixty-four month lease, beginning on February
  1, 2007, provides for the lease by the Company of approximately 37,131 square
  feet of space in Newark, California. Total base rent payable over the lease
  period is $1,771,595. The Company has one option to extend the term of the lease
  for an additional five-year period with respect to the entire premises. Future
  minimum lease payments under all operating leases are as shown below:

|2007 | $ | 191,039   | 
|---- | - | --------- | 
|2008 |   | 337,706   | 
|2009 |   | 349,663   | 
|2010 |   | 362,102   | 
|2011 |   | 374,578   | 
|2012 |   | 156,507   | 
|     | $ | 1,771,595 | 

Rental expense under all operating leases was $349,428, $377,427, and $470,524,
  for each of the years ended December 31, 2006, 2005, and 2004, respectively.

The Company has non-cancelable purchase commitments with its vendors for inventory
  used in the ordinary course of business in the aggregate amount of $1.5 million
  in 2007.



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NOTE 7 - Stock Option/Stock
  Issuance Plan

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

The 1995 Plan
  The 1995 Plan provides for the grant of incentive stock options and nonstatutory
  stock options to employees, directors, and consultants of the Company. The Company
  grants incentive stock options and nonstatutory stock options at an exercise
  price per share equal to the fair market value per share of common stock on
  the date of grant. The vesting and exercise provisions are determined by the
  Board of Directors, with a maximum term of ten years. Upon ratification of the
  2004 Plan by the shareholders in June 2004, shares in the 1995 Plan that had
  been reserved but not issued, as well as any shares issued that would otherwise
  return to the 1995 Plan as a result of termination of options or repurchase
  of shares, were added to the shares reserved for issuance under the 2004 Plan.
  No additional grants will be made from the 1995 Plan.

Information with respect to the 1995 Plan is summarized as follows:

|                                     |  |           |            |   |                     |       |           |                 |       |   |      | 
|------------------------------------ |  | --------- | ---------- | - | ------------------- | ----- | --------- | --------------- | ----- | - | ---- | 
|                                     |  |           |            |   | Outstanding Options
|                                     |  | Options   |            |   |                     |       |           | Weighted        |      
|                                 |  | Available |            |   | Number              |       |           | Average         |      
|                                     |  | For Grant |            |   | of Shares           |       |           | Price Per Share |  
|Balance at December 31, 2003         |  |           | 589,888    |   |                     |       | 4,685,265 |                 |       | $ | 1.64 | 
|Increase
      in shares authorized  |  |           | 1,193,421  |   |                     |       | ---       |                 |       |   |      | 
|Granted                              |  |           | (1,022,500 | ) |                     |       | 1,022,500 |                 |       | $ | 3.16 | 
|Canceled                             |  |           | 212,278    |   |                     |       | (212,278  | )               |       | $ | 2.71 | 
|Exercised                            |  |           | ---        |   |                     |       | (105,372  | )               |       | $ | 0.91 | 
|Transferred
      to 2004 Plan       |  |           | (973,087   | ) |                     |       | ---       |                 |       |   |      | 
|Balance at December 31, 2004         |  |           | ---        |   |                     |       | 5,390,115 |                 |       | $ | 1.90 | 
|Canceled                             |  |           | 227,212    |   |                     |       | (227,212  | )               |       | $ | 2.84 | 
|Exercised                            |  |           | ---        |   |                     |       | (67,335   | )               |       | $ | 0.84 | 
|Transferred
      to 2004 Plan       |  |           | (227,212   | ) |                     |       | ---       |                 |       |   |      | 
|Balance at December 31, 2005         |  |           | ---        |   |                     |       | 5,095,568 |                 |       | $ | 1.87 | 
|Canceled                             |  |           | 293,254    |   |                     |       | (293,254  | )               |       | $ | 2.69 | 
|Exercised                            |  |           | ---        |   |                     |       | (76,315   | )               |       | $ | 0.80 | 
|Transferred
      to 2004 Plan       |  |           | (293,254   | ) |                     |       | ---       |                 |       |   |      | 
|Balance
        at December 31, 2006 |  |           | ---        |   |                     |   | 4,725,999 |                 |       | $ | 1.83 | 

