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, 2005 **[   ]**
      **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF 1934**For the transition period from ____________
        to ____________ Commission
    file number 1-13810 **SOCKET COMMUNICATIONS, INC.** (Exact name of registrant as specified in its charter)  **Delaware**
      **94-3155066**(State or
          other jurisdiction of incorporation or organization)
      (IRS Employer Identification
          No.)  **37400 Central Court, Newark, CA 94560**(Address of principal executive offices including zip code) **(510) 744-2700**(Registrant's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act:
    None Securities registered under Section 12(g) of the Exchange Act:
    Common Stock, $0.001 Par Value 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] Check whether the registrant (1) has filed all reports required
    to be filed by Section 13 or 15(d) of the Exchange Act during the preceding
    12 months (or for such shorter period that the registrant was required to
    file such reports), and (2) has been subject to such filing requirements for
    the past 90 days. YES [X] NO [ ] Check if there is no disclosure of delinquent filers in response
    to Item 405 of Regulation S-K contained herein, and no disclosure will be
    contained, to the best of registrant's knowledge, in definitive proxy or information
    statements incorporated by reference in Part III of this Form 10-K or any
    amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is 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, 2005, the aggregate market value of the registrant's
    common stock ($0.001 par value) held by non-affiliates of the registrant was
    $31,571,347 based on the closing sale price as reported on the National Association
    of Securities Dealers Automated Quotation System National Market System. Number of shares of common stock ($0.001 par value) outstanding
    as of February 21, 2006: 30,230,709 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 19, 2006. 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
      13Item
        1B.
      Unresolved Staff
        Comments
      22Item
        2.
      Properties
      23Item
        3.
      Legal
        Proceedings
      23Item
        4.
      Submission
        of Matters to a Vote of Security Holders
      23PART
        IIItem
        5.
      Market for Registrant's Common Equity, Related Stockholder
        Matters, and Issuer Purchases of Equity Securities
      23Item
        6.
      Selected Consolidated Financial Data
      24Item
        7.
      Management's
        Discussion and Analysis of Financial Condition and Results of Operations
      25Item
        7A.
      Quantitative
        and Qualitative Disclosures about Market Risk
      39Item
        8.
      Financial
        Statements and Supplementary Data
      40Item
        9.
      Changes
        in and Disagreements with Accountants on Accounting and Financial Disclosure
      64Item
        9A.
      Controls
        and Procedures
      64Item
        9B.
      Other
        Information
      65PART
        IIIItem
        10.
      Directors and Executive Officers of the Registrant
      65Item
        11.
      Executive Compensation
      65Item
        12.
      Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters
      65Item
        13.
      Certain
        Relationships and Related Transactions
      66Item
        14.
      Principal
        Accountant Fees and Services
      66PART
        IVItem
        15.
      Exhibits and Financial Statement Schedules
      66SIGNATURES
      67 Index
        to Exhibits
      68


PART
  I

This Annual Report contains forward-looking statements within the meaning
  of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
  Exchange Act of 1934. 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. Such factors 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 8-K
  and 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 design, manufacture and sell data collection and connectivity products for
  mobile electronic devices. Our products employ innovative designs that reduce
  battery power consumption and make them easy to install and use. Our data collection
  products are designed to collect data on handheld computers, tablet computers,
  notebook computers and selected Smartphones using bar code scanning and Radio
  Frequency Identification (RFID) technologies. Our connectivity products are
  designed to connect handheld computers, tablet computers, notebook computers
  and Smartphones to the Internet, to local area computer networks, to wide area
  computer networks, and to other peripheral devices through both wireless and
  cable connections. We also offer embedded products that are designed to be installed
  inside third-party mobile electronic devices, and we offer serial products that
  connect electronic devices. Our products are designed for use with a broad range
  of mobile computing devices that support standard expansion mechanisms using
  Windows Mobile, Windows XP, Palm, J2ME (used by Research-In-Motion on its Bluetooth-enabled
  Blackberry handheld computers) or Symbian 60 and 80 operating systems. The standard
  expansion mechanisms we support include: slots for plug-in cards in the CompactFlash,
  PC Card, and Secure Digital Input/Output (SDIO) form factors; Bluetooth®,
  a short range wireless device connection technology; and Wireless LAN, a wireless
  network connection technology. We believe that growth in the mobile workforce,
  combined with technical advances and cost reductions in mobile devices and networking
  technologies, is driving broader adoption of mobile data communications. Our
  products are designed to address the growing need for mobile workforce connectivity
  by enabling the use of handheld devices to extend data communications capabilities
  beyond location-dependent wired networks or telephone lines, thereby enabling
  mobile computer users to enhance their productivity, exploit time sensitive
  opportunities and improve customer satisfaction. Overall, our products integrate
  hardware, software and services into complete mobile data collection and connectivity
  solutions.

1

---

(Table of
  Contents)

Total employee headcount on December 31, 2005 was 80 people, including 6 previously
  temporary employees who became full time employees on January 1, 2006. 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) and value added resellers.
  See "Personnel", "Sales and Marketing" and "Manufacturing" for additional information
  about our personnel, sales and marketing and manufacturing operations.

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

Products

Our products may be classified
  into four broad product families:

- Data collection products;
- Connectivity products;
- OEM embedded products and services; and
- Serial products



2

---

(Table
  of Contents)

Our data collection products consist of: 1) 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, Palm, J2ME, or Symbian 60 or 80 operating systems, and turn these devices
  into portable bar code scanners that can be used in various retail and industrial
  workplaces; 2) Radio Frequency Identification (RFID) plug-in products that read
  RFID tags; 3) a combination plug-in bar code scanner and RFID reader; and 4)
  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, a stand-alone
  handheld bar code scanner, and a ring scanner worn on the index finger that
  connects using the Bluetooth standard for short-range wireless connectivity.
  We expect during 2006 to continue to broaden the selection of products within
  this product family. Data collection products represented approximately 39 percent
  of our revenue for the year ended December 31, 2005.

Our connectivity products are connection devices that can be plugged
  into standard expansion slots in 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, or connect to these devices
  over wireless and wired connections. These products allow users to connect their
  devices to the Internet via mobile or wired phone services, or to private networks,
  or to communicate with other electronic devices such as desktop computers, other
  handheld, tablet and notebook computers, Smartphones and printers. Wireless
  connection products include plug-in cards using the Bluetooth standard for short-range
  wireless connectivity, and plug-in cards for connecting to local wireless networks
  using the Wireless LAN 802.11b/g (or Wi-Fi) standards along with extensive communications
  software enabling the use of these products. Cable connection products include
  modems for telephone connections and Ethernet cards for local area network connections.
  Our Bluetooth technology products are of two types, those that add Bluetooth
  technology to mobile devices, and those that work with devices that are Bluetooth-enabled.
  Those that add Bluetooth technology include our CompactFlash and SDIO Bluetooth
  plug-in cards and our Bluetooth embedded modules. Our cordless modem utilizes
  Bluetooth as a connection mechanism and works with other Bluetooth-enabled devices.
  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
  34 percent of our revenue for the year ended December 31, 2005.

Our OEM embedded products and services consist of Bluetooth modules,
  Wireless LAN modules, and interface chips used by Original Equipment Manufacturers
  (OEMs). 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.
  Our interface chips allow manufacturers of wide area network cards and other
  devices to enable their devices to transfer information to and from handheld
  or notebook computers. OEM embedded products and services represented approximately
  14 percent of our revenue for the year ended December 31, 2005.



3

---

(Table
  of Contents)

Our serial products add connection ports to a notebook, tablet or handheld
  computer that allow users to connect these portable computers to standard peripherals
  or to other electronic devices with serial connections over cables or using
  the Bluetooth standard for short-range wireless connectivity. Serial products
  represented approximately 13 percent of our revenue for the year ended December
  31, 2005.

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

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 slots in standard form factors, typically CompactFlash,
  Secure Digital Input/Output or Bluetooth, to allow for transfer of data in and
  out of the handheld computer. Some handheld computer models include an integrated
  phone to facilitate the transfer of data over mobile phone networks. Notebooks
  and tablet computers also have expansion slots to enable their use in mobile
  environments. Certain models of mobile phones called Smartphones using Windows
  Mobile and Symbian System 60 and 80 operating systems have limited physical
  size and computing capabilities designed primarily to process and store personal
  information and facilitate messaging over the mobile phone networks. The addition
  of Bluetooth wireless technology to these Smartphones and to the Blackberry
  handheld computer from Research-In-Motion facilitates the transfer of data between
  these devices and networks or other devices. Advances in mobile network access
  and transfer speeds are enabling mobile computing device users to access the
  Internet, send and receive email, access corporate data files, and exchange
  instant messages anywhere and at any time through wireless local area networks,
  mobile phone networks 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 slots or Bluetooth expansion are effective at collecting data. Our
  data collection products are designed to facilitate the collection of bar code
  and RFID information on these devices.

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



4

---

(Table
  of Contents)

Current market dynamics driving adoption of mobile data communications include:

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

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. Handheld computers using the Microsoft Windows Mobile operating
  system are called "Pocket PCs." The largest Pocket PC manufacturers are Hewlett-Packard
  and Dell. These companies manufacture some models that integrate phones into
  the handheld computer. Dell and Hewlett-Packard along with other computer manufacturers
  such as Siemens, Toshiba and Fujitsu offer tablet or notebook computers with
  standard expansion slots. Manufacturers of industrial versions of Pocket PCs
  include Symbol Technologies, Intermec, HandHeld Products, Casio, Itronix, TopCon
  and Tripod Data Systems. Palm's Tungsten series of handheld computer and its
  Treo, a Smartphone, have SDIO 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, Lucky Goldstar, Lenova,
  Panasonic, Samsung, Sendo and Siemens, or the Windows Mobile operating system,
  such as Motorola. These phones use Bluetooth and, in some Windows Mobile Smartphones,
  SDIO slots to facilitate the transfer or the collection of data. Increased competition
  among manufacturers is expected to result in increased availability and greater
  promotion of mobile computing devices that can be used with our products during
  2006 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.



5

---

(Table
  of Contents)

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 and Smartphones by corporations to their mobile workforce are
  expected to be major factors driving growth in mobile data applications over
  the next several years.

Third-party applications for enterprises are becoming available in increasing
  numbers. Third-party software applications are becoming available for the
  collection, processing and transfer of information by a mobile workforce. Mobile
  computing devices are being used for such diverse applications as capturing
  lot numbers of drug samples given to a doctor, managing the stocking of shelves
  in retail establishments, or entering sales orders from the field. Larger enterprise
  software companies such as Siebel Systems (recently acquired by 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 Strategic Vertical Integrator
  (SVI) Program and more than 70 companies are participants in this program. Our
  SVI 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 is 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.

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, SVI's, distributors, and end-user customers. We actively promote
  third-parties to integrate our products into their solutions through our SVI
  Program. We have a team of employees that manages each strategic relationship,
  and we provide 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 Pocket PC device manufacturers
  (Dell and Hewlett-Packard being the largest) and Symbol Technologies. We coordinate
  our product development efforts with Microsoft on an ongoing basis, with the
  goal of ensuring that our current and future products are compatible with new
  releases of Microsoft's operating systems. We spend extensive engineering time
  and resources to ensure compatibility with as many Pocket PCs as possible. Dell
  is a direct reseller of our products. We work closely with the sales teams of
  Dell and Hewlett-Packard to assist them in offering mobile device solutions
  that include our products. Symbol Technologies supplies the bar code laser scanning
  modules that we utilize in our In-Hand Scan Bar Code Scanning Card and our Cordless
  Hand Scanner. Symbol also has designed our Bluetooth connection products into
  some of their products.

