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<SEC-DOCUMENT>0000944075-06-000057.txt : 20060814
<SEC-HEADER>0000944075-06-000057.hdr.sgml : 20060814
<ACCEPTANCE-DATETIME>20060811211822
ACCESSION NUMBER:		0000944075-06-000057
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		4
CONFORMED PERIOD OF REPORT:	20060630
FILED AS OF DATE:		20060814
DATE AS OF CHANGE:		20060811

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SOCKET COMMUNICATIONS INC
		CENTRAL INDEX KEY:			0000944075
		STANDARD INDUSTRIAL CLASSIFICATION:	ELECTRONIC COMPUTERS [3571]
		IRS NUMBER:				943155066
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-13810
		FILM NUMBER:		061026617

	BUSINESS ADDRESS:	
		STREET 1:		37400 CENTRAL COURT
		CITY:			NEWARK
		STATE:			CA
		ZIP:			94560
		BUSINESS PHONE:		5107442700

	MAIL ADDRESS:	
		STREET 1:		37400 CENTRAL COURT
		CITY:			NEWARK
		STATE:			CA
		ZIP:			94560
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>q2-2006.htm
<DESCRIPTION>10-Q
<TEXT>
<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN">
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<META content="MSHTML 5.50.4522.1800" name=GENERATOR></HEAD>
<BODY bgColor=white>
<DIV align=left> </DIV>
<DIV align=left> </DIV>
<P align=center><font face="Times New Roman, Times, serif" size="3">UNITED STATES<BR>
  SECURITIES AND EXCHANGE COMMISSION<BR>
  WASHINGTON, DC 20549<BR>
  </font></P>
<P align=center><font face="Times New Roman, Times, serif" size="3"><STRONG>FORM
  10-Q</STRONG></font></P>
<TABLE cols=2 width="100%">
  <TR>
    <TD vAlign=top width="5%"><FONT size=3><STRONG>
      <CENTER>
        [X]
      </CENTER>
      </STRONG></FONT></TD>
    <TD vAlign=top width="95%"><FONT size=3><STRONG><FONT
      face="Times New Roman, Times, serif"><b>QUARTERLY REPORT PURSUANT TO SECTION
      13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</b> </FONT></STRONG></FONT></TD>
  </TR>
</TABLE>
<P align=center><font face="Times New Roman, Times, serif" size="3"><strong>&nbsp;&nbsp;</strong>For
  the quarterly period ended June 30, 2006</font></P>
<P align=center><font size="3" face="Times New Roman, Times, serif">OR</font></P>
<TABLE cols=2 width="100%">
  <TR>
    <TD vAlign=top width="5%"><FONT size=3><STRONG>
      <CENTER>
        <FONT face="Times New Roman, Times, serif">[&nbsp;&nbsp;&nbsp;] </FONT>
      </CENTER>
      </STRONG></FONT></TD>
    <TD vAlign=top width="95%"><FONT face="Times New Roman, Times, serif"
      size=3><STRONG><b>TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934</b> &nbsp;&nbsp;</STRONG><BR>
      <BR>
      For the transition period ____________ to ____________ </FONT></TD>
  </TR>
</TABLE>
<P align=center><font face="Times New Roman, Times, serif" size="3"><STRONG>Commission
  file number 1-13810 </STRONG></font></P>
<P align=center><font face="Times New Roman, Times, serif" size="3"><STRONG><b>SOCKET
  COMMUNICATIONS, INC.</b> </STRONG><BR>
  (Exact Name of Registrant as Specified in its Charter) </font></P>
<P>&nbsp;
<TABLE cols=2 width="100%">
  <TR>
    <TD height="15"><FONT size=3><STRONG>
      <CENTER>
        <FONT face="Times New Roman, Times, serif" size=3>Delaware </FONT>
      </CENTER>
      </STRONG></FONT></TD>
    <TD height="15"><FONT size=3><STRONG>
      <CENTER>
        <FONT face="Times New Roman, Times, serif" size=3>94-3155066 </FONT>
      </CENTER>
      </STRONG></FONT></TD>
  </TR>
  <TR>
    <TD><FONT size=2>
      <CENTER>
        <font face="Times New Roman, Times, serif" size="3">&nbsp; (State or other
        jurisdiction of incorporation or organization)&nbsp; </font>
      </CENTER>
      </FONT></TD>
    <TD><FONT size=2>
      <CENTER>
        <font face="Times New Roman, Times, serif" size="3">(IRS Employer Identification
        No.) </font>
      </CENTER>
      </FONT></TD>
  </TR>
</TABLE>
<font face="Times New Roman, Times, serif" size="3"><BR>
</font>
<P align=center><font face="Times New Roman, Times, serif" size="3"><STRONG>37400
  Central Court, Newark, CA 94560 </STRONG><BR>
  (Address of principal executive offices including zip code) </font></P>
<P align=center><font face="Times New Roman, Times, serif" size="3"><STRONG>(510)
  744-2700 </STRONG><BR>
  (Registrant's telephone number, including area code) <BR>
  <BR>
  <BR>
  </font></P>
<P><font face="Times New Roman, Times, serif" size="3">&nbsp;&nbsp;&nbsp; </font>
<P>Indicate by check mark whether the registrant (1) has filed all reports required
  to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
  the preceding 12 months (or for such shorter period that the registrant was
  required to file such reports), and (2) has been subject to such filing requirements
  for the past 90 days. YES [ X ] <font face="Times New Roman, Times, serif" size="3">NO[&nbsp;]</font>
</P>
<P>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]</P>
<P>Indicate by check mark whether the registrant is a shell company (as defined
  in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]</P>
<P>Number of shares of common stock ($0.001 par value) outstanding as of July
  31, 2006 was 31,847,472 shares.</P>
<p style="PAGE-BREAK-BEFORE: always">
<hr width="100%">
<P>&nbsp; </P>
<div align="center"></div>
<P align=left><font face="Times New Roman, Times, serif" size="3"><a name="tab"></a></font></P>
<table width="80%" border="0" cellspacing="0" cellpadding="0" align="center">
  <tr>
    <td colspan="3">
      <div align="center"></div>
      <p align=center><font face="Times New Roman, Times, serif" size="3"><strong>INDEX
        </strong></font></p>
    </td>
  </tr>
  <tr>
    <td width="27">&nbsp;</td>
    <td width="807">&nbsp;</td>
    <td width="56">
      <div align="center"><font face="Times New Roman, Times, serif" size="3"><u>PAGE
        <br>
        NO.</u></font></div>
    </td>
  </tr>
  <tr>
    <td colspan="3"><font face="Times New Roman, Times, serif" size="3">PART I.
      Financial information </font></td>
  </tr>
  <tr>
    <td colspan="3">&nbsp;</td>
  </tr>
  <tr>
    <td colspan="3"><font face="Times New Roman, Times, serif" size="3">Item 1.
      Consolidated Financial Statements: </font></td>
  </tr>
  <tr>
    <td width="27">&nbsp;</td>
    <td width="807">&nbsp;</td>
    <td width="56" align="center" valign="bottom">&nbsp;</td>
  </tr>
  <tr>
    <td width="27">&nbsp;</td>
    <td width="807"><font face="Times New Roman, Times, serif" size="3"><a
  href="#bs">Condensed Consolidated Balance Sheets - June 30, 2006 and December
      31, 2005 </a></font></td>
    <td width="56" align="center" valign="bottom">
      <div align="center"><font face="Times New Roman, Times, serif" size="3">1</font></div>
    </td>
  </tr>
  <tr>
    <td width="27" height="10">&nbsp;</td>
    <td width="807" height="10">&nbsp;</td>
    <td width="56" height="10" align="center" valign="bottom">&nbsp;</td>
  </tr>
  <tr>
    <td width="27" height="10">&nbsp;</td>
    <td width="807" height="10"><font face="Times New Roman, Times, serif" size="3"><a
  href="#ops">Condensed Consolidated Statements of Operations - Three Months and
      Six Months Ended June 30, 2006 and 2005</a></font></td>
    <td width="56" height="10" align="center" valign="bottom">
      <div align="center"> <font face="Times New Roman, Times, serif" size="3">2</font></div>
    </td>
  </tr>
  <tr>
    <td width="27">&nbsp;</td>
    <td width="807">&nbsp;</td>
    <td width="56" align="center" valign="bottom">&nbsp;</td>
  </tr>
  <tr>
    <td width="27">&nbsp;</td>
    <td width="807"><font face="Times New Roman, Times, serif" size="3"><a
  href="#flows">Condensed Consolidated Statements of Cash Flows - Six Months Ended
      </a><a
  href="#ops">June 30, 2006 and 2005</a></font></td>
    <td width="56" align="center" valign="bottom">
      <div align="center"><font face="Times New Roman, Times, serif" size="3">3</font></div>
    </td>
  </tr>
  <tr>
    <td width="27">&nbsp;</td>
    <td width="807">&nbsp;</td>
    <td width="56" align="center" valign="bottom">&nbsp;</td>
  </tr>
  <tr>
    <td width="27">&nbsp;</td>
    <td width="807"><font face="Times New Roman, Times, serif" size="3"><a
  href="#notes">Notes to Condensed Consolidated Financial Statements</a> </font></td>
    <td width="56" align="center" valign="bottom">
      <div align="center"><font face="Times New Roman, Times, serif" size="3">4</font></div>
    </td>
  </tr>
  <tr>
    <td colspan="2">&nbsp;</td>
    <td width="56">&nbsp;</td>
  </tr>
  <tr>
    <td colspan="2"><font face="Times New Roman, Times, serif" size="3"><a
href="#mda">Item 2. Management's Discussion and Analysis of Financial Condition
      and Results of Operations</a> </font></td>
    <td width="56">
      <div align="center"><font face="Times New Roman, Times, serif" size="3">11</font></div>
    </td>
  </tr>
  <tr>
    <td colspan="2">&nbsp;</td>
    <td width="56">&nbsp;</td>
  </tr>
  <tr>
    <td colspan="2"><font face="Times New Roman, Times, serif" size="3"><a
href="#qqd">Item 3. Quantitative and Qualitative Disclosures about Market Risk</a>
      </font></td>
    <td width="56">
      <div align="center">18</div>
    </td>
  </tr>
  <tr>
    <td colspan="2">&nbsp;</td>
    <td width="56">&nbsp;</td>
  </tr>
  <tr>
    <td colspan="2"><font face="Times New Roman, Times, serif" size="3"><a
href="#item4">Item 4. Controls and Procedures</a></font> </td>
    <td width="56">
      <div align="center">19</div>
    </td>
  </tr>
  <tr>
    <td colspan="3">&nbsp;</td>
  </tr>
  <tr>
    <td colspan="3">
      <div align="left"> <font face="Times New Roman, Times, serif" size="3"><a
href="#oth">PART II. Other information</a></font></div>
    </td>
  </tr>
  <tr>
    <td colspan="2">&nbsp;</td>
    <td width="56">&nbsp;</td>
  </tr>
  <tr>
    <td colspan="2"><font face="Times New Roman, Times, serif" size="3"><a
href="#risk">Item 1A. Risk Factors</a></font></td>
    <td width="56">
      <div align="center">20</div>
    </td>
  </tr>
  <tr>
    <td colspan="2">&nbsp;</td>
    <td width="56">&nbsp;</td>
  </tr>
  <tr>
    <td colspan="2"><font face="Times New Roman, Times, serif" size="3"><a
href="#item6">Item 6. Exhibits</a></font></td>
    <td width="56">
      <div align="center">30</div>
    </td>
  </tr>
  <tr>
    <td colspan="2">&nbsp;</td>
    <td width="56">&nbsp;</td>
  </tr>
  <tr>
    <td colspan="2"><font face="Times New Roman, Times, serif" size="3"><a
href="#sig">Signatures</a></font></td>
    <td width="56">
      <div align="center"><font face="Times New Roman, Times, serif" size="3">31</font></div>
    </td>
  </tr>
  <tr>
    <td colspan="2">&nbsp;</td>
    <td width="56">&nbsp;</td>
  </tr>
  <tr>
    <td colspan="2"><font face="Times New Roman, Times, serif" size="3"><a
href="#ind">Index to Exhibits</a></font></td>
    <td width="56">
      <div align="center"><font face="Times New Roman, Times, serif" size="3">32</font></div>
    </td>
  </tr>
</table>
<P align=left>&nbsp; </P>
<P align="center">&nbsp;
<HR width="100%">
<font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a>
<a
name=bs></a> <BR>
</font>
<P align=left><font face="Times New Roman, Times, serif" size="3">Item 1. Financial
  Statements (Unaudited) </font>
<P align=center>
<P align=center>
<table cellspacing=1 cellpadding=1 width=85% align=center border=1>
  <tr valign=bottom>
    <td colspan=3><font size=2><b>
      <p align=center><font face="Times New Roman, Times, serif" size="2">SOCKET
        COMMUNICATIONS, INC. <br>
        CONDENSED CONSOLIDATED BALANCE SHEETS </font></p>
      </b></font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%" height=19><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></td>
    <td width="18%" height=19 align="center"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2"> June
        30, 2006<br>
        (Unaudited) </font></p>
      </font></td>
    <td width="16%" height=19 valign="top"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">&nbsp;
        December 31, 2005* </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td colspan=3><b><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">ASSETS
        </font></p>
      </font></b></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">Current assets: </font></p>
      </font></td>
    <td width="18%"><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
    <td width="16%"><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Cash
        and cash equivalents </font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 7,254,040
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 6,833,193
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Accounts
        receivable, net </font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2"> 3,063,690
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">2,952,429
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Inventories
        </font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">2,486,620
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">2,195,394
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Prepaid
        expenses and other current assets</font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">268,846
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">315,287
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;Total
        current assets </font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">13,073,196
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">12,296,303
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td colspan=3><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">Property and equipment:
        </font></p>
      </font></td>
    <td width="18%"><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
    <td width="16%"><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Machinery
        and office equipment </font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">1,949,105
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">1,821,367
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Computer
        equipment </font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">972,145
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">913,389
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
      </font></td>
    <td width="18%" height="5"><font size=2>
      <p align=center><font size="2" face="Times New Roman, Times, serif">2,921,250
        </font></p>
      </font></td>
    <td width="16%" height="5"><font size=2>
      <p align=center><font size="2" face="Times New Roman, Times, serif">2,734,756
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Accumulated
        depreciation </font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(2,011,098)
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(2,106,914)
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;Property
        and equipment, net</font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">910,152
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">627,842
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td colspan="3"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font><font size="2" face="Times New Roman, Times, serif">&nbsp;</font><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font face="Times New Roman, Times, serif" size="2">Intangible
      technology, net </font></td>
    <td width="18%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">676,852
        </font></div>
    </td>
    <td width="16%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">748,937
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font face="Times New Roman, Times, serif" size="2">Goodwill
      </font></td>
    <td width="18%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">9,797,946
        </font></div>
    </td>
    <td width="16%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">9,797,946
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2> <font face="Times New Roman, Times, serif" size="2">Other
      assets </font></font></td>
    <td width="18%">
      <div align="center"><font size=2> <font face="Times New Roman, Times, serif" size="2">170,696
        </font></font></div>
    </td>
    <td width="16%">
      <div align="center"><font size=2> <font face="Times New Roman, Times, serif" size="2">163,754
        </font></font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size="2"> <font face="Times New Roman, Times, serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total
      assets </font></font></td>
    <td width="18%">
      <div align="center"><font size="2"> <font face="Times New Roman, Times, serif">$
        24,628,842 </font></font></div>
    </td>
    <td width="16%">
      <div align="center"><font size="2"> <font face="Times New Roman, Times, serif">$
        23,634,782 </font></font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan=3><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
  </tr>
  <tr valign=bottom>
    <td colspan=3 height="12">
      <div align="center"><font size="2" face="Times New Roman, Times, serif"><b>LIABILITIES
        AND STOCKHOLDERS' EQUITY</b></font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">Current liabilities:
        </font></p>
      </font></td>
    <td width="18%"><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
    <td width="16%"><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp; Accounts
        payable and accrued expenses </font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font size="2" face="Times New Roman, Times, serif">$ 3,173,399
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font size="2" face="Times New Roman, Times, serif">$ 2,616,421
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp; Accrued
        payroll and related expenses </font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">817,391
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">729,768
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%" height="7"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp; Bank
        line of credit </font></p>
      </font></td>
    <td width="18%" height="7"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">2,226,208
        </font></p>