The weighted average fair value of options granted during 2004 under the 1995
  Plan was $2.76. As of December 31, 2006, 2005, and 2004, options to purchase
  4,465,441, 4,151,892, and 3,460,694, shares, respectively, under the 1995 Plan
  were exercisable at weighted average exercise prices of $1.80, $1.85, and $1.98,
  respectively.



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The outstanding and exercisable options under the 1995 Plan at December 31,
  2005 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 |      
|$0.44
        - $0.69 |  |                           | 261,541   |  |                     |  | 2.00 |                |  | $ | 0.59        |  |  |                | 261,541   |  |  | $ | 0.59 | 
|$0.70
        - $0.76 |  |                           | 1,364,549 |  |                     |  | 6.17 |                |  | $ | 0.74        |  |  |                | 1,293,153 |  |  | $ | 0.74 | 
|$0.97
        - $1.29 |  |                           | 1,228,956 |  |                     |  | 5.00 |                |  | $ | 1.14        |  |  |                | 1,228,956 |  |  | $ | 1.14 | 
|$1.50                 |  |                           | 17,708    |  |                     |  | 2.92 |                |  | $ | 1.50        |  |  |                | 17,708    |  |  | $ | 1.50 | 
|$2.28
        - $3.38 |  |                           | 1,851,245 |  |                     |  | 5.50 |                |  | $ | 3.28        |  |  |                | 1,662,083 |  |  | $ | 3.29 | 
|$7.75                 |  |                       | 2,000     |  |                     |  | 3.00 |                |  | $ | 7.75        |  |  |            | 2,000     |  |  | $ | 7.75 | 
|$0.44
        - $7.75 |  |                       | 4,725,999 |  |                     |  | 5.33 |                |  | $ | 1.83        |  |  |            | 4,465,441 |  |  | $ | 1.80 | 

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

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

|                                     |  |           |         |  |                     |  |           |                 |       |   |      | 
|------------------------------------ |  | --------- | ------- |  | ------------------- |  | --------- | --------------- | ----- | - | ---- | 
|                                     |  |           |         |  | Outstanding Options
|                                     |  | Options   |         |  |                     |  |           | Weighted        |      
|                                     |  | Available |         |  | Number              |  |           | Average         |      
|                                     |  | For Grant |         |  | of Shares           |  |           | Price Per Share |  
|Balance at December 31, 2003         |  |           | 37,922  |  |                     |  | 1,245,483 |                 |       | $ | 2.87 | 
|Canceled                             |  |           | 142,732 |  |                     |  | (142,732  | )               |       | $ | 3.38 | 
|Balance at December 31, 2004         |  |           | 180,654 |  |                     |  | 1,102,751 |                 |       | $ | 2.88 | 
|Canceled                             |  |           | 30,000  |  |                     |  | (30,000   | )               |       | $ | 3.19 | 
|Balance at December 31, 2005         |  |           | 210,654 |  |                     |  | 1,072,751 |                 |       | $ | 2.78 | 
|No transactions                      |  |           | ---     |  |                     |  | ---       |                 |       |   |      | 
|Balance
        at December 31, 2006 |  |           | 210,654 |  |                     |  | 1,072,751 |                 |       | $ | 2.78 | 