6

---

(Table
  of Contents)

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 2004 and 2005, we 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, and a mobile power pack. In early 2006,
  we introduced 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, and a wireless LAN module to add embedded Wireless LAN to
  our OEM product offerings. During 2005 we released new Bluetooth software for
  Windows notebooks and tablets, and made major upgrades to our wireless local
  area network software. We released driver software to enable our Bluetooth and
  bar code scanning products to work with additional operating systems, including
  Smartphones using the Symbian 60 and 80 operating systems and with Blackberry
  handheld computers from Research-In-Motion with built-in Bluetooth. We introduced
  new management software including Wi-Fi Companion to manage connections to Wi-Fi
  networks and are adding Connect!Agent to our Bluetooth products to improve the
  management of Bluetooth connections. We continue to upgrade 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.

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.

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 SVI Program included
  as of February 2006 over 70 companies that offer or intend to offer their solutions
  incorporating Socket products. These solutions primarily involve our data collection
  products and address improving productivity of the mobile workforce in a number
  of categories including field force automation, asset management, retail merchandising,
  automotive/transportation, health care, and government.

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; support open software architectures such as Windows,
  Palm and Symbian; and support a standard expansion mechanism such as CompactFlash,
  Secure Digital Input/Output, or Bluetooth. During 2005, we enabled 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 enabled our Cordless
  data collection products to work with Bluetooth-enabled Blackberry handheld
  computers from Research-In-Motion.

7

---

(Table
  of Contents)

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. Commencing with the first quarter of 2006, we are adding 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 engineering services to our mobile device
  manufacturer customers to assist them as needed to integrate our embedded products
  into their mobile devices.

Competition and Competitive
  Risks

The overall market for data collection and connectivity products is both complex
  and competitive, and we expect competition in our market areas to intensify,
  particularly for our connectivity products, which compete with similar products
  that are manufactured 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 identifying
  our products as robust, dependable, small form factor, low power, and easy to
  use, and the breadth of our product offerings including the extensive features
  of our software, will continue to differentiate us relative to our competitors.
  The competition in each of our product families is discussed in more detail
  below.

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

8

---

(Table
  of Contents)

Connectivity Products - Wireless Connections. Our Wireless LAN cards
  face competition in the market today principally from other manufacturers of
  low power Wireless LAN cards, including Ambicom and Linksys. We expect competition
  to remain intense in the future. We compete based on our brand name, distribution
  and customer support infrastructure, as well as software enhancements that provide
  ease-of-use, security features, 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,
  Belkin, Brainbox, IOGEAR and Quatech. Competing SDIO Bluetooth cards are being
  offered by Pretec. 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 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 Tech, 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 Billionton Systems.
  Our CompactFlash modem cards face competition from a number of manufacturers
  including Ambicom, Billionton Systems, Hewlett-Packard, New Media, OvisLink,
  Pharos, Pretec, Trendware and Xircom.

Embedded Products. Competition for our embedded products and services
  is primarily the same competition we face for the applicable plug-in product
  in one or more of our other product families, as plug-in connection cards are
  an alternative to embedded connections. For example, we sell our serial interface
  chips for embedding in third-party devices. Interface chips with similar functions
  and features are available from other chip manufacturers. In addition, our Bluetooth
  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 Advanteck, BeInteractive,
  BlackBox, Brainbox, B&B Electronics, Quatech, Ratoc Systems, SeaLevel and Silicom.
  We also offer a cordless serial adapter with Bluetooth wireless technology.
  Companies that offer competing Bluetooth serial products include Adamya, AIRcable,
  Canon i-Tech, connectBlue, Digi International, Ezurio, Free 2 Move, and Initium.

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.

9

---

(Table
  of Contents)

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 connection products cards 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
  system functionality. For cordless bar code scanning and RFID reading this includes
  our patent pending 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 six U.S. Patents (7,003,627, 6,353,870, 6,559,147, 6,691,196,
  6,863,557, and 6,920,517) and one UK patent (2,365,182) covering our design
  for cards combining connectivity and removable memory. In July 2004 we also
  acquired from Khyber Technologies, U.S. patent 5,902,991 entitled Card Shaped
  Computer Peripheral Device. The patent is a basic patent covering the design
  and functioning of plug-in bar code scanners, bar code imagers and RFID products.
  We have additional patents covering our proprietary technology pending with
  the U.S. Patent Office.

We have developed a number of software programs that provide unique functions
  and features for our connection and data collection products. For example, our
  SocketScan software enables all of our 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
  our name, our logo, and the term "Battery Friendly." We have also applied for
  design patents covering the designs of most of our products.

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.

10

---

(Table
  of Contents)

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, 2005 was 80 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, 2005, 65 percent of our sales were in North
  America, 24 percent in Europe, and 11 percent in Asia and Pacific Rim countries.
  During the year ended December 31, 2004, 63 percent of our sales were in North
  America, 24 percent in Europe and 13 percent in Asia and Pacific Rim countries.
  Export sales are subject to the complications of complying with laws of various
  countries and the risk of import/export restrictions and tariff regulations.

We market our products through a worldwide network of distributors and resellers,
  as well as through original equipment manufacturers (OEMs) and value added resellers.
  In addition, we have more than 70 companies that are participants in our SVI
  Program. SVI participants offer or intend to offer third-party applications
  that utilize our products in their SVI solutions. Markets addressed by our SVI
  participants include field force automation, retail merchandising, healthcare,
  government, automotive/transportation, and asset management. We support our
  distributors, resellers and SVI's by providing education, training and customer
  assistance through our sales, marketing, and technical support staff in the
  U.S. and in Europe. As of December 31, 2005, we had thirty-one people in sales,
  marketing and customer and developer services support. Our United States distributor
  Tech Data Corp. accounted for 28 percent, 28 percent and 29 percent of our revenue
  for 2005, 2004 and 2003, respectively. Our United States distributor Ingram
  Micro, Inc. accounted for 14 percent, 15 percent and 14 percent of our revenue
  in 2005, 2004 and 2003, respectively. We intend to increase our sales and marketing
  effort during 2006 by adding personnel and increasing promotional activities,
  particularly in support of our distributors.

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

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

11

---

(Table
  of Contents)

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, with the exception
  of large bulk orders, for which we perform final product testing and package
  our products at the third-party contract manufacturers' locations. As of December
  31, 2005, we had twenty-six 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.

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
  chip, our laser scanning engines, our SDIO plug-in cards, and certain cable
  and connector components. Although to date we have generally been able to obtain
  adequate supplies of these components, these components are generally purchased
  on a purchase order basis under standard commercial terms and conditions, and
  we do not have long-term supply contracts for these components. Accordingly,
  the manufacturers could stop providing these components to us at any time. Alternatively,
  although our suppliers are generally large, well-financed organizations, they
  could encounter financial difficulties that interfere with our product supplies.
  In such an event, we could experience a decline in revenues until we establish
  sufficient manufacturing supply through an alternative source. Locating and
  qualifying alternative suppliers, and commencing new manufacturing operations,
  could take a significant period of time, although we believe that we can relocate
  manufacturing or find alternative suppliers for sole sourced components should
  it become necessary. We generally stock higher inventory quantities of sole
  sourced components as safety stocks to mitigate the risk of supply disruption.

Research and Development

Since our inception, we have made substantial investments in research and development
  ranging between $3.4 million and $3.7 million dollars per year over each of
  the past four years. We believe that our future performance will depend in large
  part on our ability to develop significant enhancements to our existing products
  and to develop successful new products for emerging and existing markets.

As of December 31, 2005, 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.

12

---

(Table
  of Contents)

General and Administration

As of December 31, 2005,
  we had nine people responsible for our financial and administrative activities
  including accounting and finance, personnel, and administrative support.

Item 1A. Risk Factors

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

We were profitable in two quarters in 2005, but unprofitable for fiscal year
  2005. Fiscal year 2004 was our first profitable year in our history, but only
  to the extent of $288,000. Prior to 2004 we have 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, and future operating losses could cause
  us to lose the availability of our bank line as a result of becoming non-compliant
  with these covenants.

If third-parties do not produce and sell innovative products with which
  our products are compatible, we may not achieve our sales projections.

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



13

---

(Table
  of Contents)

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

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

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

We are required beginning in the first quarter of 2006 to expense options
  granted under our employee stock plans as compensation, and as a result we expect
  our net income and earnings per share will be reduced, we may have net losses,
  and may find it necessary to change our business practices to attract and retain
  employees.

Historically, we have used stock options as a key component of our employee
  compensation packages. We believe that stock options provide an incentive to
  our employees to maximize long-term stockholder value and, through the use of
  vesting, encourage valued employees to remain with us. The expensing of employee
  stock options will adversely affect our net income and earnings per share and
  will make profitability harder to achieve or make our net losses worse. In particular,
  we would not have been profitable in any of the quarters in fiscal 2004 or 2005
  or for the entire year in 2004 if we had been required to expense options during
  those periods. 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.



14

---

(Table
  of Contents)

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 42 and
  43 percent of our worldwide revenue in fiscal years 2005 and 2004. 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 competitive products. If we lose our relationship
  with Tech Data Corp. or Ingram Micro, Inc., we would experience disruption and
  delays in marketing our products.

If the market for mobile computers 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 2005, 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.



15

---

(Table
  of Contents)

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.





16

---

(Table
  of Contents)

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

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

We have devoted significant research and development resources to design activities
  for Windows-powered mobile products and, more recently, to design activities
  for Palm devices, Smartphones using Windows Mobile and Symbian System 60 and
  80 operating systems, and handheld computers from Research-in-Motion. Such design
  activities have diverted financial and personnel resources from other development
  projects. These design activities are not undertaken pursuant to any agreement
  under which Microsoft, Palm, Symbian or Research-in-Motion 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.





17

---

(Table
  of Contents)

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

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

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

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

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

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.



18

---

(Table
  of Contents)

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

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

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

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

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

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

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.





19

---

(Table
  of Contents)

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

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

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

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

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

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



20

---

(Table
  of Contents)

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
  35 percent of our revenue in the fiscal year 2005 and 37 percent of our revenue
  in the fiscal year 2004. Accordingly, our operating results are subject to the
  risks inherent in export sales, including:

- longer payment cycles;
- unexpected changes in regulatory requirements, import and export restrictions
    and tariffs;
- difficulties in managing foreign operations;
- the burdens of complying with a variety of foreign laws;
- greater difficulty or delay in accounts receivable collection;
- potentially adverse tax consequences; and
- political and economic instability.

Our export sales are predominately denominated in United States dollars and
  in Euros for our sales to European distributors. Accordingly, an increase in
  the value of the United States dollar relative to foreign currencies could make
  our products more expensive and therefore potentially less competitive in foreign
  markets. Declines in the value of the Euro relative to the United States dollar
  may result in foreign currency losses relating to collection of Euro denominated
  receivables.

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

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

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 and a report by our Independent
  Registered Public Accounting Firm addressing this assessment. 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.



21

---

(Table
  of Contents)

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 21, 2006, we had 30,230,709 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 21, 2006, we had 82,330 shares of Series F Preferred Stock outstanding
  that are convertible into 823,300 shares of Common Stock at $0.722 per share.
  These shares convert automatically into common stock on March 21, 2006, if not
  converted sooner by the holder.

As of February 21, 2006, we had 9,174,219 shares subject to outstanding options
  under our stock option plans, and 603,004 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 21, 2006, we had warrants outstanding to purchase a total of
  1,717,674 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. As of February
  21, 2006, warrants were outstanding to purchase 461,023 common shares at $0.722
  per share that expire on March 21, 2006 if not exercised by the holder.