      </font></td>
    <td width="16%" height="7"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">2,308,771
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp; Deferred
        income on shipments to distributors</font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">1,127,115
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">1,114,450
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font></font><font face="Times New Roman, Times, serif" size="2">Current
      portion of deferred rent and capital leases</font></td>
    <td width="18%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">26,360
        </font></div>
    </td>
    <td width="16%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">42,639
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;
        Total current liabilities </font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">7,370,473
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">6,812,049
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td colspan=3><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <div align="left"><font size="2" face="Times New Roman, Times, serif">Long
        term portion of deferred rent and capital leases</font></div>
    </td>
    <td width="18%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">3,389
        </font></div>
    </td>
    <td width="16%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">8,372
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan="3"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">Commitments and contingencies
        </font></p>
      </font></td>
    <td width="18%"><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
    <td width="16%"><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
  </tr>
  <tr valign=bottom>
    <td colspan="3"><font size=2><font face="Times New Roman, Times, serif" size="2">Stockholders'
      equity:</font></font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%" height="9"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2"> </font></p>
      </font></td>
    <td width="18%" height="9"><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
    <td width="16%" height="9"><font face="Times New Roman, Times, serif" size="2">&nbsp;</font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%" height="17"><font size=2>
      <p><font size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp; Series
        F Convertible Preferred Stock, $0.001 par value: </font><font size=2><font size="2" face="Times New Roman, Times, serif">
        </font></font><font size="2" face="Times New Roman, Times, serif">Authorized
        shares - 276,269, Issued and outstanding shares - </font><font size=2><font size=2><font size="2" face="Times New Roman, Times, serif">
        </font></font><font size="2" face="Times New Roman, Times, serif"></font></font><font size="2" face="Times New Roman, Times, serif">none
        at </font><font size="2" face="Times New Roman, Times, serif">June 30,
        2006 and 82,330 at December 31, 2005</font></p>
      </font></td>
    <td width="18%" height="17"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">-- </font></p>
      </font></td>
    <td width="16%" height="17"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">82 </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%" height="14"><font size=2><font size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;
      </font></font><font size="2" face="Times New Roman, Times, serif">Common
      stock, $0.001 par value: Authorized shares - </font><font size=2><font size="2" face="Times New Roman, Times, serif">
      </font></font><font size="2" face="Times New Roman, Times, serif">100,000,000,
      Issued and outstanding shares - </font><font size=2><font size="2" face="Times New Roman, Times, serif">
      </font></font><font size="2" face="Times New Roman, Times, serif">31,836,133
      </font><font size=2><font size="2" face="Times New Roman, Times, serif">
      </font></font><font size="2" face="Times New Roman, Times, serif">at June
      30, 2006 </font><font size="2" face="Times New Roman, Times, serif">and
      30,223,709 at December 31, 2005</font></td>
    <td width="18%" height="14"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">31,836
        </font></p>
      </font></td>
    <td width="16%" height="14"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">30,224
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">Additional paid-in
        capital</font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">51,940,579
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">50,673,487
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%" height="19"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">Accumulated deficit
        </font></p>
      </font></td>
    <td width="18%" height="19"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(34,717,435)
        </font></p>
      </font></td>
    <td width="16%" height="19"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(33,889,432)
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%" height=23><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;Total
        stockholders' equity</font></p>
      </font></td>
    <td width="18%" height=23><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">17,254,980
        </font></p>
      </font></td>
    <td width="16%" height=23><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">16,814,361
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total
        liabilities and stockholders' equity</font></p>
      </font></td>
    <td width="18%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 24,628,842
        </font></p>
      </font></td>
    <td width="16%"><font size=2>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 23,634,782
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td colspan=3><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">_________________________
        </font></p>
      </font></td>
  </tr>
  <tr valign=bottom>
    <td colspan=3 height="23"><font size=2>
      <p><font face="Times New Roman, Times, serif" size="2">*Derived from audited
        consolidated financial statements </font></p>
      </font></td>
  </tr>
</table>
<P align=center><font face="Times New Roman, Times, serif" size="3">See accompanying
  notes. </font><font face="Times New Roman, Times, serif" size="3"> <BR>
  1 </font>
<P align=center>&nbsp;
<p style="PAGE-BREAK-BEFORE: always">
<HR width="100%">
<font face="Times New Roman, Times, serif" size="3"><BR>
<a href="#TAB">(Index)</a> <a name=ops></a><BR>
</font>
<P align=center>
<TABLE cellSpacing=1 cellPadding=1 width=85% align=center border=1>
  <tr valign=bottom>
    <td colspan=5 height="33"><font size=2>
      <p align=center><b><font face="Times New Roman, Times, serif" size="2">SOCKET
        COMMUNICATIONS, INC. <br>
        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS</font><font size="2"><br>
        </font></b><font size="2">(Unaudited) </font></p>
      </font></td>
  </tr>
  <TR vAlign=bottom>
    <TD height=17 width="36%">
      <P><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></P>
    </TD>
    <TD colspan="2" height=17>
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Three
        Months Ended <br>
        June 30,</font></div>
    </TD>
    <TD colspan="2" height=17>
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Six
        Months Ended <br>
        June 30,</font></div>
    </TD>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17>
      <P><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp; </font></P>
    </TD>
    <TD width="15%" height=17>
      <P align=center><font face="Times New Roman, Times, serif" size="2"><u>2006
        </u></font></P>
    </TD>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2"><u>2005
        </u></font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2"><u>2006</u>
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2"><u>2005</u>
        </font></p>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17>
      <P><font face="Times New Roman, Times, serif" size="2">Revenues </font></P>
    </TD>
    <TD width="15%" height=17>
      <P align=center><font face="Times New Roman, Times, serif" size="2">$ 6,855,028
        </font> </P>
    </TD>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 6,580,414
        </font> </p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 13,613,719
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 12,562,610
        </font></p>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17>
      <P><font face="Times New Roman, Times, serif" size="2">Cost of revenue </font></P>
    </TD>
    <TD width="15%" height=17>
      <P align=center><font face="Times New Roman, Times, serif" size="2">3,453,923
        </font></P>
    </TD>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">3,268,756
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">6,839,067
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">6,203,060
        </font></p>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17>
      <P><font face="Times New Roman, Times, serif" size="2">Gross profit </font></P>
    </TD>
    <TD width="15%" height=17>
      <P align=center><font face="Times New Roman, Times, serif" size="2">3,401,105
        </font></P>
    </TD>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">3,311,658
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">6,774,652
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">6,359,550
        </font></p>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD height=18 width="36%">
      <P><font face="Times New Roman, Times, serif" size="2"> </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        &nbsp;&nbsp; &nbsp;&nbsp;</font></P>
    </TD>
    <TD height=18 width="15%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></TD>
    <td height=18 width="15%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></td>
    <TD height=18 width="17%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></TD>
    <td height=18 width="17%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></td>
  </TR>
  <TR vAlign=bottom>
    <TD height=24 width="36%">
      <P><font face="Times New Roman, Times, serif" size="2">Operating expenses:
        </font></P>
    </TD>
    <TD height=24 width="15%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font><font size="2"></font></TD>
    <td height=24 width="15%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font><font size="2"></font></td>
    <td height=24 width="17%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font><font size="2"></font></td>
    <td height=24 width="17%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font><font size="2"></font></td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17>
      <P><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Research
        and development </font></P>
    </TD>
    <TD width="15%" height=17>
      <P align=center><font face="Times New Roman, Times, serif" size="2">1,378,791
        </font></P>
    </TD>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">897,882
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">2,515,348
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">1,787,010
        </font></p>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17>
      <P><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Sales
        and marketing </font></P>
    </TD>
    <TD width="15%" height=17>
      <P align=center><font face="Times New Roman, Times, serif" size="2">1,840,713
        </font></P>
    </TD>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">1,557,704
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">3,603,137
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">3,192,210
        </font></p>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17>
      <P><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;General
        and administrative </font></P>
    </TD>
    <TD width="15%" height=17>
      <P align=center><font face="Times New Roman, Times, serif" size="2">641,633
        </font></P>
    </TD>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">579,059
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">1,483,743
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">1,411,880
        </font></p>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17><font face="Times New Roman, Times, serif" size="2">&nbsp;
      Amortization of intangible technology</font></TD>
    <TD width="15%" height=17>
      <DIV align=center><font face="Times New Roman, Times, serif" size="2">36,043
        </font></DIV>
    </TD>
    <td width="15%" height=17>
      <div align=center><font face="Times New Roman, Times, serif" size="2">36,042
        </font></div>
    </td>
    <td width="17%" height=17>
      <div align=center><font face="Times New Roman, Times, serif" size="2">72,086
        </font></div>
    </td>
    <td width="17%" height=17>
      <div align=center><font face="Times New Roman, Times, serif" size="2">130,955
        </font></div>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17>
      <P><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;Total
        operating expenses </font></P>
    </TD>
    <TD width="15%" height=17>
      <P align=center><font face="Times New Roman, Times, serif" size="2">3,897,180
        </font></P>
    </TD>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">3,070,687
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">7,674,314
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">6,522,055
        </font></p>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=9>&nbsp;</TD>
    <TD width="15%" height=9>&nbsp;</TD>
    <td width="15%" height=9>&nbsp;</td>
    <td width="17%" height=9>&nbsp;</td>
    <td width="17%" height=9>&nbsp;</td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=11>
      <P><font face="Times New Roman, Times, serif" size="2">Operating income
        (loss) </font></P>
    </TD>
    <TD width="15%" height=11>
      <P align=center><font face="Times New Roman, Times, serif" size="2">(496,075)
        </font></P>
    </TD>
    <td width="15%" height=11>
      <p align=center><font face="Times New Roman, Times, serif" size="2">240,971
        </font></p>
    </td>
    <td width="17%" height=11>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(899,662)</font></p>
    </td>
    <td width="17%" height=11>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(162,505)</font></p>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD height=17 width="36%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font><font size="2"></font><font size="2"></font><font size="2"></font><font size="2"></font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp;</font><font size="2"></font></TD>
    <TD height=17 width="15%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></TD>
    <td height=17 width="15%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></td>
    <TD height=17 width="17%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></TD>
    <td height=17 width="17%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17>
      <P><font face="Times New Roman, Times, serif" size="2">Interest income and
        other </font> </P>
    </TD>
    <TD width="15%" height=17>
      <P align=center><font face="Times New Roman, Times, serif" size="2">49,915
        </font></P>
    </TD>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">17,968
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">86,593
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">31,475
        </font></p>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17>
      <P><font face="Times New Roman, Times, serif" size="2">Interest expense
        </font></P>
    </TD>
    <TD width="15%" height=17>
      <P align=center><font face="Times New Roman, Times, serif" size="2">(2,077)
        </font></P>
    </TD>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(857)
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(4,281)
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(2,596)
        </font></p>
    </td>
  </TR>
  <TR vAlign=bottom>
    <TD height=17 width="36%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font><font size="2"></font><font size="2"></font><font size="2"></font><font size="2"></font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp;</font><font size="2"></font></TD>
    <TD height=17 width="15%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></TD>
    <td height=17 width="15%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></td>
    <TD height=17 width="17%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></TD>
    <td height=17 width="17%"><font face="Times New Roman, Times, serif" size="2">
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font></td>
  </TR>
  <TR vAlign=bottom>
    <TD width="36%" height=17>
      <P><font face="Times New Roman, Times, serif" size="2">Net income (loss)
        </font></P>
    </TD>
    <TD width="15%" height=17>
      <P align=center><font face="Times New Roman, Times, serif" size="2">(448,237)</font></P>
    </TD>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">258,082</font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(817,350)
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(133,626)
        </font></p>
    </td>
  </TR>
  <tr valign=bottom>
    <td valign=top width="36%" height=17>
      <p><font face="Times New Roman, Times, serif" size="2">Preferred stock dividends</font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">-- </font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(12,174)
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(10,653)
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">(24,374)
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td valign=top width="36%" height=17>
      <p><font face="Times New Roman, Times, serif" size="2">Net income (loss)
        applicable to common stockholders</font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (448,237)