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As of December 31, 2006, 2005, and 2004, options to purchase 1,072,751, 1,072,751,
  and 1,094,418, shares were exercisable under the 1999 Plan at weighted average
  exercise prices of $2.78, $2.78, and $2.79, respectively. The outstanding and
  exercisable options at December 31, 2006 under the 1999 Plan presented by price
  range are as follows:

|                      |  |                           |           |  |                     |  |      |                |  |   |             |  |  |                |           |  |  |   |      | 
|--------------------- |  | ------------------------- | --------- |  | ------------------- |  | ---- | -------------- |  | - | ----------- |  |  | -------------- | --------- |  |  | - | ---- | 
|                      |  | Options
      Outstanding |           |  | Options Exercisable
|                      |  |                           |           |  | Weighted            |  |      |                |  |   |             |  |  |                |          
|Range of              |  | Number of                 |           |  | Average             |  |      | Weighted       |  |   | Number of   |  |  | Weighted       |          
|Exercise              |  | Options                   |           |  | Remaining Life      |  |      | Average        |  |   | Options     |  |  | Average        |          
|Prices                |  | Outstanding               |           |  | (Years)             |  |      | Exercise Price |  |   | Exercisable |  |  | Exercise Price |      
|$0.56                 |  |                           | 211,009   |  |                     |  | 2.50 |                |  | $ | 0.56        |  |  |                | 211,009   |  |  | $ | 0.56 | 
|$2.28                 |  |                           | 40,000    |  |                     |  | 4.58 |                |  | $ | 2.28        |  |  |                | 40,000    |  |  | $ | 2.28 | 
|$3.38                 |  |                           | 821,742   |  |                     |  | 4.08 |                |  | $ | 3.38        |  |  |            | 821,742   |  |  | $ | 3.38 | 
|$0.56
        - $3.38 |  |                       | 1,072,751 |  |                     |  | 3.75 |                |  | $ | 2.78        |  |  |            | 1,072,751 |  |  | $ | 2.78 | 

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 |  
|Transferred from 1995 Plan           |  |           | 973,087    |   |                     |       | ---       |                 |       |   |      | 
|Granted                              |  |           | (95,400    | ) |                     |       | 95,400    |                 |       | $ | 1.51 | 
|Balance at December 31, 2004         |  |           | 877,687    |   |                     |       | 95,400    |                 |       | $ | 1.51 | 
|Increase
      in shares authorized  |  |           | 1,205,657  |   |                     |       | ---       |                 |       |   |      | 
|Transferred
      from 1995 Plan     |  |           | 227,212    |   |                     |       | ---       |                 |       |   |      | 
|Granted                              |  |           | (2,098,000 | ) |                     |       | 2,098,000 |                 |       | $ | 1.38 | 
|Canceled                             |  |           | 99,600     |   |                     |       | (99,600   | )               |       | $ | 1.50 | 
|Balance at December 31, 2005         |  |           | 312,156    |   |                     |       | 2,093,800 |                 |       | $ | 1.38 | 
|Increase
      in shares authorized  |  |           | 1,208,948  |   |                     |       | ---       |                 |       |   |      | 
|Transferred from 1995 Plan           |  |           | 293,254    |   |                     |       | ---       |                 |       |   |      | 
|Granted                              |  |           | (1,361,800 | ) |                     |       | 1,361,800 |                 |       | $ | 1.18 | 
|Canceled                             |  |           | 415,787    |   |                     |       | (415,787  | )               |       | $ | 1.24 | 
|Balance
        at December 31, 2006 |  |           | 868,345    |   |                     |   | 3,039,813 |                 |       | $ | 1.31 | 



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The weighted average fair value of options granted during 2006, 2005, and 2004,
  under the 2004 Plan was $0.65, $0.97, and $1.10, respectively. As of December
  31, 2006 and 2005, options to purchase 1,251,057 and 974,321 shares were exercisable
  under the 2004 Plan at weighted average exercise prices of $1.37 and $1.37,
  respectively. At December 31, 2004, none of the outstanding options under the
  2004 Plan were exercisable.

The 2004 Plan provides for an annual increase to be added on the first day
  of each fiscal year equal to the lesser of 2,000,000 shares, four percent of
  the outstanding shares on that date, or a lesser amount as determined by the
  Board of Directors. On January 1, 2007, 2006, and 2005, a total of 1,274,051,
  1,208,948, and 1,205,657 shares, respectively, became available for grant from
  the 2004 Plan.