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

During the period from January 1, 2004 through February 21, 2006, our Common
  Stock price fluctuated between a high of $4.40 and a low of $0.88. 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.



22

---

(Table
  of Contents)

Item 2. Properties

We lease a 26,000 square foot office facility in Newark, California under a
  lease expiring in December 2006. This facility houses our headquarters and manufacturing
  operations. We believe that we will be able to extend our lease in our current
  facility at lease expiration or locate acceptable alternative space on terms
  that would not have a material impact on our financial results. We believe that
  our current facilities are sufficient to meet our needs for the foreseeable
  future.Item 3. Legal Proceedings

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

No matters were submitted for vote by security holders during the fourth quarter
  of 2005.





PART
  II

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

Common Stock

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

The quarterly high and low sales prices of our Common Stock, as reported on
  the Nasdaq National Market through February 21, 2006 and for the last two fiscal
  years are as shown below:



|                                                   | Common
        Stock
|------------------------------------------------------ | --------------------
|Quarter
        Ended                                  | High                
|2004                                                  
|March
        31, 2004                                 | $
        4.40      
| June
        30, 2004                             | $
        3.67      
| September
        30, 2004                        | $
        3.00      
| December
        31, 2004                         | $
        2.54      
|2005                                                  
|March
        31, 2005                                 | $
        2.04      
| June
        30, 2005                             | $
        1.54      
| September
        30, 2005                        | $
        1.47      
| December
        31, 2005                         | $
        1.49      
|2006                                                  
| March
        31, 2006(through February 21, 2006) | $
        1.48      



23

---

(Table
  of Contents)

On February 21, 2006,
  the closing sales price for our Common Stock as reported on the Nasdaq National
  Market was $1.14. We had 458 stockholders of record as of February 21, 2006,
  and approximately an additional 8,100 beneficial stockholders. We have not paid
  dividends on our Common Stock, and we currently intend to retain future earnings
  for use in our business and do not anticipate paying dividends in the foreseeable
  future.

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





















Item 6. Selected Consolidated
  Financial Data

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

|                                                                                                        | Year
      Ended December 31,
|------------------------------------------------------------------------------------------------------- | -----------------------------
|(Amounts
      in thousands except per share)                                                           | 2001                         
|Revenue                                                                                                 | $12,330                      
|Net income
      (loss)                                                                                 | (6,063)                      
|Net income
      (loss) applicable to 
            common stockholders          | (6,063)                      
|Net income
      (loss) per share applicable to
            common stockholders | (0.26)                       
|Weighted
      average shares outstanding:                                                              |                              
|      Basic                                                                     | 23,436                       
|      Diluted                                                                   | 23,436                       
|Total
      assets                                                                                      | 18,826                       
|Capital
      lease obligations - long term portion                                                     | 44                           
|Preferred
      stock                                                                                   | --                           
|Total
      stockholders' equity                                                                        | 13,797                       
|Dividends
      and preferred stock accretion                                                           | --                           

|                                                                                                                                                                                                                                                                                                                                                                          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)
          Net loss and net loss applicable to common stockholders in 2001 includes
          amortization of goodwill of $1.5 million. Amortization of goodwill was
          discontinued commencing in the first quarter of 2002 in accordance with
          Statement of Financial Accounting Standards No. 142, "Goodwill and Other
          Intangible Assets."

24

---

(Table
  of Contents)

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

Critical Accounting
  Policies

Our significant accounting policies are described in Note 1 to our consolidated
  financial statements for the year ended December 31, 2005. 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.



25

---

(Table
  of Contents)

Inventory Valuation

Our inventories primarily consist of component parts used to assemble our products
  after we receive orders from our customers. We purchase or have manufactured
  the component parts required by our engineering bill of materials. The timing
  and quantity of our purchases are based on order forecasts, the lead time requirements
  of our vendors, and on economic order quantities. At the end of each reporting
  period, we compare our inventory on hand to our forecasted requirements for
  the next nine-month period, and write off the cost of any inventory that is
  surplus, less any amounts that we believe we can recover from disposal of goods
  that we specifically believe will be saleable past a nine-month horizon. Our
  sales forecasts are based upon historical trends, communications from customers,
  and marketing data regarding market trends and dynamics, which we discuss in
  Item 1, Business. Surplus or obsolete inventory can also be created by changes
  to our engineering bill of materials. Charges for the amounts we record as surplus
  or obsolete inventory are included in cost of revenue.

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,
  2005, 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." 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. 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." Under SFAS 123R, we
  used a binomial lattice valuation model to estimate fair market value of stock
  options unvested and outstanding on January 1, 2006, and will use this valuation
  model for future stock option grants made after this date. 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 market value of
  our stock option grants. We will apply the prospective recognition method and
  implement the provisions of SFAS 123R beginning in the first quarter of 2006.



26

---

(Table
  of Contents)

Overview of our Business

We develop and distribute a broad range of data collection and network connectivity
  products for use with handheld and computing devices running Windows Mobile
  operating system software such as Pocket PCs and industrial ruggedized handheld
  computers, Smartphones (including the Palm Treo and phones running the Symbian
  60 and 80 operating systems) and tablet PCs. The guiding principles that we
  follow in developing products for the mobile computing market are standard form
  factors, low battery power consumption, and ease of use, and we emphasize interoperability
  and quality. We sell both Socket-branded and OEM products. We distribute our
  Socket-branded products through worldwide general distribution channels. Our
  OEM products are sold directly. 65 percent of our products were sold in the
  United States and 35 percent sold in Europe and Asia during 2005.

Our focus is 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 incorporating a handheld device and applications
  software, and thus our sales are dependent upon customers completing their selections
  of handheld devices, choosing or developing their applications and testing the
  solutions. In the second half of 2004 and in 2005, our sales were delayed by
  transitions to new models of Pocket PCs and by upgrades to new versions of the
  Windows Mobile operating system used on Pocket PCs which had the effect of reducing
  the availability of Pocket PCs or related applications during portions of these
  periods. We had two loss quarters during 2005; these were the quarters in which
  availability of Pocket PCs and related applications was most highly impacted
  by these transitions. The largest decrease in our revenue for a particular product
  was from plug-in bar code scanners, which require handheld devices like the
  Pocket PC for their deployment. These types of transitions will affect our business
  from time to time although we do not expect major model or operating system
  changes for the Pocket PC to reoccur during 2006.

We work closely with handheld computing device manufacturers to insure interoperability
  between our products and their handheld devices and we have developed three
  software developer kits to aid and encourage applications software developers
  to integrate our products into their applications. Our software developer kits
  cover data collection, Bluetooth and wireless local area networks (referred
  to as Wi-Fi or wireless LAN). We further support applications development through
  our SVI Program. Strategic Vertical Integrators are Value Added Resellers or
  third-party software application developers who integrate our products into
  their software solutions. There are more than 70 SVI's participating in this
  program addressing vertical markets such as field and sales force automation,
  retail merchandising, asset management, and health care.

We classify our products into four product families: data collection, connectivity,
  OEM and serial.

Our data collection product family, which accounted for 39 percent of our revenue
  in 2005, includes plug-in bar code scanners, cordless bar code scanners and
  plug-in Radio Frequency IDentification (RFID) reader-writers. Our cordless bar
  code scanners connect to handheld computing devices with Bluetooth technology
  and include hand scanners and a recently introduced ring scanner.



27

---

(Table
  of Contents)

The ring scanner is worn on the index finger for hands-free operation. All
  of our data collection products work with and are interchangeable with our SocketScan
  software that enables scanned data to be transferred to handheld computing devices.
  Our products incorporate laser and imager technology using bar code scanning
  engines primarily from Symbol Technologies and Hand Held Products. Most of the
  vertical applications being developed by our SVI's are for mobile data collection
  solutions using bar code scanning or RFID.

Our connectivity product family, which accounted for 34 percent of our revenue
  in 2005, consists of plug-in and cordless products that enable mobile computing
  devices to connect to a variety of networks. The principle products in this
  family provide connections to wireless local area networks, to wide area networks
  by connecting to Bluetooth-enabled mobile phones, and to phone lines. We differentiate
  our products through features in our Bluetooth and Wireless LAN software. During
  2005, we introduced stand-alone management software for Wireless LAN to assist
  users in getting and staying connected.

Our OEM product family, which accounted for 14 percent of our revenue in 2005,
  consists primarily of Bluetooth modules using our Bluetooth software that are
  designed to be embedded in third-party products. The largest market segment
  using these modules is the manufacturers of industrialized ruggedized handheld
  computers. Revenue in this segment was flat in 2005, because growth in sales
  of Bluetooth modules of approximately 30 percent was offset by declines in sales
  of our ASIC chips. We have sold the ASIC chips that we use in our own products
  to manufacturers of wide area network cards for several years, but sales have
  phased out as the higher data transfer speeds of today's phone networks require
  chips with higher throughput speeds. We have announced our intention to add
  wireless LAN modules to our family of OEM products during 2006.

Our serial product family, which accounted for 13 percent of our revenue in
  2005, 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.

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 86
  percent of our products (all but our OEM products) during 2005 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 cheapest, and we typically achieve 50 percent
  gross margins. 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.



28

---

(Table
  of Contents)

Our largest operating cost, more than 50 percent of our operating costs in
  2005, was the cost of our personnel. We increased personnel in 2005 primarily
  in support of our SVI's and developer support programs. Most of our senior employees
  have a variable portion of their compensation based on achieving financial and
  operating goals and objectives. In 2005, our revenue was below our financial
  goals, which reduced the total variable personnel compensation we paid, and
  total personnel costs, including the costs of personnel in operations that are
  charged to cost of sales, grew by only approximately 4.5 percent over 2004.
  Advertising, promotional and sales and marketing travel expense was approximately
  13 percent of our operating costs in 2005, and we increased these expenses over
  2004 as we introduced and promoted new products. These increases were offset
  by a decrease in general and administrative legal expense due to the settlement
  of a patent infringement lawsuit in the third quarter of 2004 and by reduced
  occupancy costs, including a reduction in our rent. In addition, amortization
  of intangibles was lower in 2005, as we completed amortizing intangibles purchased
  several years ago. As a result, our total operating expenses in 2005 were approximately
  $200,000, or 2 percent, lower in 2005 than in 2004.

Our balance sheet at December 31, 2005 included $6.8 million in cash, a current
  ratio (current assets divided by current liabilities) of 1.8 to 1.0, and no
  long term debt. We generated $2.2 million in cash from operations in 2005, of
  which $1.7 million related to working capital changes, including reductions
  in inventories and receivables. We were able to reduce our inventories at December
  31, 2005 by over $700,000 from the preceding year-end, reflecting lower inventory
  stockage requirements due to lower sales levels during the fourth quarter. The
  slow down of enterprise deployments also reduced end-of-quarter sales and related
  receivables that are typical for enterprise deployments, and our receivables
  at December 31, 2005 were over $1 million lower than at December 31, 2004.

We have an experienced management team with five of our eight officers having
  served the Company for more than 11 years, and the remaining officers having
  served at least 3 years. We comply with the standards for good corporate governance
  and received an unqualified opinion on our internal controls for 2005 and 2004
  contained elsewhere within this 10-K.

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 in response to the needs
  of our SVI 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 SVI's partners, our objective is to enable continued
  improvements and expansion in enterprise mobile workforce productivity.