        </font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 245,908
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (828,003)
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (158,000)
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td valign=top width="36%" height=17>&nbsp;</td>
    <td width="15%" height=17>&nbsp;</td>
    <td width="15%" height=17>&nbsp;</td>
    <td width="17%" height=17>&nbsp;</td>
    <td width="17%" height=17>&nbsp;</td>
  </tr>
  <tr valign=bottom>
    <td valign=top width="36%" height=17>
      <p><font face="Times New Roman, Times, serif" size="2">Net income (loss)
        per share applicable to common stockholders:</font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font>
        <font face="Times New Roman, Times, serif" size="2"> </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        &nbsp;&nbsp; &nbsp;&nbsp;</font> </p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font>
        <font face="Times New Roman, Times, serif" size="2"> </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        &nbsp;&nbsp; &nbsp;&nbsp;</font> </p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2"> </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        &nbsp;&nbsp; &nbsp;&nbsp;</font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font>
      </p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2"> </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        &nbsp;&nbsp; &nbsp;&nbsp;</font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font>
      </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td valign=top width="36%" height=17>
      <p><font face="Times New Roman, Times, serif" size="2"> &nbsp;&nbsp;Basic</font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (0.01)
        </font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 0.01
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (0.03)
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (0.01)
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td valign=top width="36%" height=17>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Diluted</font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (0.01)
        </font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 0.01
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (0.03)
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (0.01)
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="36%" height=7>
      <p><font face="Times New Roman, Times, serif" size="2">Weighted average
        shares outstanding:</font></p>
    </td>
    <td width="15%" height=7>
      <p align=center><font size="2"></font><font face="Times New Roman, Times, serif" size="2">
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        &nbsp;&nbsp; &nbsp;&nbsp;</font></p>
    </td>
    <td width="15%" height=7>
      <p align=center><font size="2"></font><font face="Times New Roman, Times, serif" size="2">
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        &nbsp;&nbsp; &nbsp;&nbsp;</font></p>
    </td>
    <td width="17%" height=7>
      <p align=center><font size="2"></font><font face="Times New Roman, Times, serif" size="2">
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        &nbsp;&nbsp; &nbsp;&nbsp;</font></p>
    </td>
    <td width="17%" height=7>
      <p align=center><font size="2"></font><font face="Times New Roman, Times, serif" size="2">
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
        &nbsp;&nbsp; &nbsp;&nbsp;</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td valign=top width="36%" height=17>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Basic</font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">31,695,832</font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">30,160,994
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">31,045,664
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">30,157,993
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td valign=top width="36%" height=17>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Diluted</font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">31,695,832</font></p>
    </td>
    <td width="15%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">32,301,424
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">31,045,664
        </font></p>
    </td>
    <td width="17%" height=17>
      <p align=center><font face="Times New Roman, Times, serif" size="2">30,157,993
        </font></p>
    </td>
  </tr>
</TABLE>
<P></P>
<P align=center><font face="Times New Roman, Times, serif" size="3">See accompanying
  notes. </font><font face="Times New Roman, Times, serif" size="3"> <BR>
  </font>
<P align=center>
<P align=center><font face="Times New Roman, Times, serif" size="3"> 2</font>
<P align=center>&nbsp;
<p style="PAGE-BREAK-BEFORE: always">
<HR width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
  <font face="Times New Roman, Times, serif" size="3"><a
name=flows></a></font> </p>
<table cellspacing=1 cellpadding=1 width=85% align=center border=1>
  <tr valign=bottom>
    <td colspan=3>
      <p align=center><font face="Times New Roman, Times, serif" size="2"><b>SOCKET
        COMMUNICATIONS, INC. <br>
        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS</b> <br>
        (Unaudited) </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%" height="18">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></p>
    </td>
    <td colspan=2 height="18">
      <p align=center><font face="Times New Roman, Times, serif" size="2">Six
        Months Ended June 30, </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;</font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">2006</font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">2005
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><b>
      <p><font face="Times New Roman, Times, serif" size="2">Operating activities</font>
      </p>
      </b></td>
    <td colspan=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Net loss</font>
      </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (817,350)
        </font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (133,626)
        </font> </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%" height="9">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Adjustments
        to reconcile net loss to net cash used in operating activities: </font></p>
    </td>
    <td colspan=2 height="9">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;Stock-based
        compensation </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">636,444
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">-- </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;Depreciation
        and amortization</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">317,922
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">221,801
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;
      Amortization of intangibles</font></td>
    <td width="17%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">72,085
        </font></div>
    </td>
    <td width="17%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">130,956
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;(Gain)
        loss on foreign currency translations</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(54,118)
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">115,419
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;
      (Gain) loss on forward exchange contracts</font></td>
    <td width="17%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">17,793
        </font></div>
    </td>
    <td width="17%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">(65,264)
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;
      Change in deferred rent</font></td>
    <td width="17%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">(16,512)</font></div>
    </td>
    <td width="17%">
      <div align=center><font face="Times New Roman, Times, serif" size="2">(16,510)
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan="3"><font face="Times New Roman, Times, serif" size="2"> </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font><font size="2"></font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;
        Changes in operating assets and liabilities:</font> </p>
    </td>
    <td colspan=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts
        receivable</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(73,695)
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">632,898
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inventories</font>
      </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(291,226)
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">392,675
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prepaid
        expenses and other current assets</font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">46,441
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">10,481
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other
        assets</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(6,942)
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(35,844)
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts
        payable and accrued expenses</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">567,366
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">174,714
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accrued
        payroll and related expenses</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">87,623
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">37,118
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Deferred
        income on shipments to distributors</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">12,665
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">120,757
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net
        cash provided by operating activities</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">498,496
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">1,585,575
        </font> </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan=3>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><b>
      <p><font face="Times New Roman, Times, serif" size="2">Investing activities</font>
      </p>
      </b></td>
    <td colspan=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;
        Purchase of equipment and tooling</font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(600,232)
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(266,216)
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net
        cash used in investing activities</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(600,232)
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(266,216)
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan=3>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><b>
      <p><font face="Times New Roman, Times, serif" size="2">Financing activities</font>
      </p>
      </b></td>
    <td colspan=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;
        Payments on capital leases and equipment financing notes</font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(4,750)
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(4,533)
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;
        Gross proceeds from bank line of credit</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">4,973,534
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">5,509,300
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2"> &nbsp;&nbsp;&nbsp;
        Gross payments on bank line of credit</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(5,056,097)</font>
      </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(6,162,572)
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2"> &nbsp;&nbsp;&nbsp;
        Proceeds from stock options exercised</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">48,076
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">23,415
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2"> &nbsp;&nbsp;&nbsp;
        Proceeds from warrants exercised</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">584,102</font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">-- </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%" height="10">
      <p><font face="Times New Roman, Times, serif" size="2"> &nbsp;&nbsp;&nbsp;
        Dividends paid </font></p>
    </td>
    <td width="17%" height="10">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(22,682)
        </font> </p>
    </td>
    <td width="17%" height="10">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(24,400)</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net
        cash provided by financing activities</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">522,183
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(658,790)
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan=3>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">Effect of exchange
        rate changes on cash and cash equivalents</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">400
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(45,357)
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">Net increase in cash
        and cash equivalents</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">420,847
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">615,212
        </font> </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><font face="Times New Roman, Times, serif" size="2"> </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font><font size="2"></font></td>
    <td width="17%"><font face="Times New Roman, Times, serif" size="2"> </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font><font size="2"></font></td>
    <td width="17%"><font face="Times New Roman, Times, serif" size="2"> </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      &nbsp;&nbsp; &nbsp;&nbsp;</font><font size="2"></font></td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">Cash and cash equivalents
        at beginning of period</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">6,833,193
        </font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">5,931,752
        </font> </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">Cash and cash equivalents
        at end of period</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 7,254,040
        </font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 6,546,964
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan=3>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%"><b>
      <p><font face="Times New Roman, Times, serif" size="2">Supplemental cash
        flow information</font> </p>
      </b></td>
    <td colspan=2>
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="66%">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;
        Cash paid for interest</font> </p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 4,281
        </font></p>
    </td>
    <td width="17%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 2,595
        </font> </p>
    </td>
  </tr>
</table>
<p align="center"><font face="Times New Roman, Times, serif" size="3">See accompanying
  notes. </font><font face="Times New Roman, Times, serif" size="3"> <BR>
  3 </font></p>
<p style="PAGE-BREAK-BEFORE: always">
<HR width="100%">
<P align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
  <font face="Times New Roman, Times, serif" size="3"><a name=notes></a></font>
<P align=center><font face="Times New Roman, Times, serif" size="3"><b>SOCKET
  COMMUNICATIONS, INC.<br>
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS<br>
  </b>(Unaudited) </font>
<p><font face="Times New Roman, Times, serif" size="3"><b>NOTE 1 - Basis of Presentation</b></font></p>
<p>The accompanying unaudited consolidated financial statements of Socket Communications,
  Inc. and its wholly owned subsidiaries (the "Company") have been prepared in
  accordance with accounting principles generally accepted in the United States
  for interim financial information and with the instructions to Form 10-Q and
  Article 10 of Regulation S-X. Accordingly, they do not include all of the information
  and footnotes required by accounting principles generally accepted in the United
  States for complete financial statements. In the opinion of management, all
  adjustments (consisting only of normal recurring accruals) considered necessary
  for fair presentation have been included. Certain information and footnote disclosures
  normally included in financial statements prepared in accordance with accounting
  principles generally accepted in the United States have been condensed or omitted.
  These consolidated financial statements should be read in conjunction with the
  audited consolidated financial statements and notes included in the Company's
  Annual Report on Form 10-K for the year ended December 31, 2005.</p>
<p><font face="Times New Roman, Times, serif" size="3"> <b>NOTE 2 - Summary of
  Significant Accounting Policies</b></font></p>
<p>The preparation of financial statements in conformity with accounting principles
  generally accepted in the United States requires management to make estimates
  and assumptions that affect the reported amounts of assets and liabilities,
  the disclosure of contingent assets and liabilities at the date of the financial
  statements, and 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.</p>
<p>The Company makes adjustments to the value of inventory based on estimates
  of potentially excess and obsolete inventory after considering forecasted demand
  and forecasted average selling prices. However, forecasts are subject to revisions,
  cancellations, and rescheduling. Actual demand will inevitably differ from anticipated
  demand, and such differences may have a material effect on the financial statements.
</p>
<p align="left">On January 1, 2006, the Company adopted Financial Accounting Standard
  SFAS 123R, "Share-Based Payment," for the fiscal year ended December 31, 2006.