The outstanding and exercisable options at December 31, 2006 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 |      
|$0.93
        - $1.38 |  |                           | 1,725,800 |  |                     |  | 9.17 |                |  | $ | 1.17        |  |  |                | 466,675   |  |  | $ | 1.14 | 
|$1.50
        - $1.51 |  |                       | 1,314,013 |  |                     |  | 8.08 |                |  | $ | 1.50        |  |  |            | 784,382   |  |  | $ | 1.50 | 
|$0.93
        - $1.51 |  |                       | 3,039,813 |  |                     |  | 8.67 |                |  | $ | 1.31        |  |  |            | 1,251,057 |  |  | $ | 1.37 | 



NOTE 8 - Warrants

The Company issued warrants to purchase common stock in connection with certain
  financing agreements. The Company has the following warrants outstanding to
  purchase common stock at December 31, 2006:

|Reason                                   |  | Number
        of Shares |         |  | Price
        Per Share |        | Issue
        Date |  | Expiration
        Date
|---------------------------------------- |  | ------------------------ | ------- |  | ----------------------- | ------ | ------------------ |  | -----------------------
|Common
      stock financing             |  |                          | 56,344  |  |                         | $      | 1.59               |  | Mar
        2002       
|Bank
      line financing                |  |                          | 15,000  |  |                         | $      | 0.80               |  | Oct
        2002       
|Series
      F preferred stock financing |  |                      | 289,087 |  |                         | $  | 0.722              |  | Mar
        2003       
|Common
      stock financing             |  |                          | 629,281 |  |                         | $      | 2.73               |  | Aug
        2003       
|Total
      warrants                     |  |                      | 989,712 |  |                         |    |                    |  |                        



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NOTE 9
  - Shares Reserved

Common stock reserved for future issuance was as follows at December 31, 2006:

|                                                           | Number of shares
|---------------------------------------------------------- | ----------------
|Stock option grants outstanding (see Note 7)               | 8,838,563       
|Reserved
      for future stock option grants (see Note 7) | 1,078,999       
|Common
      stock warrants (see Note 8)                   | 989,712         
|Total common stock reserved for future issuance            | 10,907,274      

NOTE
  10 - Retirement Plan

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

NOTE 11-
  Income Taxes

Deferred tax expense for the year ended December 31, 2006 is related to the
  deferred tax liability on the portion of the Company's goodwill amortized for
  tax purposes. Due to the indefinite characteristic of this deferred tax liability,
  it cannot be offset against deferred tax assets, and the deferred tax liability
  may never reverse. The provision for deferred tax for the periods ended December
  31, 2006, 2005, and 2004, consists of the following components:

|                                 |  | Years Ended December 31,
|-------------------------------- |  | ------------------------
|                                 |  | 2006                    
|Current:                         |  |                         
|Federal                          |  | $                       
|State                            |  |                     
|Total Current                    |  |                         
|                                 |  |                         
|Deferred:                        |  |                         
|Federal                          |  |                         
|State                            |  |                         
|Total
        Deferred           |  |                     
|Total provision for deferred tax |  |                     



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

|                                         |  | Years Ended December 31,
|---------------------------------------- |  | ------------------------
|                                         |  | 2006                    
|Federal tax at statutory rate            |  |                         
|State income tax rate                    |  |                         
|Losses
        and credits not benefited |  |                     
|                                         |  |                         
|Provision
        for taxes              |  |                         



Deferred income tax reflects the net tax effects of temporary differences between
  the carrying amount of assets and liabilities for financial reporting purposes
  and the amount used for income tax purposes. Significant components of net deferred
  tax assets are as follows:

|                                                  |  | Years Ended December 31,
|------------------------------------------------- |  | ------------------------
|Deferred
      tax assets:                        |  | 2006                    
|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 assets (liabilities)       |  | $                       

The Company has not generated taxable income in any periods in any jurisdiction,
  foreign or domestic. The Company has maintained a full valuation allowance for
  all deferred tax assets.