Revenue

We design, manufacture and sell data collection and connectivity products for
  use with mobile electronic devices, including handheld computers, tablet computers,
  notebook computers, and Smartphones. We also design, manufacture and sell serial
  products that connect mobile electronic devices to peripheral and other electronic
  devices, and sell embedded products that are designed to be embedded within
  third-party mobile electronic devices. Total revenue in 2005 was $25.0 million,
  a decrease of 4 percent over 2004 revenue of $26.1 million. Revenue in 2004
  increased 21 percent over 2003 revenue of $21.6 million.



29

---

(Table
  of Contents)

Our products may be classified into four broad product families:

- Our data collection
    products consist of: 1) bar code scanning products that plug into or connect
    wirelessly to handheld computers, tablet computers, notebook computers and
    Smartphones and turn these devices into portable bar code scanners that can
    be used in various retail and industrial workplaces; 2) Radio Frequency Identification
    (RFID) plug-in products that read RFID tags; 3) a combination plug-in bar
    code scanner and RFID reader; and 4) 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 developers in integrating our SocketScan software into their
    applications. Our bar code scanning products include CompactFlash and SDIO
    plug-in bar code scanners for linear and two-dimensional bar code scanning,
    a laser bar code scanning gun connected over a cabled plug-in connection,
    a stand alone hand bar code scanner that connects using the Bluetooth standard
    for short-range wireless connectivity and a ring scanner worn on the index
    finger. Data collection products represented approximately 39 percent, 40
    percent, and 31 percent of our revenue for the years ended December 31, 2005,
    2004, and 2003, respectively.
- Our connectivity
    products are connection devices that can be plugged into standard expansion
    slots in handheld computers, tablet computers, notebook computers and Smartphones
    or connect to these devices over wireless and wired connections. These products
    allow users to connect their devices to the Internet via mobile or wired phone
    services, or to private networks, or to communicate with other electronic
    devices such as desktop computers, other handheld, tablet and notebook computers,
    Smartphones and printers. Wireless connection products include plug-in cards
    using the Bluetooth standard for short-range wireless connectivity, and plug-in
    cards for connecting to local wireless networks using the Wireless LAN 802.11b/g
    (or Wi-Fi) standards along with extensive communications software enabling
    the use of these products. Cable connection products include modems for telephone
    connections and Ethernet cards for local area network connections. Our Bluetooth
    technology products are of two types, those that add Bluetooth technology
    to mobile devices, and those that work with devices that are Bluetooth-enabled.
    Those that add Bluetooth technology include our CompactFlash and SDIO Bluetooth
    plug-in cards, our Bluetooth embedded modules, and our Bluetooth USB adapter
    for Windows notebooks and desktops. Bluetooth and wireless LAN connection
    functions are built into many mobile devices which may reduce the demand for
    these categories of plug-in products. Our Cordless modem connectivity product
    utilizes Bluetooth wireless technology as a connection mechanism to work with
    other Bluetooth-enabled products. Connectivity products represented approximately
    34 percent, 32 percent, and 40 percent of our revenue for the years ended
    December 31, 2005, 2004, 2003, respectively.



30

---

(Table of
  Contents)

- Our OEM embedded
    products and services consist of Bluetooth modules, Wireless LAN modules,
    interface chips, and engineering design services to install these products.
    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.
    Our interface chips allow manufacturers of wide area network cards and other
    devices to transfer information to and from handheld or notebook computers.
    Embedded products and services represented approximately 14 percent, 14 percent,
    and 12 percent of our revenue for the years ended December 31, 2005, 2004,
    2003, respectively.
- Our serial products
    add connection ports to a notebook, tablet or handheld computer that allow
    users to connect these portable computers to standard peripherals or to other
    electronic devices with serial connections over cables or using Bluetooth
    wireless technology for short-range wireless connectivity. Serial products
    represented approximately 13 percent, 14 percent, and 17 percent of our revenue
    for the years ended December 31, 2005, 2004, 2003, respectively.

Our data collection product revenues in 2005 were $9.6 million compared
  to revenue of $10.4 million in 2004 and $6.7 million in 2003. Revenue declines
  in 2005 of $1.0 million were from our primary scanning product, the 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
  by the major PDA manufacturers, slowed sales in the fourth quarter, and may
  continue to slow customer deployment of our data collection products through
  the first quarter of 2006, or longer, until tested with the new operating system.
  Revenue growth in 2004 of $1.1 million was due to our primary scanning product,
  the In-Hand Scan card, growth of $2.9 million from our SDIO In-Hand Scan card
  which began shipping to customers in the fourth quarter of 2003, and growth
  of $0.5 million from our Cordless Hand Scanner which began shipping in the second
  quarter of 2004. Partially offsetting this growth were declines of $0.6 million
  from our bar code laser scanner system and slight declines in sales of our In-Hand
  Scan Imager. Our scanning products are sold both through general distribution
  and through value added resellers who contract with customers to provide scanning
  solutions. Our products are becoming more widely adopted by the value added
  reseller community for lightweight portable scanning.

Our connectivity product revenues in 2005 were $8.7 million compared
  to $8.3 million in 2004 and $8.7 million in 2003. 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 the 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
  or 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 by the major PDA manufacturers slowed sales in the fourth
  quarter, and may continue to slow customer deployment of our connectivity products
  until tested with the new operating system. Revenue declines in 2004 of $1.0
  million resulted from reductions in Cordless GPS product sales including delays
  in the third quarter in shipping our new Cordless GPS receiver with navigation
  kit, and additional declines of $0.4 million were from our Ethernet plug-in
  cards and Digital Phone cards. Partially offsetting these declines were growth
  of $0.5 million from our Secure Digital IO (SDIO) Wireless LAN card which began
  shipping in the third quarter of 2003, and growth of $0.5 million from our modem
  cards and our SDIO Bluetooth plug-in card which began shipping in only modest
  quantities in 2003. Network connection product revenues in the second half of
  2004 were affected by model changeovers of Pocket PCs resulting in order delays
  while new models became available.

31

---

(Table
  of Contents)

Our OEM embedded products and services revenues in 2005 were $3.4 million
  compared to $3.7 million in 2004 and $2.6 million in 2003. Revenue declines
  in 2005 of $0.8 million in our proprietary ASIC chip due to customers choosing
  higher speed 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. Revenue growth in 2004 of $1.4 million was primarily from our embedded
  Bluetooth modules combined with modest growth in revenues from our embedded
  Bluetooth plug-in cards, as more manufacturers adopted our embedded solutions
  for use in ruggedized industrial PDA's, printers and other mobile devices. Partially
  offsetting this growth were declines of $0.3 million in revenues from sales
  of our proprietary ASIC chip.

Our serial product revenues in 2005 were $3.3 million compared to $3.7
  million in 2004 and $3.6 million in 2003. Revenue declines of $0.5 million in
  sales of our standard serial PC Card products were partially offset by increased
  sales of our cordless Bluetooth serial adapter. Standard peripheral connection
  cards are primarily sold to connect peripheral devices or other electronic equipment
  to notebook computers. Our CompactFlash Card product sales in 2005 were relatively
  flat compared to 2004. The revenue increase in 2004 was due primarily to sales
  of our cordless Bluetooth serial adapter which began shipping in the third quarter
  of 2003, partially offset by declines in sales volumes for both our standard
  serial PC Card products and custom serial card sales.

Gross Margins

Gross margins for 2005 were 50% of revenues compared to gross margins of 51%
  in 2004, and 50% in 2003. We generally price our products as a markup from our
  cost, and we offer discount pricing for higher volume purchases. Margin reductions
  in 2005 from volume sales of our data collection products, and overall margin
  reductions across our remaining product lines from a change in product sales
  mix, were partially offset by margin improvements from cost reductions on specific
  products in each of our product lines. Cost reductions in 2004 on several of
  our products, including our Bluetooth modules and Bluetooth cards, our modems,
  and additional cost reductions on our third generation lower cost proprietary
  ASIC chip which we introduced in the third quarter of 2003 resulted in improved
  margins for 2004 compared to 2003. Our average target gross margin is 50%, and
  we expect the gross margin to fluctuate within a narrow range.



32

---

(Table
  of Contents)

Research and Development
  Expense

Research and development
  expense in 2005 was $3.5 million, a decrease of 4% from research and development
  expense in 2004 of $3.7 million. Research and development expense in 2004 increased
  by 6% from research and development expense in 2003 of $3.4 million. Reductions
  in 2005 were primarily attributable to reduced consulting and professional fees
  and outside services related to the timing of development projects. Increases
  in 2004 of $0.4 million, primarily in payroll, outside services, and legal expense
  associated with the development of potential patents, were partially offset
  by lower consulting and professional fees and reduced engineering supplies expense
  from the completion of development of a third generation proprietary ASIC chip
  at the end of the first quarter of 2003.

Sales and Marketing
  Expense

Sales and marketing expense in 2005 was $6.6 million, an increase of 11% compared
  to sales and marketing expense in 2004 of $5.9 million. Sales and marketing
  expense in 2004 increased by 14% compared to sales and marketing expense in
  2003 of $5.2 million. Increases of $0.4 million 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. Increases in 2004 of $0.8 million in total were due to increased
  staffing of sales and marketing personnel beginning in the second half of 2003,
  increases in advertising and promotional activities, travel, and outside sales
  and marketing services. Partially offsetting these increases were reductions
  in occupancy and equipment costs.

General and Administrative
  Expense

General and administrative expense in 2005 was $2.5 million, a decrease of
  17% compared to general and administrative expense in 2004 of $3.1 million.
  General and administrative expense in 2004 increased by 7% compared to general
  and administrative expense in 2003 of $2.9 million. 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. The increase in 2004 was
  due primarily to increased legal and professional fees related to our response
  to the patent infringement complaint filed by Khyber Technologies Corporation
  in June 2003. In July 2004, we purchased the related patent from Khyber Technologies,
  and they agreed to discontinue litigation. Partially offsetting these fees were
  reductions in legal and professional fees related to general corporate matters
  from a lower level of activity in 2004 compared to 2003.

Amortization of Intangibles

On July 15, 2004, the Company acquired U.S. Patent 5,902,991 entitled Card
  Shaped Computer Peripheral Device from Khyber Technologies, Inc. The patent
  covers the design and functioning of plug-in bar code scanners, bar code imagers
  and RFID products. The patent was purchased for $600,000 and has been capitalized
  as an intangible asset. The patent is being amortized on a straight line basis
  over a ten year period. During the first quarter of 2002, the Company acquired
  intangible assets in conjunction with the acquisition of Nokia's CompactFlash
  Bluetooth Card business and related product line technology. These intangible
  assets were valued at $980,000, and consisted of purchased technology and a
  licensing agreement. Estimated useful lives of the acquired assets at the time
  of acquisition ranged from one to three years. At March 31, 2005 all components
  of the acquired Nokia intangibles were fully amortized. Intangible assets of
  $723,750 from a prior acquisition in 2000 consist of developed software and
  technology with estimated lives at the time of acquisition ranging from 2.5
  to 8.5 years. At December 31, 2004, a licensing agreement with a book value
  of $38,000 was reclassified as an intangible asset and is being amortized over
  its remaining life of three years. Total amortization charges for 2005 were
  $0.2 million compared to $0.4 million in 2004 and 2003. The lower amortization
  charges in 2005 are due to components of intangible property becoming fully
  amortized.