  SFAS 123R requires all share-based awards to employees, including grants of
  employee stock options, to be recognized in the financial statements based on
  their fair values. Adoption of SFAS had a material impact on the Company's consolidated
  financial position, results of operations and cash flows. See Note 3 for additional
  information regarding the Company's stock-based compensation assumptions and
  expenses, including pro forma disclosures for prior periods.</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">4</font>
</p>
<hr width="100%">
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p><font face="Times New Roman, Times, serif" size="3"><b>NOTE 3 - Stock-Based
  Compensation </b></font></p>
<p>On January 1, 2006, the Company adopted SFAS 123R for the fiscal year ended
  December 31, 2006. SFAS 123R requires all share-based awards to employees, including
  grants of employee stock options, to be recognized in the financial statements
  based on their fair values. The valuation provisions of SFAS 123R apply to new
  grants and to grants that were outstanding as of the effective date. Under SFAS
  123R, the Company uses a binomial lattice valuation model to estimate fair value
  of stock option grants made on or after January 1, 2006. The binomial lattice
  model incorporates estimates for expected volatility, risk-free interest rates,
  employee exercise patterns and post-vesting employment termination behavior,
  and these estimates will affect the calculation of the fair value of the Company's
  stock option grants. The fair value of stock option grants outstanding as of
  the effective date is estimated using the Black-Scholes option pricing model
  used under SFAS 123. The Company adopted the modified prospective recognition
  method and implemented the provisions of SFAS 123R beginning with the first
  quarter of 2006.</p>
<p>At June 30, 2006, options issued to employees for 9,020,755 shares were outstanding,
  of which 6,431,681 were exercisable. The weighted average fair value of the
  individual options issued and outstanding during the three and six months ended
  June 30, 2006 was estimated at $1.69 and $1.72, respectively. The fair values
  were determined using a binomial lattice valuation model for options granted
  during the first six months of 2006, and a Black-Scholes valuation model for
  options granted prior to the first quarter of 2006. Weighted average assumptions
  for options issued and outstanding during the three and six months ended June
  30, 2006 are shown below:</p>
<p align=left>&nbsp;
<table cellspacing=1 cellpadding=1 width=80% align=center border=1>
  <tr valign=bottom>
    <td width="43%" height="18"><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font></td>
    <td colspan="2" height="18">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Three
        Months Ended<br>
        June 30, 2006</font></div>
    </td>
    <td colspan="2" height="18" width="28%">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Six
        Months Ended <br>
        June 30, 2006</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Risk-free interest
        rate (%)</font> </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">3.51%
        </font> </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">3.49%
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Dividend yield</font>
      </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">-- </font>
      </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">-- </font>
      </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Volatility factor</font>
      </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">1.2</font>
      </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">1.2</font>
      </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Expected option life
        (years) </font> </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">4.8
        </font> </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">4.9
        </font> </p>
    </td>
  </tr>
</table>
<br>
<p>Total stock-based compensation expense recognized in our consolidated statement
  of income for the three and six months ended June 30, 2006 are as follows:<br>
  <br>
</p>
<table cellspacing=1 cellpadding=1 width=80% align=center border=1>
  <tr valign=bottom>
    <td width="43%" height="11"><font size="2">Income Statement Classification</font></td>
    <td colspan="2" height="11">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Three
        Months Ended <br>
        June 30, 2006</font></div>
    </td>
    <td colspan="2" height="11" width="28%">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Six
        Months Ended <br>
        June 30, 2006</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%" height="8">
      <p><font face="Times New Roman, Times, serif" size="2">Cost of revenue</font></p>
    </td>
    <td colspan="2" height="8">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 23,295</font>
      </p>
    </td>
    <td colspan="2" height="8" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 47,691</font>
      </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%" height="12">
      <p><font face="Times New Roman, Times, serif" size="2">Research and development</font></p>
    </td>
    <td colspan="2" height="12">
      <p align=center><font face="Times New Roman, Times, serif" size="2">87,729
        </font> </p>
    </td>
    <td colspan="2" height="12" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">182,696
        </font> </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Sales and marketing</font>
      </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">107,311
        </font> </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">240,567
        </font> </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%" height="17">
      <p><font face="Times New Roman, Times, serif" size="2">General and administrative</font></p>
    </td>
    <td colspan="2" height="17">
      <p align=center><font face="Times New Roman, Times, serif" size="2">92,296
        </font> </p>
    </td>
    <td colspan="2" height="17" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">165,490
        </font> </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Total</font> </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 310,631
        </font> </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 636,444</font></p>
    </td>
  </tr>
</table>
<br>
<p>Prior to January 1, 2006 the Company accounted for employee stock options in
  accordance with Accounting Principles Board Opinion No. 25, "Accounting for
  Stock Issued to Employees" (APB 25), and the Company adopted the disclosure-only
  alternative described in Statement of Financial Accounting Standards No. 123,
  "Accounting for Stock-Based Compensation" (SFAS 123). Under APB 25, the Company
  generally did not record compensation expense, because the exercise price of
  the Company's employee stock options equaled the market price of the underlying
  stock on the date of grant. Pro forma information regarding net loss and loss
  per share available to common stockholders was required by SFAS 123, and such
  information has been determined as if the Company had accounted for its employee
  stock options under the fair value method.</p>
<p align="center">5 </p>
<hr width="100%">
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p align=left>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 for the three and six months ended June 30, 2005 would have changed
  to the pro forma net loss amounts indicated below:<br>
  <br>
  <br>
<table cellspacing=1 cellpadding=1 width=80% align=center border=1>
  <tr valign=bottom>
    <td width="43%" height="11"><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></td>
    <td colspan="2" height="11">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Three
        Months Ended <br>
        June 30, 2005</font></div>
    </td>
    <td colspan="2" height="11" width="28%">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Six
        Months Ended <br>
        June 30, 2005</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%" height="8">
      <p><font face="Times New Roman, Times, serif" size="2">Net income (loss)
        applicable to common stockholders, as reported</font></p>
    </td>
    <td colspan="2" height="8">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 245,908</font>
      </p>
    </td>
    <td colspan="2" height="8" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (158,000)</font>
      </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%" height="10">
      <p><font face="Times New Roman, Times, serif" size="2">Stock-based employee
        compensation expense determined under fair value based method</font> </p>
    </td>
    <td colspan="2" height="10">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(384,671)
        </font> </p>
    </td>
    <td colspan="2" height="10" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">(1,562,451)
        </font> </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Pro forma net loss
        applicable to common stockholders</font> </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (138,763)
        </font> </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (1,720,451)
        </font> </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%" height="9">&nbsp;</td>
    <td colspan="2" height="9">&nbsp;</td>
    <td colspan="2" height="9" width="28%">&nbsp;</td>
  </tr>
  <tr valign=bottom>
    <td width="43%" height="9">
      <p><font face="Times New Roman, Times, serif" size="2">Basic net income
        (loss) per share, as reported</font></p>
    </td>
    <td colspan="2" height="9">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 0.01</font>
      </p>
    </td>
    <td colspan="2" height="9" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (0.01)</font>
      </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%" height="17">
      <p><font face="Times New Roman, Times, serif" size="2">Diluted net income
        (loss) per share, as reported</font></p>
    </td>
    <td colspan="2" height="17">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 0.01
        </font> </p>
    </td>
    <td colspan="2" height="17" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (0.01)
        </font> </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Pro forma basic and
        diluted net loss per share</font> </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (0.00)
        </font> </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ (0.06)
        </font> </p>
    </td>
  </tr>
</table>
<br>
<p>The fair value of these options was estimated at the date of grant using the
  Black-Scholes option pricing model. Weighted average assumptions for the three
  and six months ended June 30, 2005 is presented below:</p>
<table cellspacing=1 cellpadding=1 width=80% align=center border=1>
  <tr valign=bottom>
    <td width="43%" height="18"><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;
      </font></td>
    <td colspan="2" height="18">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Three
        Months Ended<br>
        June 30, 2005</font></div>
    </td>
    <td colspan="2" height="18" width="28%">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Six
        Months Ended <br>
        June 30, 2005</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Risk-free interest
        rate (%)</font> </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">3.85%
        </font> </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">3.78%
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Dividend yield</font>
      </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">-- </font>
      </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">-- </font>
      </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Volatility factor</font>
      </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">1.0</font>
      </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">1.0</font>
      </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="43%">
      <p><font face="Times New Roman, Times, serif" size="2">Expected option life
        (years) </font> </p>
    </td>
    <td colspan="2">
      <p align=center><font face="Times New Roman, Times, serif" size="2">4.5
        </font> </p>
    </td>
    <td colspan="2" width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">4.5
        </font> </p>
    </td>
  </tr>
</table>
<br>
<p><font face="Times New Roman, Times, serif" size="3"><b>NOTE 4 - Inventories</b></font></p>
<p>Inventories consist principally of raw materials and sub-assemblies, which
  are stated at the lower of cost (first-in, first-out) or market.<br>
  <br>
</p>
<table cellspacing=1 cellpadding=1 width=80% align=center border=1>
  <tr valign=bottom>
    <td><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></td>
    <td width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">June
        30, 2006 </font></p>
    </td>
    <td width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">December
        31, 2005 </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td>
      <p><font face="Times New Roman, Times, serif" size="2">Raw materials and
        subassemblies </font></p>
    </td>
    <td width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 2,207,265
        </font></p>
    </td>
    <td width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 1,910,653
        </font> </p>
    </td>
  </tr>
  <tr valign=bottom>
    <td height="21">
      <p><font face="Times New Roman, Times, serif" size="2">Finished goods</font></p>
    </td>
    <td width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">279,355
        </font></p>
    </td>
    <td width="28%">
      <p align=center><font face="Times New Roman, Times, serif" size="2">284,741
        </font></p>
    </td>
  </tr>
  <tr valign=bottom>
    <td height="11">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;
        </font> </p>
    </td>
    <td width="28%" height="11">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 2,486,620
        </font></p>
    </td>
    <td width="28%" height="11">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 2,195,394
        </font></p>
    </td>
  </tr>
</table>
<p><br>
</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">6</font>
</p>
<hr width="100%">
<font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p><font face="Times New Roman, Times, serif" size="3"><b>NOTE 5 - Bank Financing
  Arrangements</b></font></p>
<p>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 at June
  30, 2006 were 8.75% on both the domestic and international lines. At June 30,
  2006, outstanding amounts borrowed under the lines were $1,515,794 and $710,414,
  respectively, which were the approximate amounts available on the lines. These
  amounts outstanding at June 30, 2006 were repaid in July 2006. At December 31,
  2005, outstanding amounts borrowed under the lines were $1,358,984 and $949,787,
  respectively, which were the approximate amounts available on the lines. These
  amounts outstanding at December 31, 2005 were repaid in January 2006. The Company
  used the credit facility only at the end of the first and second quarters in
  2006, and the end of each quarter in fiscal year 2005. Under the credit agreement,
  the Company must maintain quarterly minimum tangible net worth equal to $5,400,000,
  plus 50% of quarterly net profits and 50% of net proceeds from equity and subordinated
  debt financing transactions beginning with the quarter ending March 31, 2006.
  The Company was in compliance with the quarterly tangible net worth requirement
  at the end of the first and second quarters of 2006.</p>
<p align="left"><font face="Times New Roman, Times, serif" size="3"><b>NOTE 6
  - Series F Convertible Preferred Stock Financing</b></font></p>
<p>On March 21, 2003, the Company sold 276,269 units of securities at a price
  of $7.22 per unit (total of $2,000,000 gross cash proceeds) in a private equity
  placement. Each unit consisted of one share of the Company's Series F convertible
  preferred stock (the "Series F Preferred Stock") and a three-year warrant to
  purchase three shares of the Company's common stock. Two directors of the Company
  invested an aggregate of $115,000 in the financing. Each share of Series F Preferred
  Stock was convertible, in whole or in part, into 10 shares of common stock at
  the option of the holder at any time for a period of three years following the
  date of sale, with a mandatory conversion date on March 21, 2006. The holders
  of Series F Preferred Stock had voting rights equal to the number of shares
  of common stock issuable upon conversion. The originally issued Series F Preferred
  Stock was convertible into a total of 2,762,690 shares of common stock at a
  conversion price of $0.722 per share, subject to certain adjustments. An additional
  828,807 shares of common stock were issuable upon exercise of the originally
  issued warrants at an exercise price of $0.722 per share. In addition, the Company
  issued five-year warrants to the placement agent to acquire up to 718,300 shares
  of common stock at $0.722 per share.</p>
<p>On March 21, 2006, the remaining outstanding shares of Series F Preferred Stock
  automatically converted into common stock, resulting in the issuance of 823,300
  shares of common stock. During the first quarter of 2006, holders elected to
  exercise the remaining outstanding three-year warrants resulting in the issuance
  of 461,022 shares of common stock. </p>
<p align=left>Dividends accrued on the Series F Preferred Stock at the rate of
  8% per annum and were payable quarterly in cash or in common stock, at the option
  of the Company. Final dividends on the Series F Preferred Stock up through the
  date of mandatory conversion in the first quarter 2006 were $10,653, and were
  paid in cash prior to the end of the first quarter. Dividends for the three
  and six months ended June 30, 2005 were $12,174 and $24,374, respectively, which
  were paid in cash subsequent to the end of each of the respective quarters.