As of December 31, 2006, the Company had net operating loss carryforwards for
  federal income tax purposes of approximately $26,000,000, which will expire
  at various dates beginning in 2007 through 2026, and federal research and development
  tax credits of approximately $375,000, which will expire at various dates beginning
  in 2007 through 2026. As of December 31, 2006, the Company had net operating
  loss carryforwards for state income tax purposes of approximately $6,700,000,
  which will expire at various dates in 2007 through 2016, and state research
  and development tax credits of approximately $406,000, which can be carried
  forward indefinitely. During 2006, approximately $212,000 of California net
  operating loss expired unutilized.

Utilization of the net operating loss and tax credit carryforwards may be subject
  to a substantial annual limitation due to the ownership change limitations provided
  by the Internal Revenue Code Section 382 and similar state provisions. The annual
  limitation may result in the expiration of the net operating loss and credit
  carryforwards before utilization.



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The tax benefits associated with employee stock options provide a deferred
  benefit of approximately $800,000 which has been offset by the valuation allowance.
  The deferred tax benefit associated with the employee stock options will be
  credited to additional paid-in capital when realized.

In June 2006, the Financial Accounting Standards Board issued Interpretation
  No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
  Statement No. 109" ("FIN 48"), to create a single model to address accounting
  for uncertainty in tax positions. FIN 48 clarifies the accounting for income
  taxes by prescribing a minimum recognition threshold a tax position is required
  to meet before being recognized in the financial statements. FIN 48 also provides
  guidance on derecognition, measurement, classification, interest and penalties,
  accounting in interim periods, disclosure and transition. FIN 48 is effective
  for fiscal years beginning after December 15, 2006. The Company adopted FIN
  48 as of January 1, 2007, as required. The cumulative effect of adopting FIN
  48 will be recorded in retained earnings and other accounts as applicable. The
  Company has determined that the adoption of FIN 48 will not have a material
  affect on the Company's position and consolidated results of operations or cash
  flows.



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

Not Applicable.

Item 9A. Controls and
  Procedures

Evaluation of disclosure
  controls and procedures

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

Management's
  Report on Internal Control Over Financial Reporting

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

We assessed the effectiveness of the Company's internal control over financial
  reporting as of December 31, 2006. In making this assessment, we used the criteria
  set forth by the Committee of Sponsoring Organizations of the Treadway Commission
  (COSO) in Internal Control - Integrated Framework.

Based on our assessment using those criteria, we believe that, as of December
  31, 2006, our internal control over financial reporting is effective.

Changes in internal
  control over financial reporting

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



Item 9B. Other Information

None.

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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 18,
  2007.

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 18,
  2007.

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 18, 2007.

The following table provides information as of December 31, 2006 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
  7 to the Company's Consolidated Financial Statements.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | Number
        of securities to be issued upon exercise of outstanding options |           |  | Weighted-average
        exercise price of outstanding options |         | Number
        of securities remaining available for future issuance under equity compensation
        plans (excluding securities reflected in column (a))
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ | --------- |  | -------------------------------------------------------------- | ------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | (a)                                                                            |           |  | (b)                                                            |         | (c)                                                                                                                                                        
|Equity
      compensation plans approved by security holders (1)                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                | 7,765,812 |  |                                                                | $       | 1.63                                                                                                                                                       
|Equity
      compensation plans not approved by security holders (2)                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                | 1,072,751 |  |                                                                | $       | 2.78                                                                                                                                                       
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                            | 8,838,563 |  |                                                                |   $ | 1.77                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(1) Includes the 1995 Stock Plan and its successor,
      the 2004 Equity Incentive Plan. Pursuant to an affirmative vote by security
      holders in June 2004, an annual increase in shares is added on the first
      day of each fiscal year equal to the lesser of (a) 2,000,000 shares, (b)
      4% of the outstanding shares on that date, or (c) a lesser amount as determined
      by the Board of Directors. 
      (2) Consists of the 1999 Stock Plan.