33

---

(Table
  of Contents)

Interest Income and
  Other, and Interest Expense

Interest income reflects interest earned on cash balances. Interest income
  was $92,000 in 2005, $37,000 in 2004, and $23,000 in 2003. Increased interest
  income in 2005 reflects higher average levels of cash on hand combined with
  higher rates of return compared to 2004. Higher levels of cash on hand in 2005
  were primarily from changes in working capital balances resulting in a source
  of cash. Increased interest income in 2004 reflects higher average levels of
  cash on hand compared to 2003. Higher levels of cash on hand in 2004 were primarily
  from our offering of common stock in August 2003. Other income of $12,000 in
  2003 was the result of net currency gains on foreign currency contracts partially
  offset by a loss on the Euro note payable to Nokia.

Interest expense in 2005 of $5,000 is related to interest on equipment lease
  financing obligations. Lower interest expense in 2005 reflects the repayment
  of the note payable to Nokia in April 2004. Interest expense in 2004 of $8,000
  is related to interest on equipment lease financing obligations including those
  assumed from 3rd Rail and interest on the outstanding note payable balance due
  to Nokia for acquisition of their Bluetooth CompactFlash Card business and related
  product line technology in March 2002. Lower interest expense in 2004 reflects
  lower note payable balances in 2004 compared 2003. The final payment on the
  note payable to Nokia was made in April 2004.

Income Taxes

There were no provisions for income taxes for the years ended December 31,
  2005, 2004, and 2003. We were not profitable in 2005, profitable in 2004, and
  not profitable in 2003 and all prior periods. 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 Dividend
  and Accretion of Preferred Stock

Preferred stock dividends of $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. Preferred stock dividends of $136,000 in 2003 reflect dividends accrued
  on Series F Preferred Stock and dividends accrued at the rate of 12% per annum
  on Series E redeemable convertible preferred stock issued in October 2002. Dividends
  for Series F were paid in cash subsequent to the end of each of the quarters
  in 2005 and 2004. In 2003, dividends for Series F for the first, third, and
  fourth quarters were paid in cash, and for the second quarter were paid in Common
  Stock. Dividends for Series E were paid in cash for each of the three quarters
  in 2003 until the Series E was fully converted. Preferred stock accretion was
  $565,300 in 2003 arising from the accounting for the redemption of the Series
  E issuance, and a one time accretion charge in the first quarter of 2003 of
  $296,500 reflecting the discount from market after giving effect to an allocation
  to the investor warrants of $296,500 of the proceeds of the Series F issuance.



34

---

(Table
  of Contents)

Series F Preferred Stock shares convert automatically into common stock on
  March 21, 2006 if not converted sooner by the holder.

Quarterly Results of
  Operations

The following table sets forth summary quarterly statements of operations data
  for each of the quarters in 2004 and 2005. 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 shareamounts)                                   | Mar 31,              
|2004                                                                                    | 2004                 
|Summary
      Quarterly Data:                                                          
|Revenue                                                                                 | $
        6,743      
|Cost of
      revenue                                                                   | 3,312                
|Gross
      profit                                                                      | 3,431                
|Operating
      expenses:                                                              
| 
      Research and development                                                    | 924                  
| 
      Sales and marketing                                                         | 1,519                
| 
      General and administrative                                                  | 847                  
|  Amortization of intangibles                                                       | 92                   
|Total
      operating expenses                                                          | 3,382                
|Interest
      income (expense), net                                                    | 4                    
|Net income
      (loss)                                                                 | 53                   
|Preferred
      stock dividends                                                         | (13)                 
|Net income
      (loss) applicable to common stockholders                               | $
        40         
|Basic and diluted
        net income (loss) per share applicable to common stockholders | $
        0.00       

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.

35

---

(Table
  of Contents)

Liquidity and Capital
  Resources

We were profitable in two quarters in 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.

Cash provided by operating activities was $2.2 million in 2005 compared to
  cash used in operating activities of $0.6 million in 2004 and $0.7 million in
  2003. Changes in working capital balances resulted in a source of cash in 2005,
  partially offset by financing our net losses of $0.2 million. The use of cash
  in 2004 and 2003 resulted from changes in working capital balances partially
  offset by income in 2004, and from financing our net losses of $1.2 million
  in 2003. Adjustments for non-cash items, including depreciation, amortization
  of intangibles, gains and losses on foreign currency forward exchange contracts,
  foreign currency translation losses, and changes in deferred rent, totaled $0.7
  million in 2005, and $0.9 million in each of 2004 and 2003. Changes in working
  capital balances resulted in a source of cash of $1.7 million in 2005, and a
  use of cash of $1.9 million in 2004 and $0.4 million in 2003. 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. Changes
  in working capital balances during 2003 reflect increased accounts receivable
  balances from higher levels of shipments in the fourth quarter of 2003 and lower
  accounts payable balances due to reductions in deferred payments, partially
  offset by reductions in inventory stock as we transitioned to our third generation
  proprietary ASIC chip and phased out existing stock, increases in deferred revenue
  due to higher levels of shipments in the later half of December of 2003, and
  reductions in prepaid expenses.

Cash used in investing activities was $0.6 million in 2005, $1.0 million in
  2004, and $0.3 million in 2003. Investing activities in 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, and the investing activities
  in 2003, reflect the costs of new computer hardware and software, and tooling
  costs.

Cash used in financing activities was $0.6 million in 2005 compared to cash
  provided by financing activities of $1.0 million in 2004 and $4.3 million in
  2003. 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. During 2003 we completed two private placement
  financings, our Series F convertible preferred stock, which provided $1.5 million
  net of issuance costs, and a Common Stock financing, which provided $3.7 million
  net of issuance costs. Additional cash was provided by financing activities
  in 2003 from the exercise of $0.7 million in stock options and warrants, and
  from gains on the sale of foreign exchange contracts of $0.3 million entered
  into in conjunction with the Euro note payable to Nokia. During 2003 we made
  payments of $1.3 million on the note payable to Nokia, $0.3 million in net payments
  against our bank revolving credit line, $0.2 million in redemption payments
  of our Series E redeemable convertible preferred stock, and $0.1 million in
  combined dividend payments on our Series E and Series F preferred stock. At
  the end of 2003 we drew $1.6 million in cash against our bank credit line which
  we repaid in January 2004. Net cash from using our bank line of credit was $0.4
  million used in 2003.

36

---

(Table
  of Contents)

Our cash balances at December 31, 2005 were $6.8 million, including cash of
  $2.3 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 3, 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, 2006. 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 the cost of 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, 2005 are outlined in the table
  below:

|                                                                     | Payments
        Due by Period
|-------------------------------------------------------------------- | ------------------------------
|Contractual
        Obligations                                      | Total                         
|Capital
      leases                                                 | $
        18,000              
|Operating
      leases                                               | 379,000                       
|Unconditional
      purchase obligations with contract manufacturers | 938,000                       
|Total
      contractual cash obligations                             | $
        1,335,000           



37

---

(Table
  of Contents)

Off-Balance Sheet Arrangements

As of December 31, 2005, we have no off-balance sheet arrangements as defined
  in Item 303 of Regulation S-K.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued SFAS No.
  123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS
  No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supercedes
  APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires
  all share-based awards to employees, including grants of employee stock options,
  to be recognized in the financial statements based on their fair values. The
  pro forma disclosures previously permitted under SFAS 123 will no longer be
  an alternative to financial statement recognition. Under SFAS 123R, we must
  determine the appropriate fair value model to be used for valuing share-based
  awards, the amortization method for compensation cost, and the transition method
  to be used at date of adoption. The transition methods include modified-prospective
  and modified-retrospective adoption alternatives. Under the modified-retrospective
  method, prior periods may be restated either as of the beginning of the year
  of adoption or for all periods presented. The modified-prospective method requires
  that compensation expense be recorded for all unvested stock options and restricted
  stock at the beginning of the first quarter of adoption of SFAS 123R, while
  the modified-retrospective method would record compensation expense for all
  unvested stock options and restricted stock beginning with the first period
  restated.

On January 1, 2006, we adopted SFAS 123R. Under SFAS 123R, we will use a binomial
  lattice valuation model to estimate the fair value of stock options granted
  on or after this date. 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 market value of our stock option grants. We will
  apply the prospective recognition method and implement the provisions of SFAS
  123R beginning in the first quarter of 2006. The adoption of SFAS 123R is estimated
  to result in a compensation charge for fiscal year 2006 of approximately $1.2
  million based on the stock options outstanding at December 31, 2005.



38

---

(Table
  of Contents)

Item 7A. Quantitative
  and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily
  to invested cash. Our cash is invested in short-term money market investments
  backed by U.S. Treasury notes and other investments that mature within one year
  and whose principal is not subject to market rate fluctuations. Accordingly,
  interest rate declines would adversely affect our interest income but would
  not affect the carrying value of our cash investments. Based on a sensitivity
  analysis of our cash investments during the quarter ended December 31, 2005,
  a decline of 1% in interest rates would reduce our quarterly interest income
  by approximately $11,300.

Our bank credit line facilities of up to $4.0 million have variable interest
  rates based upon the lender's index rate plus 0.5% for both the domestic line
  (up to $2.5 million) and the international line (up to $1.5 million). Accordingly,
  interest rate increases would increase our interest expense on outstanding credit
  line balances. We utilized our credit line facility only at the end of each
  quarter in 2005 and 2004, 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, 2005, an
  adverse change of 10% in exchange rates would result in a decrease in our net
  income for the fourth quarter of approximately $55,200, if left unprotected.
  For the fourth quarter of 2005 the total net adjustment for the effects of changes
  in foreign currency on cash balances, collections, payables, and derivatives
  was a net gain of $ 5,500. We hedge a 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.

39

---

(Table
  of Contents)

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 LLPINDEPENDENT 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,
  2005 and 2004, and the related consolidated statements of operations, redeemable
  preferred stock and stockholders' equity, and cash flows for the years ended
  December 31, 2005 and 2004. We also have audited management's assessment, included
  in the accompanying Management's Report on Internal Control Over Financial Reporting,
  that Socket Communications, Inc. maintained effective internal control over
  financial reporting as of December 31, 2005, based on criteria set forth by
  the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
  in Internal Control - Integrated Framework. Socket Communications, Inc.'s
  management is responsible for these financial statements, for maintaining effective
  internal control over financial reporting, and for its assessment of the effectiveness
  of internal control over financial reporting. Our responsibility is to express
  an opinion on these financial statements, an opinion on management's assessment,
  and an opinion on the effectiveness of the Company's internal control over financial
  reporting based on our 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 and whether effective
  internal control over financial reporting was maintained in all material respects.
  Our audit of financial statements included examining, on a test basis, evidence
  supporting the amounts and disclosures in the financial statements, assessing
  the accounting principles used and significant estimates made by management,
  and evaluating the overall financial statement presentation. Our audit of internal
  control over financial reporting included obtaining an understanding of internal
  control over financial reporting, evaluating management's assessment, testing
  and evaluating the design and operating effectiveness of internal control, and
  performing such other procedures as we considered necessary in the circumstances.
  We believe that our audits provide a reasonable basis for our opinions.

40

---

(Table
  of Contents)

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

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

In our opinion, the consolidated financial statements referred to above present
  fairly, in all material respects, the financial position of Socket Communications,
  Inc. as of December 31, 2005 and 2004, and the consolidated results of its operations
  and its cash flows for the years ended December 31, 2005 and 2004 in conformity
  with accounting principles generally accepted in the United States of America.
  Also in our opinion, management's assessment that Socket Communications, Inc.
  maintained effective internal control over financial reporting as of December
  31, 2005, is fairly stated, in all material respects, based on criteria set
  forth by the Committee of Sponsoring Organizations of the Treadway Commission
  (COSO) in Internal Control - Integrated Framework. Furthermore, in our
  opinion, Socket Communications, Inc. maintained, in all material respects, effective
  internal control over financial reporting as of December 31, 2005, based on
  criteria set forth by the Committee of Sponsoring Organizations of the Treadway
  Commission (COSO) in Internal Control - Integrated Framework.