<p align=center>7
<p align=center>
<hr width="100%">
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p align=left><font face="Times New Roman, Times, serif" size="3"><b>NOTE 7 -
  Intangible Assets</b></font>
<p>Intangible assets at June 30, 2006 consist of a patent purchased in 2004 for
  $600,000 covering the design and functioning of plug-in bar code scanners, bar
  code imagers and RFID products, which is being amortized on a straight line
  basis over its estimated life of ten years; intangible assets of $570,750 remaining
  from a prior acquisition in 2000 consisting of developed software and technology
  with estimated lives at the time of acquisition of 8.5 years; and a licensing
  agreement with a book value of $38,000, which was reclassified as an intangible
  asset at December 31, 2004 and is being amortized over its remaining life of
  three years.</p>
<p>Amortization of all intangible assets for the three and six months ended June
  30, 2006 was $36,043 and $72,086, respectively, compared to $36,042 and $130,955,
  respectively, for the same periods in 2005. Intangible assets as of June 30,
  2006 consisted of the following:<br>
  <br>
</p>
<table cellspacing=1 cellpadding=1 width=78% align=center border=1>
  <tr valign=bottom>
    <td width="472">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp; </font></p>
    </td>
    <td width="169">
      <p align=center><font face="Times New Roman, Times, serif" size="2">Gross<br>
        Assets </font></p>
    </td>
    <td width="138">
      <div align="center"><font size="2" face="Times New Roman, Times, serif">Accumulated
        Amortization</font></div>
    </td>
    <td width="162">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Net
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="472">
      <p><font face="Times New Roman, Times, serif" size="2">Patent</font></p>
    </td>
    <td width="169">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ 600,000
        </font></p>
    </td>
    <td width="138">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (120,000) </font></div>
    </td>
    <td width="162">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        480,000 </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="472">
      <p><font face="Times New Roman, Times, serif" size="2">Project management
        tools </font></p>
    </td>
    <td width="169">
      <p align=center><font face="Times New Roman, Times, serif" size="2">570,750
        </font></p>
    </td>
    <td width="138">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">(386,095)
        </font></div>
    </td>
    <td width="162">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">184,655
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="472">
      <p><font face="Times New Roman, Times, serif" size="2">Licensing agreement</font></p>
    </td>
    <td width="169">
      <p align=center><font face="Times New Roman, Times, serif" size="2">114,342
        </font></p>
    </td>
    <td width="138">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">(102,145)
        </font></div>
    </td>
    <td width="162">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">12,197
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="472">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;Intangible
        technology </font></p>
    </td>
    <td width="169">
      <p align=center><font face="Times New Roman, Times, serif" size="2">$1,285,092
        </font></p>
    </td>
    <td width="138">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (608,240) </font></div>
    </td>
    <td width="162">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        676,852 </font></div>
    </td>
  </tr>
</table>
<br>
<p align=left>Based on definite lived intangible assets recorded at June 30, 2006,
  and assuming no subsequent impairment of the underlying assets, the annual amortization
  expense is expected to be as follows:<br>
  <br>
  <br>
<table cellspacing=1 cellpadding=1 width=60% align=center border=1>
  <tr valign=bottom>
    <td colspan="3">
      <p align="left"><font face="Times New Roman, Times, serif" size="2">Year
        </font></p>
    </td>
    <td width="226" align="center">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Amount</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan="3">
      <div align="left"><font face="Times New Roman, Times, serif" size="2">2006
        (six months remaining)</font></div>
    </td>
    <td width="226" align="center">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        68,361 </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan="3">
      <div align="left"><font face="Times New Roman, Times, serif" size="2">2007
        </font></div>
    </td>
    <td width="226" align="center">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">134,557
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan="3">
      <div align="left"><font face="Times New Roman, Times, serif" size="2">2008
        </font></div>
    </td>
    <td width="226" align="center">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">127,147
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan="3">
      <div align="left"><font face="Times New Roman, Times, serif" size="2">2009
        </font></div>
    </td>
    <td width="226" align="center">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">76,787
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan="3">
      <div align="left"><font face="Times New Roman, Times, serif" size="2">2010
        </font></div>
    </td>
    <td width="226" align="center">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">60,000
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan="3">
      <div align="left"><font face="Times New Roman, Times, serif" size="2">2011
        and beyond </font></div>
    </td>
    <td width="226" align="center">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">210,000
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td colspan="3">
      <div align="left"><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;
        </font></div>
    </td>
    <td width="226" align="center">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        676,852 </font></div>
    </td>
  </tr>
</table>
<p>&nbsp;</p>
<p align=center>8 <br>
  <br>
<hr width="100%">
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p align=left><font face="Times New Roman, Times, serif" size="3"><b>NOTE 8 -
  Net Income (Loss) Per Share Applicable to Common Stockholders</b></font>
<p>The Company calculates earnings per share in accordance with Financial Accounting
  Standards Board Statement No. 128, <i>Earnings per Share</i>.</p>
<p>The following table sets forth the computation of basic and diluted net income
  (loss) per share:<br>
  <br>
</p>
<table cellspacing=1 cellpadding=1 width=80% align=center border=1>
  <tr valign=top>
    <td width=412 height="22"><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></td>
    <td colspan=2 height="22">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Three
        Months Ended <br>
        June 30,</font></div>
    </td>
    <td colspan=2 height="22">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">Six
        Months Ended <br>
        June 30,</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width=412 height="2"><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></td>
    <td width="120">
      <div align="center"><font size="2">2006</font></div>
    </td>
    <td width="120">
      <div align="center"><font size="2">2005</font></div>
    </td>
    <td width="120">
      <div align="center"><font size="2">2006</font></div>
    </td>
    <td width="120">
      <div align="center"><font size="2">2005</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="412">
      <p><font face="Times New Roman, Times, serif" size="2">Numerator: </font></p>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width=412 height="14">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbspNet
        income (loss)</font></p>
    </td>
    <td width="120" height="14">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (448,237)</font></div>
    </td>
    <td width="120" height="14">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        258,082</font></div>
    </td>
    <td width="120" height="14">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (817,350) </font></div>
    </td>
    <td width="120" height="14">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (133,626)</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width=412 height="18">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbspPreferred
        stock dividends</font></p>
    </td>
    <td width="120" height="18">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">--
        </font><font face="Times New Roman, Times, serif" size="2"> </font></div>
    </td>
    <td width="120" height="18">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">(12,174)
        </font><font face="Times New Roman, Times, serif" size="2"> </font></div>
    </td>
    <td width="120" height="18">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">(10,653)
        </font><font face="Times New Roman, Times, serif" size="2"> </font></div>
    </td>
    <td width="120" height="18">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">(24,374)
        </font><font face="Times New Roman, Times, serif" size="2"> </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width=412 height="13">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbspNet
        income (loss) applicable to common stockholders </font></p>
    </td>
    <td width="120" height="13">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (448,237)</font></div>
    </td>
    <td width="120" height="13">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        245,908</font></div>
    </td>
    <td width="120" height="13">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (828,003) </font></div>
    </td>
    <td width="120" height="13">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (158,000)</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width="412" height="4">&nbsp;</td>
    <td width="120" height="4">&nbsp;</td>
    <td width="120" height="4">&nbsp;</td>
    <td width="120" height="4">&nbsp;</td>
    <td width="120" height="4">&nbsp;</td>
  </tr>
  <tr valign=bottom>
    <td width="412" height="4">
      <p><font face="Times New Roman, Times, serif" size="2">Denominator: </font></p>
    </td>
    <td width="120" height="4">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
    <td width="120" height="4">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
    <td width="120" height="4">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
    <td width="120" height="4">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td width=412 height="2" valign="top">
      <p><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbspWeighted
        average common shares outstanding used&nbspin computing net income (loss)
        per share</font></p>
    </td>
    <td width="120" height="2">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
    <td width="120" height="2">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
    <td width="120" height="2" valign="bottom">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
    <td width="120" height="2" valign="bottom">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td align=left width=412 height="12">
      <p align="left"><font face="Times New Roman, Times, serif" size="2">&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbspBasic
        </font></p>
    </td>
    <td width="120" height="12">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">31,695,832</font><font face="Times New Roman, Times, serif" size="2">
        </font></div>
    </td>
    <td width="120" height="12">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">30,160,994</font><font face="Times New Roman, Times, serif" size="2">
        </font></div>
    </td>
    <td width="120" height="12">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">31,045,664</font><font face="Times New Roman, Times, serif" size="2">
        </font></div>
    </td>
    <td width="120" height="12">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">30,157,993</font><font face="Times New Roman, Times, serif" size="2">
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td align=left width=412>
      <p align="left"><font face="Times New Roman, Times, serif" size="2"> &nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbspDiluted
        </font></p>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">31,695,832
        </font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">32,301,424
        </font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">31,045,664
        </font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">30,157,993
        </font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td align=left width=412>&nbsp;</td>
    <td width="120">&nbsp;</td>
    <td width="120">&nbsp;</td>
    <td width="120">&nbsp;</td>
    <td width="120">&nbsp;</td>
  </tr>
  <tr valign=bottom>
    <td align=left width=412>
      <p align="left"><font face="Times New Roman, Times, serif" size="2">Basic
        net income (loss) per share</font></p>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (0.01)</font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        0.01</font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (0.03)</font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (0.01)</font></div>
    </td>
  </tr>
  <tr valign=bottom>
    <td align=left width=412>
      <p align="left"><font face="Times New Roman, Times, serif" size="2">Diluted
        net income (loss) per share </font></p>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (0.01)</font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        0.01</font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (0.03)</font></div>
    </td>
    <td width="120">
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        (0.01)</font></div>
    </td>
  </tr>
</table>
<br>
<p>For the three and six months ended June 30, 2006, and the six months ended
  June 30, 2005, the diluted net loss per share is equivalent to the basic net
  loss per share, because the Company experienced losses in these periods and
  thus no potential common shares underlying stock options, warrants, or convertible
  preferred stock have been included in the net loss per share calculation as
  their effect is anti-dilutive. Therefore, options and warrants to purchase 10,137,677
  and 9,573,019 shares of common stock at June 30, 2006 and 2005, from the exercise
  of stock options, warrants, and conversion of preferred stock have been omitted
  from the net loss per share calculation. </p>
<p align="left"><font face="Times New Roman, Times, serif" size="3"> <b>NOTE 9
  - Income Taxes</b></font></p>
<p>There were no provisions for income taxes for the three and six months ended
  June 30, 2006 due to the year to date net losses. The Company was not profitable
  in fiscal 2005, was profitable in 2004, and was not profitable in 2003 and all
  prior periods. The Company has maintained a full valuation allowance for all
  deferred tax assets.</p>
<p align="center">9</p>
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font></p>
<p><font face="Times New Roman, Times, serif" size="3"><b>NOTE 10 - Segment Information</b></font></p>
<p>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 three and six months ended March 31, 2006
  and 2005 are as follows:<br>
  <br>
</p>
<CENTER>
  <TABLE cellSpacing=1 cellPadding=1 width=80% align=center border=1>
    <TR vAlign=bottom>
      <TD width=378 height="22"><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></TD>
      <TD height="22" colSpan=2>
        <div align="center"><font face="Times New Roman, Times, serif" size="2">Three
          Months Ended <br>
          June 30,</font></div>
      </TD>
      <TD colSpan=2 height="22">
        <P align=center><font face="Times New Roman, Times, serif" size="2">Six
          Months Ended <br>
          June 30,</font></P>
      </TD>
    </TR>
    <TR vAlign=bottom>
      <TD width=378>
        <P><font face="Times New Roman, Times, serif" size="2">Revenues: </font></P>
      </TD>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">2006
          </font></p>
      </td>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">2005
          </font></p>
      </td>
      <TD width=160>
        <P align=center><font face="Times New Roman, Times, serif" size="2">2006
          </font></P>
      </TD>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">2005
          </font></p>
      </td>
    </TR>
    <TR vAlign=bottom>
      <TD width=378>
        <P><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;United
          States </font></P>
      </TD>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">$
          4,973,927 </font></p>
      </td>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">$
          4,013,266 </font></p>
      </td>
      <TD width=160>
        <P align=center><font face="Times New Roman, Times, serif" size="2">$9,714,050
          </font></P>
      </TD>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">$
          8,048,808 </font></p>
      </td>
    </TR>
    <TR vAlign=bottom>
      <TD width=378 height="6">
        <P><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Europe
          </font></P>
      </TD>
      <td width=160 height="6">
        <p align=center><font face="Times New Roman, Times, serif" size="2">1,460,363
          </font></p>
      </td>
      <td width=160 height="6">
        <p align=center><font face="Times New Roman, Times, serif" size="2">1,994,414
          </font></p>
      </td>
      <TD width=160 height="6">
        <P align=center><font face="Times New Roman, Times, serif" size="2">2,844,686
          </font></P>
      </TD>
      <td width=160 height="6">
        <p align=center><font face="Times New Roman, Times, serif" size="2">3,359,893
          </font></p>
      </td>
    </TR>
    <TR vAlign=bottom>
      <TD width=378>
        <P><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;Asia
          and rest of world </font></P>
      </TD>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">420,738
          </font></p>
      </td>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">572,734
          </font></p>
      </td>
      <TD width=160>
        <P align=center><font face="Times New Roman, Times, serif" size="2">1,054,983
          </font></P>
      </TD>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">1,153,909
          </font></p>
      </td>
    </TR>
    <TR vAlign=bottom>
      <TD width=378>
        <P><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;Total
          revenues </font></P>
      </TD>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">$
          6,855,028</font></p>
      </td>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">$
          6,580,414</font></p>
      </td>
      <TD width=160>
        <P align=center><font face="Times New Roman, Times, serif" size="2">$
          13,613,719</font></P>
      </TD>
      <td width=160>
        <p align=center><font face="Times New Roman, Times, serif" size="2">$
          12,562,610</font></p>
      </td>
    </TR>
  </TABLE>
  <br>
</CENTER>
<P></P>
<P><font face="Times New Roman, Times, serif" size="3"><BR>
  Export revenues are attributable to countries based on the location of the customers.