67

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(Table
  of Contents)



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 18,
  2007.

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 18, 2007.





PART
  IV

Item 15. Exhibits and
  Financial Statement Schedules

> (a) Documents filed as
>     part of this report:
>   1. All financial statements.
>     INDEX
>           TO FINANCIAL STATEMENTS
>         PAGE 
>           Report of Moss Adams LLP, Independent Registered
>           Public Accounting Firm
>         43Consolidated
>           Balance Sheets
>         44Consolidated
>           Statements of Operations
>         45Consolidated
>           Statements of Preferred Stock and Stockholders' Equity
>         46Consolidated
>           Statements of Cash Flows
>         47Notes
>           to Consolidated Financial Statements
>         482. 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 70. 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 70. The Exhibits listed on the accompanying
>     Index of Exhibits are filed or incorporated by reference as part of this report.

68

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(Table
  of Contents)








SIGNATURES

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

|                           | SOCKET
      COMMUNICATIONS, INC.
      Registrant                                       
|-------------------------- | -----------------------------------------------------------------------------------------
|                           |                                                                                          
|Date:
      March 16, 2007 | /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 16, 2007
|-- | ---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|   | Kevin
      J. Mills        
|   |                              |                                                                                                                                    |  |               
|By | /s/
      Charlie Bass       | Chairman
      of the Board                                                                                                        |  | March 16, 2007
|   | Charlie
      Bass          
|   |                              |                                                                                                                                    |  |               
|By | /s/
      David W. Dunlap    | Vice
      President of Finance and Administration and Chief Financial Officer 
      (Principal Financial and Accounting Officer) |  | March 16, 2007
|   | David
      W. Dunlap       
|   |                              |                                                                                                                                    |  |               
|By | /s/
      Micheal L. Gifford | Executive
      Vice President and Director                                                                                        |  | March 16, 2007
|   | Micheal
      L. Gifford    
|   |                              |                                                                                                                                    |  |               
|By | /s/
      Gianluca Rattazzi  | Director                                                                                                                           |  | March 16, 2007
|   | Gianluca
      Rattazzi     
|   |                              |                                                                                                                                    |  |               
|By | /s/
      Leon Malmed        | Director                                                                                                                           |  | March 16, 2007
|   | Leon
      Malmed           
|   |                              |                                                                                                                                    |  |               
|By | /s/
      Enzo Torresi       | Director                                                                                                                           |  | March 16, 2007
|   | Enzo Torresi                
|   |                              |                                                                                                                                    |  |               
|By | /s/
      Peter Sealey       | Director                                                                                                                           |  | March 16, 2007
|   | Peter Sealey                