/s/ Moss Adams LLP

San Francisco, California
  March 6, 2006



41

---

(Table
  of Contents)

REPORT OF ERNST & YOUNG LLP 
  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying
  consolidated statements of operations, redeemable preferred stock and stockholders'
  equity, and cash flows for the year ended December 31, 2003. These financial
  statements are the responsibility of the Company's management. Our responsibility
  is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
  Accounting Oversight Board (United States). Those standards require that we
  plan and perform the audit to obtain reasonable assurance about whether the
  financial statements are free of material misstatement. An audit includes consideration
  of internal control over financial reporting as a basis for designing audit
  procedures that are appropriate in the circumstances, but not for the purpose
  of expressing an opinion on the effectiveness of the Company's internal control
  over financial reporting. Accordingly, we express no such opinion. An audit
  also includes examining, on a test basis, evidence supporting the amounts and
  disclosures in the financial statements, assessing the accounting principles
  used and significant estimates made by management, and evaluating the overall
  financial statement presentation. We believe that our audit provides a reasonable
  basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
  fairly, in all material respects, the consolidated results of operations and
  cash flows of Socket Communications, Inc. for the year ended December 31, 2003,
  in conformity with U.S. generally accepted accounting principles.



/s/ Ernst & Young LLP

San Jose, California
  February 11, 2004

42

---

(Table
  of Contents)



|SOCKET
        COMMUNICATIONS, INC. 
        CONSOLIDATED BALANCE SHEETS                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|ASSETS                                                                                                                                                                                                                
|Current assets:                                                                                                                                                                                                       
|Cash
        and cash equivalents                                                                                                                                                                                     
|Accounts
        receivable, net of allowance for doubtful accounts of 
          $118,651 at December 31, 2005 and $127,300 at December 31,
        2004                                                             
|Inventories                                                                                                                                                                                                           
|Prepaid
        expenses and
        other current assets                                                                                                                                                             
|Total
        current assets                                                                                                                                                                                          
|                                                                                                                                                                                                                  
|Property and equipment:                                                                                                                                                                                               
|Machinery
        and office equipment                                                                                                                                                                                
|Computer
        equipment                                                                                                                                                                                            
|                                                                                                                                                                                                                      
|Accumulated
        depreciation                                                                                                                                                                                      
|Property
        and equipment, net                                                                                                                                                                                   
|                                                                                                                                                                                                                      
|Intangible
      technology, net                                                                                                                                                                                      
|Goodwill                                                                                                                                                                                                              
|Other
        assets                                                                                                                                                                                                  
|Total
        assets                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|LIABILITIES
        AND STOCKHOLDERS' EQUITY                                                                                                                                                                          
|Current liabilities:                                                                                                                                                                                                  
|Accounts
      payable                                                                                                                                                                                                
|Accrued
      expenses                                                                                                                                                                                                
|Accrued
        payroll and related expenses                                                                                                                                                                          
|Bank
        line of credit                                                                                                                                                                                           
|Deferred
        income on shipments to distributors                                                                                                                                                                  
|Current
      portion of deferred rent and capital leases                                                                                                                                                             
|Total
        current liabilities                                                                                                                                                                                     
|                                                                                                                                                                                                                  
|Long
      term portion of deferred rent and capital leases                                                                                                                                                           
|Commitments and contingencies                                                                                                                                                                                         
|Stockholders' equity:                                                                                                                                                                                                 
|Series
        F Convertible Preferred Stock, $0.001 par value: 
          Authorized shares - 276,269, Issued and outstanding shares
        - 
          82,330 at December 31, 2005 and 83,823 at December 31, 2004
|Common
        stock, $0.001 par value: Authorized shares - 100,000,000
          Issued and outstanding shares - 30,223,709 at December 31, 2005
          and 30,141,444 at December 31, 2004                   
|Additional
        paid-in capital                                                                                                                                                                                    
|Accumulated
        deficit                                                                                                                                                                                           
|Total
        stockholders' equity                                                                                                                                                                                    
|Total
        liabilities and stockholders' equity                                                                                                                                                                    

See accompanying
  notes.

43

---

(Table
  of Contents)



|SOCKET COMMUNICATIONS, INC.
        CONSOLIDATED STATEMENTS OF OPERATIONS
|-------------------------------------------------------------------------
|                                                                         
|                                                                         
|                                                                         
|Revenues                                                                 
|Cost of revenue                                                          
|Gross profit                                                             
|Operating expenses:                                                      
|Research and development                                                 
|Sales and marketing                                                      
|General and administrative                                               
|Amortization of intangible
        technology                            
|Total
        operating expenses                                         
|Operating income (loss)                                                  
|Interest income
      and other                                          
|Interest expense                                                         
|Net income (loss)                                                        
|Preferred stock dividends                                                
|Preferred stock accretion                                                
|Net income (loss) applicable to
      common stockholders                
|Net income (loss) per share applicable
      to common stockholders      
|      Basic                                      
|      Diluted                                    
|Weighted average shares outstanding:                                     
|      Basic                                      
|      Diluted                                    

See accompanying notes.





44

---

(Table
  of Contents)



|SOCKET COMMUNICATIONS, INC.
        CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK 
        AND STOCKHOLDERS' EQUITY                        
|--------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                  
|                                                                                                                                                  
|Balance at December 31, 2002                                                                                                                      
|Exercise of warrants                                                                                                                              
|Exercise of stock options                                                                                                                         
|Issuance of common stock                                                                                                                          
|Issuance of common stock warrants                                                                                                                 
|Issuance
      of Series F convertible preferred stock including 
      stock accretion                                                           
|Issuance
      of common stock warrants in conjunction with Series F
      financing                                                              
|Series E stock accretion to redemption
        value                                                                                              
|Conversion of Series E redeemable convertible
        preferred
        stock to common stock                                                     
|Redemption of Series E redeemable convertible
        preferred
        stock for cash                                                            
|Conversion of Series F convertible preferred
        stock to common stock                                                                        
|Dividends paid/payable in cash on Series
        E redeemable
        convertible preferred stock and Series F convertible
        preferred stock
|Dividends paid in common stock on Series
        F convertible
        preferred stock                                                            
|Net loss and comprehensive net loss                                                                                                               
|Balance at December 31, 2003                                                                                                                      
|Exercise of warrants                                                                                                                              
|Exercise of stock options                                                                                                                         
|Conversion of Series F convertible preferred
        stock to common stock                                                                        
|Dividends paid in cash on Series F convertible
        preferred stock                                                                            
|Net income and comprehensive net income                                                                                                           
|Balance at December 31, 2004                                                                                                                      
|Exercise of stock options                                                                                                                         
|Charge for compensatory stock options                                                                                                             
|Conversion of Series F convertible preferred
        stock to common stock                                                                        
|Dividends paid in cash on Series F convertible
        preferred stock                                                                            
|Net loss and comprehensive net loss                                                                                                               
|Balance at December 31, 2005                                                                                                                      

See accompanying
  notes.

45

---

(Table
  of Contents)



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

See accompanying
  notes.

46

---

(Table
  of Contents)

NOTE 1 - Summary of
  Significant Accounting Policies

Organization and BusinessSocket Communications, Inc. ("Socket" or the "Company") designs,
  manufactures and sells data collection and connectivity products for mobile
  electronic devices. The Company's data collection products are designed to collect
  data on handheld computers, tablet computers, notebook computers and 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'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 $866,095, $969,492, and $1,132,563, in 2005, 2004, and 2003, 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, 2005 and 2004, all of the Company's cash and cash equivalents consisted
  of amounts held in demand and money market deposits in banks.

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

47

---

(Table
  of Contents)

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, 2005,
  2004, and 2003:





|Year | Balance
        at Beginning of Year | Charged
        to Costs and Expenses | Amounts
        Written Off | Balance
        at End of Year
|---- | ------------------------------------ | ------------------------------------- | --------------------------- | ------------------------------
|2005 | $127,300                             | $
        --                          | $
        8,649             | $118,651                      
|2004 | $113,244                             | $
        47,953                      | $
        33,897            | $127,300                      
|2003 | $100,761                             | $
        28,731                      | $
        16,248            | $113,244                      



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

|                                 | December 31,
|-------------------------------- | ------------
|                                 | 2005        
|Raw materials and sub-assemblies | $ 1,910,653 
|Finished goods                   | 284,741     
|                                 | $ 2,195,394 

48

---

(Table
  of Contents)

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

Goodwill and Other Intangible
  Assets Review
  Goodwill and intangible assets are accounted for in accordance with Statement
  of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
  (FAS 142). The Company assesses the impairment of long-lived assets, including
  goodwill and intangibles on an 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, 2005, management determined that there is no impairment of goodwill.

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

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

49

---

(Table
  of Contents)

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 $825,238, $790,730, and $504,214, in advertising costs during 2005,
  2004, and 2003, respectively.

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

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



50

---

(Table
  of Contents)

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,
|----------------------------------------------------------------------------------------------- | ------------------------
|                                                                                                | 2005                    
|Numerator:                                                                                      |                         
|Net
      income (loss)                                                                         | $ (166,675)             
|Preferred stock dividends
        and accretion                                                 | (48,490)                
|Net income (loss) applicable to
      common stockholders                                       | $ (215,165)             
|                                                                                               
|Denominator:                                                                                    |                         
|Weighted average common shares outstanding
      used in computing net income (loss) per share: |                         
|Basic                                                                                           | 30,181,266              
|Dilutive potential common shares                                                                | --                      
|Diluted                                                                                         | 30,181,266              
|Net income (loss) per share applicable
      to common stockholders:                            |                         
|Basic                                                                                           | $ (0.01)                
|Diluted                                                                                         | $ (0.01)                

For the 2005 and 2003 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 9,979,793, and 7,785,220,
  shares of Common Stock in 2005 and 2003, 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.

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

51

---

(Table
  of Contents)

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:

|                                                                                         | 2005                  | 2004                  | 2003                 
|---------------------------------------------------------------------------------------- | --------------------- | --------------------- | ---------------------
|Net income (loss)
      applicable to common shareholders, as reported                   | $
        (215,165)   | $
        287,778     | $
        (1,951,613)
|Stock-based employee
      compensation expense determined under fair value based method | (2,317,132)           | (1,763,002)           | (2,409,731)          
|Pro forma net loss
      applicable to common shareholders                               | $
        (2,532,297) | $
        (1,475,224) | $
        (4,361,344)
|                                                                                         |                       |                       |                      
|Basic
      and diluted net loss per share, as reported                                  | $
        (0.01)      | $
        0.01        | $
        (0.07)     
|Pro forma
      basic and diluted net loss per share                                     | $
        (0.08)      | $
        (0.05)      | $
        (0.17)     

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  | 2003 
|---------------------------------- | ----- | ----- | -----
|Risk-free interest
      rate (%)  | 4.02% | 3.13% | 2.85%
|Dividend yield                     | --    | --    | --   
|Volatility factor                  | 0.8   | 1.3   | 1.4  
|Expected option life
      (years) | 4.6   | 4.5   | 4.5  

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.