  The Company does not hold long-lived assets in foreign locations.</font></P>
<p>Major customers who accounted for at least 10% of the Company's total revenues
  during the three and six months ended June 30, 2006 and 2005 were as follows:<br>
  <br>
</p>
<P align=center>
<CENTER>
  <TABLE cellSpacing=1 cellPadding=1 width=80% align=center border=1>
    <TR vAlign=bottom>
      <TD width="32%" height=16><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></TD>
      <td colspan=2 height=16>
        <p align=center><font face="Times New Roman, Times, serif" size="2">Three
          Months Ended <br>
          June 30, </font></p>
      </td>
      <TD colSpan=2 height=16>
        <P align=center><font face="Times New Roman, Times, serif" size="2">Six
          Months Ended <br>
          June 30, </font></P>
      </TD>
    </TR>
    <TR vAlign=bottom>
      <TD width="32%"><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;</font></TD>
      <td width="16%">
        <p align=center><font face="Times New Roman, Times, serif" size="2">2006
          </font></p>
      </td>
      <td width="16%">
        <p align=center><font face="Times New Roman, Times, serif" size="2">2005
          </font></p>
      </td>
      <TD width="16%">
        <P align=center><font face="Times New Roman, Times, serif" size="2">2006
          </font></P>
      </TD>
      <td width="16%">
        <p align=center><font face="Times New Roman, Times, serif" size="2">2005
          </font></p>
      </td>
    </TR>
    <tr valign=bottom>
      <td width="32%" height=23>
        <p><font face="Times New Roman, Times, serif" size="2">Tech Data</font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">32%
          </font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">32%
          </font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">29%
          </font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">31%
          </font></p>
      </td>
    </tr>
    <tr valign=bottom>
      <td width="32%" height=23>
        <p><font face="Times New Roman, Times, serif" size="2">Ingram Micro</font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">13%
          </font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">13%
          </font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">14%
          </font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">12%
          </font></p>
      </td>
    </tr>
    <tr valign=bottom>
      <td width="32%" height=23>
        <p><font face="Times New Roman, Times, serif" size="2">Intermec Technologies
          Corp. </font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">11%
          </font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">*
          </font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">*
          </font></p>
      </td>
      <td width="16%" height=23>
        <p align=center><font face="Times New Roman, Times, serif" size="2">*
          </font></p>
      </td>
    </tr>
  </TABLE>
</CENTER>
<P></P>
<p>&nbsp;</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">10</font><font face="Times New Roman, Times, serif" size="3">
  </font> </p>
<p align=center>
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
  <font face="Times New Roman, Times, serif" size="3"><a
name=mda></a></font> </p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Item 2. Management's
  Discussion and Analysis of Financial Condition and Results of Operations </b></font></p>
<p><font face="Times New Roman, Times, serif" size="3"><i>This Quarterly 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. Factors that could cause actual results and outcomes to differ materially
  include, but are not limited to, the risk of delays in the availability of our
  products due to technological, market or financial factors including, the availability
  of necessary working capital, our ability to successfully introduce and market
  future products, our ability to effectively manage and contain our operating
  costs, the availability of announced third-party handheld computer hardware
  and software that our products are intended to work with, product delays associated
  with new model introductions and product changeovers by the makers of products
  that our products are intended to work with, continued growth in demand for
  handheld computers, market acceptance of emerging standards such as Bluetooth
  and Wireless LAN and of our related connection and data collection products,
  the ability of our strategic relationships to benefit our business as expected,
  our ability to enter into additional distribution relationships, or other factors
  described in this Form 10-Q including "Item 1A. Risk Factors" and recent 8-K
  and 10-K 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.</i></font></p>
<p><i>You should read the following discussion in conjunction with the interim
  condensed consolidated financial statements and notes included elsewhere in
  this report, the Company's annual financial statements in the 10-K, and other
  information contained in other reports and documents filed from time to time
  with the Securities and Exchange Commission.</i></p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Revenue<br>
  </b></font><br>
  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 sell embedded products that are designed
  to be built into third-party mobile electronic devices, and we also design,
  manufacture and sell serial products that connect mobile electronic devices
  to peripheral and other electronic devices. Total revenue for the three and
  six months ended June 30, 2006 of $6.9 million and $13.6 million, respectively,
  represented increases of 4% and 8% from revenue of $6.6 million and $12.6 million
  for the corresponding periods one year ago.</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">11</font></p>
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font></p>
<p>Our products may be classified into four broad product families:</p>
<ul>
  <li> Our <i>data collection products</i> 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 and write
    to RFID tags; 3) a combination plug-in bar code scanner and RFID reader-writer;
    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 Card plug-in bar code scanners for linear and
    two-dimensional bar code scanning, a stand alone hand held bar code scanner
    that connects to computing devices using the Bluetooth standard for short-range
    wireless connectivity, and a cordless ring scanner using Bluetooth wireless
    technology. Data collection products represented approximately 37 percent
    of our revenue for both the three and six month periods ended June 30, 2006.</li>
</ul>
<ul>
  <li><font face="Times New Roman, Times, serif" size="3"> Our <i>connectivity
    products</i> </font>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 and cordless serial
    adapter connectivity products utilize Bluetooth wireless technology as a connection
    mechanism to work with other Bluetooth-enabled products. Connectivity products
    represented approximately 31 percent and 30 percent of our revenue for the
    three and six month periods ended June 30, 2006.<br>
  </li>
</ul>
<p align="center"><font face="Times New Roman, Times, serif" size="3">12 </font></p>
<hr width="100%">
<p align=left>
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<ul>
  <li><font face="Times New Roman, Times, serif" size="3">Our <i>OEM embedded
    products and services</i> consist of Bluetooth cards and modules, WLAN cards,
    interface chips, and engineering design services. Our Bluetooth cards and
    modules, and our WLAN cards, allow manufacturers of handheld computers and
    other devices to build wireless connection functions into their products using
    the Bluetooth and WLAN 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. We are developing
    modules using Wireless LAN standards for wireless connectivity that are expected
    to begin shipping in the second half of 2006. Embedded products and services
    represented approximately 22 percent of our revenue in both the three and
    six month periods ended June 30, 2006.</font></li>
</ul>
<ul>
  <li>Our <i>serial products</i> 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 10 percent and 11
    percent of our revenue for the three and six month periods ended June 30,
    2006.</li>
</ul>
<p>Our data collection product revenues were $2.6 million for the three months
  ended June 30, 2006, a decrease of 9% compared to $2.8 million for the same
  period one year ago. Revenue declines totaling $0.5 million were due to decreases
  in sales of our Cordless Hand Scanner, our In-Hand Scan Imager card, and our
  SDIO In-Hand Scan card. Partially offsetting these decreases were increases
  in sales of our In-Hand Scan card and sales of our Cordless Ring Scanner, which
  began shipping in the fourth quarter of 2005. Our data collection product revenues
  were $5.1 million for the six month period ended June 30, 2006, an increase
  of 2% compared to $5.0 million for the same period one year ago. Revenue increases
  totaling $0.4 million were due to increases in sales of our In-Hand Scan card
  and our Cordless Ring Scanner, partially offset by declines in sales of our
  Cordless Hand Scanner, our SDIO In-Hand Scan card, and our In-Hand Scan Imager
  card. The introduction of an operating system upgrade, Windows Mobile 5.0, announced
  in September 2005 by the major PDA manufacturers, continued to slow customer
  deployments through the second quarter of 2006, as third party applications
  continued to be modified and tested with the new operating system. In addition,
  transition to lead-free products to comply with the Reduction of Hazardous Substances
  (RoHS) rules being implemented in Europe and around the world limited the availability
  of units by the major PDA manufacturers until late in the second quarter of
  2006. 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.</p>
<p>Our connectivity product revenues were $2.1 million for the three months ended
  June 30, 2006, a decrease of 3% compared to $2.2 million for the same period
  one year ago. Revenue declines for the comparable three months are attributed
  to declines of $0.4 million in sales of Cordless GPS receiver with navigation
  kit, and slight declines in sales of our Ethernet plug-in products and Bluetooth
  plug-in products, partially offset by increases of $0.3 million in sales of
  our Modem plug-in products, and slight increases in sales of our Wireless LAN
  products. Our connectivity product revenues were $4.1 million for the six months
  ended June 30, 2006, a decline of 4% compared to $4.3 million for the same period
  one year ago. Revenue declines for the comparable six months are attributed
  to declines of $0.6 million in sales of Cordless GPs receiver with navigation
  kit, and slight declines in sales of our Ethernet plug-in products, partially
  offset by increases of $0.3 million in sales of our Modem plug-in products,
  and slight increases in sales of our Wireless LAN products and Bluetooth plug-in
  products. The introduction of an operating system upgrade, Windows Mobile 5.0,
  announced in September 2005 by the major PDA manufacturers, continued to slow
  customer deployments through the second quarter of 2006 as third party applications
  continue to be modified and tested with the new operating system. In addition,
  transition to lead-free products to comply with the Reduction of Hazardous Substances
  (RoHS) rules being implemented in Europe and around the world limited the availability
  of units by the major PDA manufacturers until late in the second quarter of
  2006.</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">13</font>
</p>
<p align=center>
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
</p>
<p>Our OEM embedded products and services revenues were $1.5 million for the three
  months ended June 30, 2006, an increase of 111% compared to $0.7 million in
  the same period one year ago. Our embedded products and services revenues were
  $3.0 million for the six month period ended June 30, 2006, and increase of 91%
  compared to $1.6 million for the same period one year ago. Revenue growth of
  $0.8 million and $1.5 million for the three and six month periods in 2006 from
  sales of our Bluetooth modules was due to increased manufacturing volumes of
  industrial ruggedized PDAs by our customers, partially offset by declines in
  sales of our proprietary ASIC chip due to customers choosing higher speed alternative
  ASIC solutions beginning in the latter half of 2005. We expect continued reduced
  levels of chip sales for 2006 due to limited marketability of this ASIC solution.</p>
<p>Our serial product revenues were $0.7 million for the three months ended June
  30, 2006, a decrease of 18% compared to $0.8 million for the same period one
  year ago. Our serial product revenues were $1.4 million for the six month period
  ended June 30, 2006, a decrease of 16% compared to $1.7 million for the same
  period one year ago. Revenue decreases of $0.1 million and $0.3 million from
  the three and six month comparable periods in 2005, were from declining sales
  of our standard serial PC Card products. Sales of our cordless Bluetooth serial
  adapter were flat in the comparable periods. Overall serial product revenues
  have declined successively in fiscal 2005 and in the first six months of fiscal
  2006 from 2004 levels. Standard peripheral connection cards are primarily sold
  to connect peripheral devices or other electronic equipment to notebook computers.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Gross Margins</b></font></p>
<p>Gross margins for both the three and six month periods ended June 30, 2006
  were 50%, compared to margins of 50% and 51% in the comparable periods in 2005.
  Margin reductions primarily reflect higher accruals for inventory reserves in
  the first six months of 2006 compared to the same period in 2005. Higher reserves
  in the first and second quarters of 2006 reflect excess non-RoHS compliant inventories
  estimated at the end of the first and second quarters of 2006. We generally
  price our products as a markup from our cost, and we offer discount pricing
  for higher volume purchases.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Research and Development
  Expense</b></font></p>
<p>Research and development expense for the three months ended June 30, 2006 was
  $1.4 million, an increase of 54% compared to research and development expense
  of $0.9 million in the corresponding period one year ago. Research and development
  expense for the six months ended June 30, 2006 was $2.5 million, an increase
  of 41% compared to research and development expense of $1.8 million in the corresponding
  period one year ago. Increases in personnel costs of $0.1 million and $0.2 million
  in the three and six months ended June 30, 2006 related primarily to the recognition
  of stock-based compensation expense resulting from the adoption and implementation
  of SFAS 123R beginning January 1, 2006. Additional increases were from increased
  equipment costs, outside services, and consulting and professional fees reflecting
  increased development activities. Expenses are expected to decrease in the third
  quarter of 2006 from second quarter levels.<br>
  <br>
</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">14</font><font face="Times New Roman, Times, serif" size="3">
  <br>
  </font> </p>
<p align=center>
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font></p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Sales and Marketing
  Expense</b></font> </p>
<p>Sales and marketing expense for the three months ended June 30, 2006 was $1.8
  million, an increase of 18% compared to sales and marketing expense of $1.6
  million in the corresponding period one year ago. Sales and marketing expense
  for the six month period ended June 30, 2006 was $3.6 million, an increase of
  13% compared to sales and marketing expense of $3.2 million in the corresponding
  period one year ago. Half of the overall increase in the comparable three and
  six month periods was related to stock-based compensation expense recognized
  in 2006 resulting from the adoption and implementation of SFAS 123R beginning
  January 1, 2006. Personnel and advertising and promotion expenses also increased
  reflecting higher sales levels. Expenses are expected to remain flat in the
  third quarter of 2006 from second quarter levels.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>General and Administrative
  Expense</b></font></p>
<p>General and administrative expense for the three months ended June 30, 2006
  was $0.6 million, an increase of 11% compared to the corresponding period one
  year ago. General and administrative expense for the six month period ended
  June 30, 2006 was $1.5 million, an increase of 5% compared to general and administrative
  expense in the corresponding period one year ago. Increases in personnel costs
  of $0.1 million and $0.2 million in the three and six months ended June 30,
  2006 were from stock-based compensation expense recognized in the first two
  quarters of 2006 resulting from the adoption and implementation of SFAS 123R
  beginning January 1, 2006. Partially offsetting these increases in the comparable
  six month periods were reduced professional fees related to Sarbanes-Oxley compliance
  requirements in 2005. Expenses are expected to remain flat in the third quarter
  of 2006 from second quarter levels.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Amortization of Intangibles</b></font></p>
<p>In July 2004 we acquired a patent which covers the design and functioning of
  plug-in bar code scanners, bar code imagers and RFID products. The patent was
  purchased for $600,000 and has been capitalized as an intangible asset. The
  patent is being amortized on a straight line basis over a ten year period. Intangible
  assets of $570,750 remaining from a prior acquisition in 2000 consist of developed
  software and technology with estimated lives at the time of acquisition of 8.5
  years. At December 31, 2004, a licensing agreement with a book value of $38,000
  was reclassified as an intangible asset and is being amortized over its remaining
  life of three years. During the first quarter of 2002, we acquired intangible
  assets in conjunction with the acquisition of Nokia's CompactFlash Bluetooth
  Card business and related product line technology valued at $980,000. Estimated
  useful lives of the acquired assets at the time of acquisition ranged from one
  to three years. At March 31, 2005, all components of the acquired Nokia intangibles
  were fully amortized. Amortization charges for all acquired intangibles for
  the three and six months ended June 30, 2006 were $36,000 and $72,000, respectively,
  compared to $36,000 and $131,000, for the same periods one year ago. The lower
  amortization charges in 2006 are due to components of intangible property becoming
  fully amortized.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Interest Income, Interest
  Expense, Net</b></font></p>
<p>Interest income reflects interest earned on cash balances. Interest income
  of $50,000 and $87,000 for the three and six month periods ended June 30, 2006,
  respectively, compared to interest income of $18,000 and $31,000, respectively,
  for the comparable periods one year ago. Higher levels of interest income reflects
  higher average levels of cash on hand combined with higher rates of return in
  the three and six months of 2006 compared to the same periods in 2005.<br>
  <br>
</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">15<br>
  </font> </p>
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font></p>
<p><font face="Times New Roman, Times, serif" size="3">Interest expense of $2,100
  and $4,300 for the three and six months ended June 30, 2006 respectively, compared
  to interest expense of $900 and $2,600, respectively, for the comparable periods
  one year ago. Interest expense is related to interest on equipment lease financing
  obligations and interest on amounts drawn on our bank lines of credit. We used
  our bank lines of credit only at the end of the first and second quarter of
  2006, and the end of each quarter in 2005.</font></p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Preferred Stock Dividends
  </b></font></p>
<p>Dividends accrued on the Series F Preferred Stock at the rate of 8% per annum
  and were payable quarterly in cash or in common stock, at the option of the
  Company. Preferred stock dividends for the six months ended June 30, 2006 reflect
  dividends of $10,700 on the Series F Preferred Stock up through the date of
  mandatory conversion in the first quarter 2006, which were paid prior to the
  end of the first quarter. On March 21, 2006 the outstanding shares of Series
  F Preferred Stock automatically converted into common stock resulting in the
  issuance of 823,300 shares of common stock. Dividends on the Series F Preferred
  Stock for the three and six month periods ended June 30, 2005 were $12,200 and
  $24,400, respectively, which were paid in cash subsequent to the end of each
  of those respective quarters.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Income Taxes </b></font></p>
<p>There were no provisions for income taxes for the three and six months ended
  June 30, 2006 due to our year-to-date net losses. We were not profitable in
  fiscal 2005, profitable in fiscal 2004, and not profitable in fiscal 2003 and
  all prior periods. We have maintained a full valuation allowance for all deferred
  tax assets.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Liquidity and Capital
  Resources</b></font></p>
<p>We were unprofitable in the first two quarters of 2006 due in part to the negative
  impact of the adoption of SFAS 123R on January 1, 2006. We were profitable in
  two of the quarters in fiscal year 2005, but unprofitable for fiscal year 2005.