69

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Index
  to Exhibits

|Exhibit
        Number | Description                                                                                                                            
|---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                        
|2.1
        (1)        | Agreement and Plan of Reorganization.                                                                                                  
|                       |                                                                                                                                        
|3.1
        (2)        | Amended and Restated Certificate of Incorporation.                                                                                     
|                       |                                                                                                                                        
|3.2
        (2)        | Certificate of Designation of Series E Convertible Preferred
      Stock.                                                              
|                       |                                                                                                                                        
|3.3
        (2)        | Certificate of Designation of Series F Convertible Preferred
      Stock.                                                              
|                       |                                                                                                                                        
|3.4
        (3)        | Bylaws.                                                                                                                                
|                       |                                                                                                                                        
|3.5
        (3)        | Certificate of Amendment of Bylaws dated March 14, 2001.                                                                               
|                       |                                                                                                                                        
|10.1 (4)*              | Form of Indemnification Agreement entered into between the
      Company and its directors and officers.                               
|                       |                                                                                                                                        
|10.2 (4)*              | 1995 Stock Plan and forms of agreement thereunder.                                                                                     
|                       |                                                                                                                                        
|10.3 (5)*              | Form of Amendment No.1 to Stock Option Agreement between the
      Company and certain Option Holders under the 1995 Stock Option Plan.
|                       |                                                                                                                                        
|10.4 (6)*              | 1999 Nonstatutory Stock Option Plan.                                                                                                   
|                       |                                                                                                                                        
|10.5 (7)*              | 2004 Equity Incentive Plan and forms of agreement
      thereunder.                                                                    
|                       |                                                                                                                                        
|10.6 (8)               | Standard Lease Agreement by and between Central Court, LLC
      and the Company dated September 15, 1996.                             
|                       |                                                                                                                                        
|10.7 (9)               | Second Amendment to Lease by and between Central Court, LLC
      and the Company dated December 14, 2001.                             
|                       |                                                                                                                                        
|10.8 (10)*             | Form of Executive Management Bonus Plan between the Company
      and certain eligible participants.                                   
|                       |                                                                                                                                        
|10.9 (11)*             | Form of Employment Agreement dated December 28, 2005 between
      the Company and the officers of the Company.                        

|            |                                                                                                                                      
|----------- | -------------------------------------------------------------------------------------------------------------------------------------
|10.10 (12)* | Standard Industrial /Commercial Multi-Tenant Lease by and
      between Del Norte Farms, Inc. and the Company dated October 24, 2006.
|            |                                                                                                                                      
|11.1        | Computation of Earnings per Share (see Consolidated Statements
      of Operations in Item 8).                                       
|            |                                                                                                                                      
|14.1 (13)   | Code of Business Conduct and Ethics.                                                                                                 
|            |                                                                                                                                      
|21.1 (3)    | Subsidiaries.                                                                                                                        
|            |                                                                                                                                      
|23.1        | Consent of Moss Adams LLP, Independent Registered Public Accounting
      Firm.                                                      



|31.1 | Certification of Chief Executive Officer pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002.                            
|---- | -------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                      
|31.2 | Certification of Chief Financial Officer pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002.                            
|     |                                                                                                                                      
|32.1 | Certification of Chief Executive Officer and Chief Financial
      Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

|_________
        * Executive compensation plan or arrangement.
        (1) Incorporated by reference to exhibits filed with the Company's Form
        8-K filed on October 20, 2000.
      (2) Incorporated by reference to exhibits filed with the Company's Form
        10-K filed on March 15, 2004.
      (3) Incorporated by reference to exhibits filed with the Company's Form
        10-K filed on March 31, 2003.
      (4) Incorporated by reference to exhibits filed with Company's Registration
        Statement on Form SB 2 (File No. 33 91210 LA) filed on June 2, 1995 and
        declared effective on October 20, 2000.
      (5) Incorporated by reference to exhibits filed with the Company's Form
        10-KSB filed on March 30, 1998.
      (6) Incorporated by reference to exhibits filed with the Company's Form
        10-QSB filed on August 16, 1999.
      (7) Incorporated by reference to Appendix C filed with the Company's
        Form DEF 14A filed on April 29, 2004.
      (8) Incorporated by reference to Exhibit 10.5 of the Company's Registration
        Statement on Form SB 2 (File No. 333 22273) filed on February 24, 1997.
      (9) Incorporated by reference to exhibits filed with the Company's Form
        10-K filed on April 1, 2002.
      (10) Incorporated by reference to exhibits filed with the Company's Form
        10-KSB filed on April 2, 2001.
      (11) Incorporated by reference to exhibits filed with the Company's Form
        8-K filed on December 28, 2005.
      (12) Incorporated by reference to exhibits filed with the Company's Form
        10-Q filed on November 13, 2006.
      (13) Incorporated by reference to exhibits filed with the Company's Form
        10-K filed on March 10, 2006.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

70

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