52

---

(Table
  of Contents)

Recent Accounting Standards
  In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
  (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No.
  123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supercedes APB
  Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires
  all share-based awards to employees, including grants of employee stock options,
  to be recognized in the financial statements based on their fair values. The
  pro forma disclosures previously permitted under SFAS 123 will no longer be
  an alternative to financial statement recognition. Under SFAS 123R, the Company
  must determine the appropriate fair value model to be used for valuing share-based
  awards, the amortization method for compensation cost, and the transition method
  to be used at date of adoption. The transition methods include modified-prospective
  and modified-retrospective adoption alternatives. Under the modified-retrospective
  method, prior periods may be restated either as of the beginning of the year
  of adoption or for all periods presented. The modified-prospective method requires
  that compensation expense be recorded for all unvested stock options and restricted
  stock at the beginning of the first quarter of adoption of SFAS 123R, while
  the modified-retrospective methods would record compensation expense for all
  unvested stock options and restricted stock beginning with the first period
  restated.

On January 1, 2006, the Company adopted SFAS 123R. Under SFAS 123R, the Company
  will use a binomial lattice valuation model to estimate the fair value of stock
  options granted on or after this date. 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 market value of our stock option grants.
  The Company will apply the prospective recognition method and implement the
  provisions of SFAS 123R beginning in the first quarter of 2006. The adoption
  of SFAS 123R is estimated to result in a compensation charge for fiscal year
  2006 of approximately $1.2 million based on the stock options outstanding at
  December 31, 2005.

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, 2005,
  2004 and 2003 is as follows:

|                               | Years
        Ended December 31,
|------------------------------ | --------------------------------
|Revenues:
      (in thousands) | 2005                            
|United
      States            | $
        16,206                
|Europe                         | 6,142                           
|Asia and
      rest of world   | 2,686                           
|                           | $
        25,034                



53

---

(Table
  of Contents)

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

Information regarding product families for the years ended December 31, 2005,
  2004 and 2003 is as follows:

|                                     | Years
        Ended December 31,
|------------------------------------ | --------------------------------
|Revenues:
      (in thousands)       | 2005                            
|Data collection
      products       | $
        9,628                 
|Connectivity
      products          | 8,692                           
|Embedded
      products and services | 3,444                           
|Serial
      products                | 3,270                           
|                                 | $
        25,034                

Major Customers
  Customers who accounted for at least 10% of total revenues in fiscal 2005, 2004,
  and 2003 were as follows:

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

NOTE 2 - Intangible
  Technology

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

During the first quarter of 2002, the Company acquired intangible assets in
  conjunction with the acquisition of Nokia's CompactFlash Bluetooth Card business
  and related product line technology. These intangible assets were valued at
  $980,000, and consisted of purchased technology and a licensing agreement. Estimated
  useful lives of the acquired assets at the time of acquisition ranged from one
  to three years. During the first quarter of 2005, the Company completed amortization
  of all acquired Nokia intangibles. At December 31, 2005, intangible assets of
  $723,750 from a prior acquisition in 2000 consist of developed software and
  technology with estimated lives at the time of acquisition ranging from 2.5
  to 8.5 years. At December 31, 2004, a licensing agreement with a book value
  of $38,000 was reclassified as an intangible asset and is being amortized over
  its remaining life of three years.



54

---

(Table
  of Contents)

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

|                                          | Gross
        Assets | Accumulated
        Amortization | Net              
|----------------------------------------- | -------------------- | -------------------------------- | -----------------
|Patent                                    | $ 600,000            | $
        (90,000)               | $
        510,000
|Bluetooth CompactFlash
        technology | 900,000              | (900,000)                        | --               
|Project management
        tools          | 570,750              | (352,522)                        | 218,228          
|Schematic library                         | 153,000              | (153,000)                        | --               
|Licensing agreement                       | 114,342              | (93,633)                         | 20,709           
|Intangible
        technology             | $ 2,338,092          | $
        (1,589,155)            | $
        748,937

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

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

Based on identified intangible assets recorded at December 31, 2005 and assuming
  no subsequent impairment of the underlying assets, the annual amortization expense
  is expected to be as follows:

|Year                    | Amount           
|----------------------- | -----------------
|2006                    | $
        140,446
|2007                    | 134,557          
|2008                    | 127,147          
|2009                    | 76,787           
|2010                    | 60,000           
|2011
        and beyond | 210,000          
|                        | $
        748,937

NOTE 3 -
  Series F Convertible Preferred Stock

On March 21, 2003, the Company sold 276,269 units at a price of $7.22 per unit
  (total of $2,000,000 gross cash proceeds) in a private equity placement. Each
  unit consisted of one share of the Company's Series F convertible preferred
  stock (the "Series F Preferred Stock") and a three-year warrant to purchase
  three shares of the Company's common stock. Two directors of the Company invested
  an aggregate of $115,000 in the financing. Each share of Series F Preferred
  Stock is convertible, in whole or in part, into 10 shares of common stock at
  the option of the holder at any time for a period of three years following the
  date of sale, with a mandatory conversion date on March 21, 2006. The originally
  issued Series F Preferred Stock was convertible into a total of 2,762,690 shares
  of common stock at a conversion price of $0.722 per share, subject to certain
  adjustments. An additional 828,807 shares of common stock were issuable upon
  exercise of the originally issued warrants at an exercise price of $0.722 per
  share. In addition, the Company issued five-year warrants to the placement agent
  to acquire up to 718,300 shares of common stock at $0.722 per share. Using a
  Black-Scholes valuation model with the following assumptions: 0.0% dividend
  yield rate, risk free interest rates of 1.9% and 2.81%, respectively, for the
  investors and placement agent, $0.73 per share fair value of common stock, $0.722
  exercise price, a life of three years and five years, respectively, for the
  investors and placement agent, and a volatility of 0.911, $296,494 of the proceeds
  were attributed to the warrants issued to investors, and the warrants issued
  to the placement agent were valued at $366,333, which was included in the cost
  of the financing. The Company recorded a one-time accretion charge of $296,494
  in the first quarter of 2003 reflecting the discount from market resulting from
  the allocation of the proceeds to the investor warrants.

55

---

(Table
  of Contents)

The Series F Preferred Stock automatically converts into common stock on March
  21, 2006 and automatically converts earlier in the event of a merger or consolidation
  of the Company, subject to certain conditions. The holders of Series F Preferred
  Stock have voting rights equal to the number of shares of common stock issuable
  upon conversion. In the event of liquidation, holders of Series F Preferred
  Stock are entitled to liquidation preferences over common stockholders equal
  to their initial investment plus all accrued but unpaid dividends. Dividends
  accrue at the rate of 8% per annum and are payable quarterly in cash or in common
  stock, at the option of the Company. Dividends for 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. Dividends for 2003 were $89,273 and were paid in cash and common stock
  resulting in the issuance of 26,265 shares. During the third and fourth quarters
  of 2003, holders of 183,363 shares of Series F Preferred Stock elected to convert
  their shares into 1,833,630 shares of common stock.

NOTE 4 - Series E Redeemable Convertible Preferred Stock

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

Dividends were $47,090 for the year ended December 31, 2003 which were paid
  in cash. Accretion to the redemption value of the Series E preferred stock was
  $268,813 for 2003. The Company elected to make monthly redemption payments on
  the Series E preferred stock totaling $200,000 during the first quarter of 2003.
  During the second quarter of 2003, the Series E holder elected to convert 53,366
  shares of preferred stock resulting in the issuance of 613,400 shares of common
  stock during the quarter. During the third quarter of 2003, the Series E holder
  elected to convert the remaining 26,634 shares of preferred stock resulting
  in the issuance of 306,140 shares of common stock during the quarter.



56

---

(Table
  of Contents)

NOTE 5 - Common Stock
  Financing

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

NOTE 6
  - 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
  3, 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 on December
  31, 2005 were 7.75% for both the domestic and international lines. 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. At December
  31, 2004, outstanding amounts borrowed under the lines were $1,790,218 and $1,159,054,
  respectively, which were the approximate amounts available on the lines. These
  amounts outstanding at December 31, 2004 were repaid in January 2005. The Company
  used the credit facility only at the end of each of the quarters in fiscal years
  2005 and 2004. 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 March 31, 2006. The Company was in compliance
  with the tangible net worth requirements at the end of fiscal years 2005 and
  2004.

NOTE 7 - 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, 2005, property
  and equipment with a cost of $37,333 were subject to such financing arrangements.
  Related accumulated amortization at December 31, 2005 amounted to $19,342. Future
  minimum payments under capital lease and equipment financing arrangements as
  of December 31, 2005, are as follows:

57

---

(Table
  of Contents)

|2006                                        | $
        10,266
|------------------------------------------- | ----------------
|2007                                        | 8,556           
|Total
      minimum payments                | 18,822          
|Less amount
      representing interest     | (831)           
|Present
      value of net minimum payments | 17,991          
|Less current
      portion                  | (9,619)         
|Long-term
      portion                     | $
        8,372 

NOTE 8 - Commitments

The Company's headquarters
  are operated under a five-year noncancelable operating lease which expires in
  December 2006. Future minimum lease payments under all operating leases are
  $379,037 for fiscal 2006.

Rental expense under all operating leases was $377,427, $470,524,
  and $625,624, for each of the years ended December 31, 2005, 2004, and 2003,
  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 $0.9 million
  in 2006.

NOTE 9 - Stock Option/Stock
  Issuance Plan

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

The 1995 Plan
  The 1995 Plan 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.



58

---

(Table
  of Contents)

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

|                                      |                          | Outstanding
        Options                      
|------------------------------------- | ------------------------ | -------------------------------------------------
|Options
        Available For Grant   | Number
        of Shares | Weighted
        Average 
        Price Per Share
|
|Balance
      at December 31, 2002    | 672,342                  | 3,773,083                                        
|Increase
      in shares authorized   | 964,559                  | --                                               
|Granted                               | (1,119,200)              | 1,119,200                                        
|Canceled                              | 72,187                   | (72,187)                                         
|Exercised                             | --                       | (134,831)                                        
|Balance
      at December 31, 2003    | 589,888                  | 4,685,265                                        
|Increase
        in shares authorized | 1,193,421                | --                                               
|Granted                               | (1,022,500)              | 1,022,500                                        
|Canceled                              | 212,278                  | (212,278)                                        
|Exercised                             | --                       | (105,372)                                        
|Transferred
        to 2004 Plan      | (973,087)                | --                                               
|Balance
      at December 31, 2004    | --                       | 5,390,115                                        
|Canceled                              | 227,212                  | (227,212)                                        
|Exercised                             | --                       | (67,335)                                         
|Transferred
        to 2004 Plan      | (227,212)                | --                                               
|Balance
      at December 31, 2005    | --                       | 5,095,568                                        

The weighted average fair value of options granted during 2004 and 2003 under
  the 1995 Plan was $2.76 and $0.73, respectively. As of December 31, 2005, 2004
  and 2003, options to purchase 4,151,892, 3,460,694, and 2,291,396 shares, respectively,
  under the 1995 Plan were exercisable at weighted average exercise prices of
  $1.85, $1.98, and $2.05, respectively.