  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.</p>
<p align="left">Cash provided by operating activities was $0.5 million in the
  first half of 2006 and $1.6 million in the first half of 2005. Cash provided
  in the first half of 2006 from our net loss adjusted for non-cash items was
  $0.2 million, compared to $0.3 million in the first half of 2005. Adjustments
  for non-cash items, including depreciation and amortization, amortization of
  intangibles, gains and losses on foreign currency forward exchange contracts,
  changes in deferred rent, and beginning January 1, 2006, stock-based compensation,
  totaled $1.0 million in the first half of 2006, compared to $0.4 million in
  the first half of 2005. Changes in working capital balances in the first half
  of 2006 resulted in a source of cash of $0.3 million, which was primarily from
  increases in payables and reductions in prepaid and other current assets, partially
  offset by increases in levels of inventories and receivables. Changes in working
  capital balances in the first half of 2005 resulted in a source of cash of $1.3
  million, which was primarily from decreases in receivables due to early collections
  from key distributors, reductions in levels of inventory, and increases in payables
  and deferred revenue on shipments to distributors.<br>
  <br>
</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">16</font>
</p>
<hr width="100%">
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<P>Cash used in investing activities was $0.6 million in the first half of 2006,
  compared to $0.3 million in the first half of 2005. Investing activities in
  both 2006 and 2005 primarily reflect the cost of new computer hardware and software,
  and tooling costs.</P>
<p>Cash provided from financing activities was $0.5 million in the first half
  of 2006, compared to cash used of $0.7 million during the first half of 2005.
  Financing activities in the first half of 2006 consisted primarily of proceeds
  from the exercise of warrants and stock options, partially offset by a net decrease
  in the amounts drawn on our bank lines of credit, and the final dividend payments
  on Series F Preferred Stock. Financing activities in the first half of 2005
  consisted primarily of a net decrease in the amounts drawn on our bank lines
  of credit, payment of cash dividends, and payments on capital leases partially
  offset by proceeds from the exercise of stock options.</p>
<p>Our cash balances at June 30, 2006 were $7.3 million, including cash of $2.2
  million drawn against our bank line of credit. In March 2006, we extended our
  bank line of credit agreement which will now expire on March 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
  June 30, 2007. If we can return to profitability and revenue growth, we anticipate
  requirements for cash will include funding of higher receivable and inventory
  balances, and increasing expenses, including more employees to support our growth
  and increases in salaries, benefits, and related support costs for employees.
  If we cannot return to profitability, we will not be able to support our operations
  from positive cash flows, and we would use our existing cash to support operating
  losses. Should the need arise, we cannot assure you that additional capital
  will be available on acceptable terms, if at all, and any such terms may be
  dilutive to existing stockholders. Although we do not anticipate the need to
  raise additional capital at this time to fund our operations, we may raise additional
  capital if market conditions are appropriate.</p>
<p align=left>Our contractual cash obligations at June 30, 2006 are outlined in
  the table below:
<p align=left>&nbsp;
<table cellspacing=1 cellpadding=1 width=80% align=center border=1>
  <tr>
    <td width=275>
      <div align=center><font face="Times New Roman, Times, serif" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></div>
    </td>
    <td colspan=5>
      <div align=center><font face="Times New Roman, Times, serif" size="2">Payments
        Due by Period</font></div>
    </td>
  </tr>
  <tr>
    <td width=275 valign="bottom">
      <div align="left"><font face="Times New Roman, Times, serif" size="2">Contractual
        Obligations</font></div>
    </td>
    <td valign=bottom align=middle width=163>
      <div align=center><font face="Times New Roman, Times, serif" size="2">Total
        </font></div>
    </td>
    <td valign=bottom align=middle width=134>
      <div align=center><font face="Times New Roman, Times, serif" size="2">Less
        than <br>
        1 year</font></div>
    </td>
    <td valign=bottom align=middle width=121>
      <div align=center><font face="Times New Roman, Times, serif" size="2">1
        to 3 <br>
        years</font></div>
    </td>
    <td valign=bottom align=middle width=121>
      <div align=center><font face="Times New Roman, Times, serif" size="2">4
        to 5 <br>
        years</font></div>
    </td>
    <td valign=bottom align=middle width=141>
      <div align="center"><font face="Times New Roman, Times, serif" size="2">More
        than<br>
        5 years</font></div>
    </td>
  </tr>
  <tr>
    <td width=275><font face="Times New Roman, Times, serif" size="2">Capital
      leases </font></td>
    <td valign=bottom align=middle width=163>
      <div align=center><font face="Times New Roman, Times, serif" size="2">$
        13,200</font></div>
    </td>
    <td valign=bottom align=middle width=134>
      <div align=center><font face="Times New Roman, Times, serif" size="2">$
        9,800</font></div>
    </td>
    <td valign=bottom align=middle width=121>
      <div align=center><font face="Times New Roman, Times, serif" size="2">$
        3,400 </font></div>
    </td>
    <td valign=bottom align=middle width=121>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ --
        </font></p>
    </td>
    <td valign=bottom align=middle width=141>
      <p align=center><font face="Times New Roman, Times, serif" size="2">$ --
        </font></p>
    </td>
  </tr>
  <tr>
    <td width=275><font face="Times New Roman, Times, serif" size="2">Operating
      leases</font></td>
    <td valign=bottom align=middle width=163>
      <div align=center><font face="Times New Roman, Times, serif" size="2">221,100
        </font></div>
    </td>
    <td valign=bottom align=middle width=134>
      <div align=center><font face="Times New Roman, Times, serif" size="2">221,100
        </font></div>
    </td>
    <td valign=bottom align=middle width=121>
      <div align=center><font face="Times New Roman, Times, serif" size="2">--
        </font></div>
    </td>
    <td valign=bottom align=middle width=121>
      <div align=center><font face="Times New Roman, Times, serif" size="2"> --
        </font></div>
    </td>
    <td valign=bottom align=middle width=141>
      <div align="center"><font face="Times New Roman, Times, serif" size="2">
        -- </font></div>
    </td>
  </tr>
  <tr>
    <td align=left width=275><font face="Times New Roman, Times, serif" size="2">Unconditional
      purchase obligations with </font><font face="Times New Roman, Times, serif" size="2">contract
      manufacturers</font></td>
    <td valign=bottom align=middle width=163>
      <div align=center><font face="Times New Roman, Times, serif" size="2">920,500
        </font></div>
    </td>
    <td valign=bottom align=middle width=134>
      <div align=center><font face="Times New Roman, Times, serif" size="2">920,500
        </font></div>
    </td>
    <td valign=bottom align=middle width=121>
      <div align=center><font face="Times New Roman, Times, serif" size="2">--</font></div>
    </td>
    <td valign=bottom align=middle width=121>
      <div align=center><font face="Times New Roman, Times, serif" size="2">--
        </font></div>
    </td>
    <td valign=bottom align=middle width=141>
      <div align="center"><font face="Times New Roman, Times, serif" size="2">--
        </font></div>
    </td>
  </tr>
  <tr>
    <td width=275><font face="Times New Roman, Times, serif" size="2">Total contractual
      cash obligations</font></td>
    <td valign=bottom align=middle width=163>
      <div align=center><font face="Times New Roman, Times, serif" size="2">$
        1,154,800</font></div>
    </td>
    <td valign=bottom align=middle width=134>
      <div align=center><font face="Times New Roman, Times, serif" size="2">$
        1,151,400</font></div>
    </td>
    <td valign=bottom align=middle width=121>
      <div align=center><font face="Times New Roman, Times, serif" size="2">$
        3,400 </font></div>
    </td>
    <td valign=bottom align=middle width=121>
      <div align=center><font face="Times New Roman, Times, serif" size="2">$
        --</font></div>
    </td>
    <td valign=bottom align=middle width=141>
      <div align="center"><font face="Times New Roman, Times, serif" size="2">$
        --</font></div>
    </td>
  </tr>
</table>
<p>&nbsp;</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">17</font><font face="Times New Roman, Times, serif" size="3">
  <br>
  </font> </p>
<p align=center>
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
</p>
<P><font face="Times New Roman, Times, serif" size="3"><b>Off-Balance Sheet Arrangements</b></font></P>
<p>We have no off-balance sheet arrangements as defined in Item 303 of Regulation
  S-K.</p>
<p><b>Stock Based Compensation</b></p>
<p>On January 1, 2006, we adopted SFAS 123R for the fiscal year ended December
  31, 2006. SFAS 123R requires all share-based awards to employees, including
  grants of employee stock options, to be recognized in the financial statements
  based on their fair values. The valuation provisions of SFAS 123R apply to new
  grants and to grants that were outstanding as of the effective date. Under SFAS
  123R, we use a binomial lattice valuation model to estimate fair value of stock
  option grants made on or after January 1, 2006. The binomial lattice model incorporates
  estimates for expected volatility, risk-free interest rates, employee exercise
  patterns and post-vesting employment termination behavior, and these estimates
  will affect the calculation of the fair value of our stock option grants. The
  fair value of stock option grants outstanding as of the effective date is estimated
  using the Black-Scholes option pricing model used under SFAS 123. We adopted
  the modified prospective recognition method and implemented the provisions of
  SFAS 123R beginning with the first quarter of 2006. </p>
<p>Adoption of SFAS 123R resulted in stock-based compensation expense of $311,000
  and $636,000 for the three and six months ended June 30, 2006, and had a material
  impact on our consolidated financial position, results of operations and cash
  flows. We expect that the adoption of FAS 123R will continue to have a material
  impact on our reported results in future quarters. See Note 3 for additional
  information regarding our stock-based compensation assumptions and expenses,
  including pro forma disclosures for prior periods.</p>
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a><a
name=qqd></a></font></p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Item 3. Quantitative
  and Qualitative Disclosures About Market Risk</b></font> </p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Interest Rate Risk</b></font></p>
<p>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 June 30, 2006, a decline
  of 1% in interest rates would reduce our quarterly interest income by approximately
  $13,000.</p>
<p>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 the first
  and second quarters of 2006, and the end of each quarter in 2005, and therefore
  did not subject ourselves to interest rate exposure. Based on a sensitivity
  analysis, an increase of 1% in the interest rate would increase our borrowing
  costs by $10,000 for each $1 million of borrowings against our bank credit facility,
  if outstanding for the entire year, or a maximum of $40,000 if we utilized our
  entire credit line.<br>
  <br>
  <font face="Times New Roman, Times, serif" size="3"> </font></p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">18</font>
</p>
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font><font face="Times New Roman, Times, serif" size="3">
  </font></p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Foreign Currency Risk</b></font></p>
<p>A substantial majority of our revenue, expense and purchasing activities are
  transacted in US 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 June 30, 2006, an adverse
  change of 10% in exchange rates would result in a decrease in our net income
  for the second quarter of approximately $52,000, if left unprotected. For the
  second quarter of 2006 the total net adjustment for the effects of changes in
  foreign currency on cash balances, collections, payables, and derivatives was
  a net gain of $15,000. We hedge a significant portion of our European receivable
  balances denominated in Euros to reduce the foreign currency risk associated
  with these assets. We will continue to monitor and assess the risk associated
  with these exposures and may at some point in the future take additional actions
  to mitigate these risks.</p>
<p><font face="Times New Roman, Times, serif" size="3"><a
name=item4></a></font></p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Item 4. Controls and
  Procedures</b></font></p>
<p><font face="Times New Roman, Times, serif" size="3">(a) Evaluation of disclosure
  controls and procedures</font></p>
<p>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 Quarterly Report
  on Form 10-Q. 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.</p>
<p><font face="Times New Roman, Times, serif" size="3">(b) Changes in internal
  control over financial reporting</font></p>
<p align="left">There was no change in our internal control over financial reporting
  that occurred during the period covered by this Quarterly Report on Form 10-Q
  that has materially affected, or is reasonably likely to materially affect,
  our internal control over financial reporting. <br>
</p>
<p align="center"><br>
  <font face="Times New Roman, Times, serif" size="3">19</font> </p>
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font><font face="Times New Roman, Times, serif" size="3">
  <a
name=oth></a> <a
name=risk></a></font></p>
<P><font face="Times New Roman, Times, serif" size="3"><b>PART II. OTHER INFORMATION</b></font></P>
<P><b>Item 1A. Risk Factors</b></P>
<p>There are no material changes to the risk factors described in Part I, "Item
  1A. Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended
  December 31, 2005. The risk factor below titled, "<i>Failure to maintain effective
  internal controls could have a material adverse effect on our business, operating
  results and stock price</i>," has been updated to reflect that under our current
  status as a non-accelerated filer, the requirement under Section 404 of the
  Sarbanes-Oxley Act that our Independent Registered Public Accounting Firm issue
  a report on the annual assessment by management of the design and effectiveness
  of internal controls over financial reporting, is no longer in effect, and therefore
  the reference has been deleted. The presentation of numerical amounts and percentages
  in the following risk factors below titled: "<i>A significant portion of our
  revenue currently comes from two distributors, and any decrease in revenue from
  these distributors could harm our business</i>;" "<i>Our operating results could
  be harmed by economic, political, regulatory and other risks associated with
  export sales</i>;" "<i>The sale of a substantial number of shares of common
  stock could cause the market price of our common stock to decline</i>;" and
  "<i>Volatility in the trading price of our common stock could negatively impact
  the price of our common stock</i>," have been updated to reflect information
  for the six month period ending June 30, 2006.</p>
<p>The risks described in our Annual Report on Form 10-K, as updated in this Report
  on Form 10-Q, are not the only risks facing our Company. Additional risks and
  uncertainties not currently known to us or that we currently deem to be immaterial
  also may materially adversely affect our business, financial condition, and
  operating results.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>We have a history of
  operating losses and may not achieve ongoing profitability.</b></font></p>
<p>We were unprofitable in the first and second quarters of 2006. 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 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.</p>
<p><b>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.</b></p>
<p align=left>Although we do not anticipate the need to raise additional capital
  during the next twelve months to fund our operations, we may incur operating
  losses in future quarters and may need to raise capital to fund these losses.