The outstanding and exercisable options under the 1995 Plan at December 31,
  2005 presented by price range are as follows:

|                                          | Options
        Outstanding           | Options
        Exercisable                    
|----------------------------------------- | ------------------------------------- | -----------------------------------------------
|Range
        of 
        Exercise Prices | Number
        of Options Outstanding | Weighted
        Average Remaining Life (Years)
|$
        0.44 - $ 0.69                   | 263,937                               | 3.00                                           
|$
        0.70 - $ 0.76                   | 1,428,284                             | 7.17                                           
|$
        0.97 - $ 1.29                   | 1,275,892                             | 6.08                                           
|$
        1.50                            | 17,708                                | 3.92                                           
|$
        2.28 - $ 3.38                   | 2,107,747                             | 6.58                                           
|$
        7.75                            | 2,000                                 | 4.00                                           
|$
        0.44 - $ 7.75                   | 5,095,568                             | 6.42                                           



59

---

(Table
  of Contents)

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

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

|                                   | Outstanding
        Options                         
|---------------------------------- | ----------------------------------------------------
|                                   | Options
        
        Available
        For Grant
|Balance
      at December 31, 2002 | 37,922                                              
|Exercised                          | --                                                  
|Balance
      at December 31, 2003 | 37,922                                              
|Canceled                           | 142,732                                             
|Balance
      at December 31, 2004 | 180,654                                             
|Canceled                           | 30,000                                              
|Balance
      at December 31, 2005 | 210,654                                             

As of December 31, 2005, 2004, and 2003, options to purchase 1,072,751, 1,094,418,
  and 1,010,712 shares were exercisable under the 1999 Plan at weighted average
  exercise prices of $2.78, $2.79, and $2.75, respectively. The outstanding and
  exercisable options at December 31, 2005 under the 1999 Plan presented by price
  range are as follows:

|                                 | Options
        Outstanding           | Options
        Exercisable                                               
|-------------------------------- | ------------------------------------- | --------------------------------------------------------------------------
|Range
        of Exercise Prices | Number
        of Options Outstanding | Weighted
        
        Average 
        Remaining Life 
        (Years)
|$ 0.56                           | 211,009                               | 3.50                                                                      
|$
        2.28                   | 40,000                                | 5.58                                                                      
|$
        3.38                   | 821,742                               | 5.08                                                                      
|$
        0.56 - $ 3.38          | 1,072,751                             | 4.75                                                                      

The 2004 Plan
  The 2004 Plan provides for the grant of incentive stock options, nonstatutory
  stock options, restricted stock, stock appreciation rights, and performance
  awards, to employees, directors, and consultants of the Company. Upon ratification
  of the 2004 Plan by the shareholders in June 2004, shares in the 1995 Plan that
  had been reserved but not issued, as well as any shares issued that would otherwise
  return to the 1995 Plan as a result of termination of options or repurchase
  of shares, were 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.



60

---

(Table
  of Contents)

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

|                                   | Outstanding
        Options                         
|---------------------------------- | ----------------------------------------------------
|                                   | Options
        
        Available
        For Grant
|Transferred
      from 1995 Plan   | 973,087                                             
|Granted                            | (95,400)                                            
|Balance
      at December 31, 2004 | 877,687                                             
|Increase in shares authorized      | 1,205,657                                           
|Transferred from 1995 Plan         | 227,212                                             
|Granted                            | (2,098,000)                                         
|Canceled                           | 99,600                                              
|Balance
      at December 31, 2005 | 312,156                                             

The weighted average fair value of options granted during 2005 and 2004 under
  the 2004 Plan was $0.97 and $1.10, respectively. As of December 31, 2005, options
  to purchase 974,321 shares were exercisable under the 2004 Plan at a weighted
  average exercise price of $1.37. 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, 2006 and 2005, a total of 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, 2005 presented by price
  range are as follows:

|                                                 | Options Outstanding                                   | Options
        Exercisable                                    
|------------------------------------------------ | ----------------------------------------------------- | ---------------------------------------------------------------
|Range
        of
        Exercise
        Prices | Number
        of
        Options
        Outstanding | Weighted
        Average
        Remaining Life
        (Years)
|$
        1.03 - $ 1.51                          | 2,093,800                                             | 9.33                                                           



61

---

(Table
  of Contents)

NOTE 10 - 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, 2005:

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

NOTE 11
  - Shares Reserved

Common stock reserved for future issuance was as follows at December 31, 2005:

|                                                                      | Number
        of shares
|--------------------------------------------------------------------- | ------------------------
|Stock
      option grants outstanding (see Note 9)                    | 8,262,119               
|Reserved
      for future stock option grants (see Note 9)            | 522,810                 
|Common
      stock warrants (see Note 10)                             | 1,717,674               
|Conversion
      of Series F convertible preferred stock (see Note 3) | 823,300                 
|Total common stock reserved for future issuance                       | 11,325,903              

NOTE 12 - Related Party

The Company from time to time purchases engineering design and consulting services
  from Impact Zone. Impact Zone's principal stockholder, Dale Gifford, is a sibling
  of Michael L. Gifford, Executive Vice President and Director of Socket. At December
  31, 2005 the Company had outstanding accounts payable due to Impact Zone of
  $10,000. The Company purchased engineering design and consulting services from
  Impact Zone amounting to $10,000 during the year ended December 31, 2005. The
  Company received no services during 2004 and had no outstanding accounts payable
  due to Impact Zone at December 31, 2004. At December 31, 2003 the Company had
  outstanding accounts payable due to Impact Zone of $5,000. The Company purchased
  engineering design and consulting services from Impact Zone amounting to $72,500
  during the year ended December 31, 2003.

NOTE 13 - 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.

62

---

(Table
  of Contents)

NOTE 14 - Income Taxes

There were no provisions for income taxes for the years ended December 31,
  2005, 2004, and 2003. The Company was not profitable in 2005, profitable in
  2004, and not profitable in 2003 and all prior periods. 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, 2005, the Company had net operating loss carryforwards for
  federal income tax purposes of approximately $24,100,000, which will expire
  at various dates beginning in 2007 through 2025, and federal research and development
  tax credits of approximately $300,000, which will expire at various dates beginning
  in 2007 through 2024. As of December 31, 2005, the Company had net operating
  loss carryforwards for state income tax purposes of approximately $4,700,000,
  which will expire at various dates in 2006 through 2015, and state research
  and development tax credits of approximately $400,000, which can be carried
  forward indefinitely. During 2005 approximately $470,000 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 and similar state provisions. The annual limitation
  may result in the expiration of the net operating loss and credit carryforwards
  before utilization.

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

|                                                  | Years
        Ended December 31,
|------------------------------------------------- | --------------------------------
|Deferred tax assets:                              | 2005                            
|Net
      operating loss carryforwards            | $
        8,486,000             
|Credits                                           | 608,000                         
|Capitalized
      research and development costs  | 496,000                         
|Other
      acquired intangibles                  | 171,000                         
|Accruals
      not currently deductible           | 958,000                         
|Total
      deferred tax assets                   | 10,719,000                      
|Valuation
      allowance for deferred tax assets | (10,572,000)                    
|Net
      deferred tax assets                     | 147,000                         
|                                                  |                                 
|Deferred tax liability:                           |                                 
|Acquired
      intangibles                        | (147,000)                       
|                                                  |                                 
|Net deferred tax assets                           | $ --                            

The tax benefits associated with employee stock options provide a deferred
  benefit of approximately $770,000 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.



63

---

(Table
  of Contents)

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

Not Applicable.

Item 9A. Controls and
  Procedures

Evaluation of disclosure
  controls and procedures

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

Management's
  Report on Internal Control Over Financial Reporting

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

We assessed the effectiveness of the Company's internal control over financial
  reporting as of December 31, 2005. 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, 2005, our internal control over financial reporting is effective.

Our management's assessment of the effectiveness of our internal control over
  financial reporting as of December 31, 2005 and December 31, 2004 has been audited
  by Moss Adams LLP, an independent registered public accounting firm. Their report
  appears on page 40 of this Annual Report on Form 10-K.

Changes in internal
  control over financial reporting

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

64

---

(Table
  of Contents)

Item 9B. Other Information

None.

PART
  III

Item 10. Directors and
  Executive Officers of the Registrant

The information required
  hereunder is incorporated by reference from our Proxy Statement to be filed
  in connection with our annual meeting of stockholders to be held on April 19,
  2006.

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 19,
  2006.

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

The following table provides information as of December 31, 2005 about our
  common stock that may be issued under the Company's existing equity compensation
  plans. For additional information about the equity compensation plans see Note
  9 to the Company's 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)             | 7,189,368                                                                      | $
        1.73                                                 | 312,156                                                                                                                                                    
|Equity
        compensation plans not     approved by security holders
        (2) | 1,072,751                                                                      | $2.78                                                          | 210,564                                                                                                                                                    
|Total                                                                                              | 8,262,119                                                                      | $1.86                                                          | 552,750                                                                                                                                                    

______________________

(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.

65

---

(Table
  of Contents)

Item 13. Certain Relationships
  and Related Transactions

Certain information required
  hereunder is incorporated by reference from our Proxy Statement to be filed
  in connection with our annual meeting of stockholders to be held on April 19,
  2006.

Item 14. Principal
  Accountant Fees and Services

Certain information required hereunder is incorporated by reference from our
  Proxy Statement to be filed in connection with our annual meeting of stockholders
  to be held on April 19, 2006.





PART
  IV

Item 15. Exhibits, Financial
  Statement Schedules, and Reports on Form 8-K

> (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
>         40Report
>           of Ernst & Young LLP, Independent Registered Public Accounting Firm
>         42Consolidated
>           Balance Sheets
>         43Consolidated
>           Statements of Operations
>         44Consolidated
>           Statements of Redeemable Preferred Stock and Stockholders' Equity
>         45Consolidated
>           Statements of Cash Flows
>         46Notes
>           to Consolidated Financial Statements
>         472. 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 69. 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 69. The Exhibits listed on the accompanying
>     Index of Exhibits are filed or incorporated by reference as part of this report.
>   66

---

(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 6, 2006 | /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 6, 2006
|-- | ---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- |  | -------------
|   | Kevin
      J. Mills        
|   |                              |                                                                                                                                    |  |              
|By | /s/
      Charlie Bass       | Chairman
      of the Board                                                                                                        |  | March 6, 2006
|   | Charlie
      Bass          
|   |                              |                                                                                                                                    |  |              
|By | /s/
      David W. Dunlap    | Vice
      President of Finance and Administration and Chief Financial Officer 
      (Principal Financial and Accounting Officer) |  | March 6, 2006
|   | David
      W. Dunlap       
|   |                              |                                                                                                                                    |  |              
|By | /s/
      Micheal L. Gifford | Executive
      Vice President and Director                                                                                        |  | March 6, 2006
|   | Micheal
      L. Gifford    
|   |                              |                                                                                                                                    |  |              
|By | /s/
      Enzo Torresi       | Director                                                                                                                           |  | March 6, 2006
|   | Enzo
      Torresi          
|   |                              |                                                                                                                                    |  |              
|By | /s/
      Gianluca Rattazzi  | Director                                                                                                                           |  | March 6, 2006
|   | Gianluca
      Rattazzi     
|   |                              |                                                                                                                                    |  |              
|By | /s/
      Peter Sealey       | Director                                                                                                                           |  | March 6, 2006
|   | Peter Sealey                
|   |                              |                                                                                                                                    |  |              
|By | /s/
      Leon Malmed        | Director                                                                                                                           |  | March 6, 2006
|   | Leon
      Malmed           

67

---

(Table
  of Contents)








Index
  to Exhibits

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

|         |                                                                                               
|-------- | ----------------------------------------------------------------------------------------------
|11.1     | Computation of Earnings per Share (see Consolidated Statements
      of Operations in Item 8).
|         |                                                                                               
|14.1     | Code of Business Conduct and Ethics.                                                          
|         |                                                                                               
|21.1 (3) | Subsidiaries.                                                                                 
|         |                                                                                               
|23.1     | Consent of Moss Adams LLP, Independent Registered Public Accounting
      Firm.               

68

---

(Table
  of Contents)

|23.2 | Consent of Ernst & Young 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.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

69

---