  Our forecasts are highly dependent on factors beyond our control, including
  market acceptance of our products and sales of handheld computers. If capital
  requirements vary materially from those currently planned, we may require additional
  capital sooner than expected. There can be no assurance that such capital will
  be available in sufficient amounts or on terms acceptable to us, if at all.
  In addition, the availability of our bank line is dependent upon our meeting
  certain covenants, including a tangible net worth covenant. Future operating
  losses could cause us to lose the availability of our bank line as a result
  of becoming non-compliant with these covenants.<br>
  <br>
<p align="center"><font face="Times New Roman, Times, serif" size="3">20</font>
</p>
<hr width="100%">
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p><b>If third-parties do not produce and sell innovative products with which
  our products are compatible, we may not achieve our sales projections.</b></p>
<p>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-mobile handheld devices, particularly the Pocket PC and other
  devices, such as the line of handhelds with expansion options offered by Palm
  and the adoption of smartphones for business use. If manufacturers are unable
  or choose not to ship new products such as Pocket PC and other Windows-mobile
  devices or Palm devices on schedule, or experience difficulties with new product
  transitions that cause delays in the market as we experienced in 2005 and the
  first six months of 2006, 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.</p>
<p align="left"><b>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. </b></p>
<p>The market for our products is prone to rapidly changing technology, evolving
  industry standards and short product life cycles. If we are unsuccessful at
  developing and introducing new products and services on a timely basis that
  include the latest technologies conforming to the newest standards and that
  are appealing to end users, we will not be able to compete effectively, and
  our ability to generate significant revenues will be seriously harmed.</p>
<p>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:</p>
<ul>
  <li><font face="Times New Roman, Times, serif" size="3"> identify emerging standards
    in the field of mobile computing products; <br>
    </font></li>
  <li><font face="Times New Roman, Times, serif" size="3"> enhance our products
    by adding additional features; <br>
    </font></li>
  <li> invest <font face="Times New Roman, Times, serif" size="3">significant
    resources in research and development, sales and marketing, and customer support;<br>
    </font></li>
  <li> maintain superior or competitive performance in our products; and</li>
  <li> anticipate our end users' needs and technological trends accurately.</li>
</ul>
<p>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.</p>
<p align="center"> <font face="Times New Roman, Times, serif" size="3">21</font><font face="Times New Roman, Times, serif" size="3"><br>
  </font> </p>
<hr width="100%">
<p align=left>
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p align="left"><b>Beginning January 1, 2006 we began to expense options granted
  under our employee stock plans as compensation, and as a result our net income
  and earnings per share were negatively affected, we may continue to have net
  losses as a result of the requirement to expense options, and may find it necessary
  to change our business practices to attract and retain employees.</b></p>
<p>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 has adversely affected our net income and earnings per share in
  the first and second quarter of 2006, will continue to adversely affect future
  quarters, and will make profitability harder to achieve or make our net losses
  worse. In addition, we may decide in response to the effects of expensing stock
  options on our operating results to reduce the number of stock options granted
  to employees or to grant options to fewer employees. This could adversely affect
  our ability to retain existing employees and attract qualified candidates, and
  also could increase the cash compensation we would have to pay to them.</p>
<p><b>A significant portion of our revenue currently comes from two distributors,
  and any decrease in revenue from these distributors could harm our business.</b></p>
<p align=left>A significant portion of our revenue comes from two distributors,
  Tech Data Corp. and Ingram Micro, Inc., which together represented approximately
  43 and 42 percent of our worldwide revenue in the first six months of 2006 and
  fiscal year 2005, respectively. We expect that a significant portion of our
  revenue will continue to depend on sales to Tech Data Corp. and Ingram Micro,
  Inc. We do not have long-term commitments from Tech Data Corp. or Ingram Micro,
  Inc. to carry our products. Either could choose to stop selling some or all
  of our products at any time, and each of these companies also carries 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.
<p><b>If the market for mobile computers fails to grow, we will not achieve our
  sales projections.</b></p>
<p>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 and in the
  first six months of 2006, we will not achieve our sales projections.</p>
<p align="left"><font face="Times New Roman, Times, serif" size="3"><b>Our sales
  will be hurt if the new technologies used in our products do not become widely
  adopted, or are adopted slower than expected.</b></font></p>
<p>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.</p>
<p align="center"> <font face="Times New Roman, Times, serif" size="3">22</font>
  <font face="Times New Roman, Times, serif" size="3"> <br>
  </font> </p>
<p align=center>
<hr width="100%">
<p align=left>
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p><b>We could face increased competition in the future, which would adversely
  affect our financial performance.</b></p>
<p>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:</p>
<ul>
  <li>some of our competitors have greater financial, marketing, and technical
    resources than we do; </li>
  <li>we periodically face intense price competition, particularly when our competitors
    have excess inventories and discount their prices to clear their inventories;
    and</li>
  <li>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.</li>
</ul>
<p>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.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>If we do not correctly
  anticipate demand for our products, our operating results will suffer.</b></font></p>
<p>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.</p>
<p>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.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>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.</b></font></p>
<p>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.<br>
  <br>
</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">23</font><font face="Times New Roman, Times, serif" size="3"><br>
  </font> </p>
<p align=center>
<hr width="100%">
<p align=left>
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p>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.</p>
<p align=left>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.
<p><font face="Times New Roman, Times, serif" size="3"><b>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.</b></font></p>
<p>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.</p>
<p>We have devoted significant research and development resources to design activities
  for Windows-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.</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">24</font><font face="Times New Roman, Times, serif" size="3">
  <br>
  </font> </p>
<p align=center>
<hr width="100%">
<p align=left>
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<p><font face="Times New Roman, Times, serif" size="3"><b>Our intellectual property
  and proprietary rights may be insufficient to protect our competitive position.</b></font></p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>We may become subject
  to claims of intellectual property rights infringement, which could result in
  substantial liability.</b></font></p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">25</font><font face="Times New Roman, Times, serif" size="3">
  </font> </p>
<p align=center>
<hr width="100%">
<p align=left>
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<p><b>New industry standards may require us to redesign our products, which could
  substantially increase our operating expenses.</b></p>
<p>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.</p>
<p><b>Undetected flaws and defects in our products may disrupt product sales and
  result in expensive and time-consuming remedial action.</b></p>
<p>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.</p>
<p><b>Our quarterly operating results may fluctuate in future periods, which could
  cause our stock price to decline.</b></p>
<p>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:</p>
<ul>
  <li><font face="Times New Roman, Times, serif" size="3"> the demand for our
    products;<br>
    </font></li>
  <li><font face="Times New Roman, Times, serif" size="3"> the size and timing
    of customer orders;<br>
    </font></li>
  <li> unanticipated <font face="Times New Roman, Times, serif" size="3">delays
    or problems in our introduction of new products and product enhancements;<br>
    </font></li>
  <li><font face="Times New Roman, Times, serif" size="3"> the introduction of
    new products and product enhancements by our competitors;<br>
    </font></li>
  <li> the <font face="Times New Roman, Times, serif" size="3">timing of the introduction
    of new products that work with our connection products;<br>
    </font></li>
  <li> changes <font face="Times New Roman, Times, serif" size="3">in the proportion
    of revenues attributable to royalties and engineering development services;<br>
    </font></li>
  <li> product mix;<font face="Times New Roman, Times, serif" size="3"><br>
    </font></li>
  <li> timing of software enhancements;<font face="Times New Roman, Times, serif" size="3"><br>
    </font></li>
  <li> changes in the level of operating expenses;<font face="Times New Roman, Times, serif" size="3"><br>
    </font></li>
  <li> competitive <font face="Times New Roman, Times, serif" size="3">conditions
    in the industry including competitive pressures resulting in lower average
    selling prices; and<br>
    </font></li>
  <li> timing of distributors' shipments to their customers.</li>
</ul>
<p align="center"> <font face="Times New Roman, Times, serif" size="3">26</font><font face="Times New Roman, Times, serif" size="3">
  </font> </p>
<p align=center>
<hr width="100%">
<p align=left>
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p>Because we base our staffing and other operating expenses on anticipated revenue,
  delays in the receipt of orders can cause significant variations in operating
  results from quarter to quarter. As a result of any of the foregoing factors,
  or a combination, our results of operations in any given quarter may be below
  the expectations of public market analysts or investors, in which case the market
  price of our common stock would be adversely affected.</p>
<p align="left"><font face="Times New Roman, Times, serif" size="3"><b>The loss
  of one or more of our senior personnel could harm our existing business. </b></font></p>
<p>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.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>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.</b></font></p>
<p>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.</p>
<p align=left><b>We may not be able to collect revenues from customers who experience
  financial difficulties. </b>
<p>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.</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">27</font><font face="Times New Roman, Times, serif" size="3">
  </font> </p>
<p align=center>
<hr width="100%">
<p align=left>
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p><font face="Times New Roman, Times, serif" size="3"><b>We may be unable to
  manufacture our products, because we are dependent on a limited number of qualified
  suppliers for our components.</b></font></p>
<p>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.</p>
<p align="left"><font face="Times New Roman, Times, serif" size="3"><b>Our operating
  results could be harmed by economic, political, regulatory and other risks associated
  with export sales.</b></font></p>
<p>Export sales (sales to customers outside the United States) accounted for approximately
  29 percent of our revenue in the first six months of 2006 and 35 percent of
  our revenue in the fiscal year 2005. Accordingly, our operating results are
  subject to the risks inherent in export sales, including:</p>
<ul>
  <li><font face="Times New Roman, Times, serif" size="3">longer payment cycles;<br>
    </font></li>
  <li><font face="Times New Roman, Times, serif" size="3">unexpected changes in
    regulatory requirements, import and export restrictions and tariffs;<br>
    </font></li>
  <li><font face="Times New Roman, Times, serif" size="3">difficulties in managing
    foreign operations;<br>
    </font></li>
  <li><font face="Times New Roman, Times, serif" size="3">the burdens of complying
    with a variety of foreign laws;<br>
    </font></li>
  <li><font face="Times New Roman, Times, serif" size="3">greater difficulty or
    delay in accounts receivable collection;<br>
    </font></li>
  <li><font face="Times New Roman, Times, serif" size="3">potentially adverse
    tax consequences; and<br>
    </font></li>
  <li><font face="Times New Roman, Times, serif" size="3">political and economic
    instability.</font></li>
</ul>
<p align="left">Our export sales are primarily denominated in United States dollars
  and in Euros for our sales to European distributors. Accordingly, an increase
  in the value of the United States dollar relative to foreign currencies could
  make our products more expensive and therefore potentially less competitive
  in foreign markets. Declines in the value of the Euro relative to the United
  States dollar may result in foreign currency losses relating to collection of
  Euro denominated receivables.</p>
<p align="left"><b>Our operations are vulnerable to interruption by fire, earthquake,
  power loss, telecommunications failure, and other events beyond our control.</b></p>
<p align="left">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.</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">28</font>
  <font face="Times New Roman, Times, serif" size="3"> <br>
  </font> </p>
<p align=center>
<hr width="100%">
<p align=left>
<p align=left><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
<p><b>Failure to maintain effective internal controls could have a material adverse
  effect on our business, operating results and stock price. </b></p>
<p>We have evaluated and will continue to evaluate our internal control procedures
  in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act,
  which requires an annual management assessment of the design and effectiveness
  of our internal controls over financial reporting. If we fail to maintain the
  adequacy of our internal controls, as such standards are modified, supplemented
  or amended from time to time, we may not be able to ensure that we can conclude
  on an ongoing basis that we have effective internal controls over financial
  reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover,
  effective internal controls, particularly those related to revenue recognition,
  are necessary for us to produce reliable financial reports and are important
  to helping prevent financial fraud. If we cannot provide reliable financial
  reports or prevent fraud, our business and operating results could be harmed,
  investors could lose confidence in our reported financial information, and the
  trading price of our stock could drop significantly.</p>
<p><font face="Times New Roman, Times, serif" size="3"><b>The sale of a substantial
  number of shares of common stock could cause the market price of our common
  stock to decline.</b></font></p>
<p align="left">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.</p>
<p align="left">As of July 31, 2006, we had 31,847,472 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.</p>
<p align="left">As of July 31, 2006, we had 9,147,965 shares subject to outstanding
  options under our stock option plans, and 562,756 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.</p>
<p align="left">As of July 31, 2006, we had warrants outstanding to purchase a
  total of 989,712 shares of our common stock at exercise prices ranging from
  $0.722 to $2.73. All such warrants may be exercised at any time, and the shares
  issuable upon exercise may be resold, either without restrictions or subject,
  in some cases, only to S-3 prospectus delivery requirements, and, in some cases,
  only to manner of sale, volume, and notice requirements of Rule 144.</p>
<p align="left"><b>Volatility in the trading price of our common stock could negatively
  impact the price of our common stock.</b></p>
<p align="left">During the period from January 1, 2005 through July 31, 2006,
  our common stock price fluctuated between a high of $2.04 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.</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">29</font>
  <font face="Times New Roman, Times, serif" size="3"> <br>
  </font> </p>
<p align=center>
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a><a
name=item6></a></font></p>
<p><font face="Times New Roman, Times, serif" size="3"><b>Item 6. Exhibits</b></font></p>
<p><font face="Times New Roman, Times, serif" size="3"> Exhibits</font></p>
<p>31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
  Sarbanes-Oxley Act of 2002.</p>
<p>31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
  Sarbanes-Oxley Act of 2002.</p>
<p>32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant
  to Section 906 of the Sarbanes-Oxley Act of 2002.</p>
<p>&nbsp;</p>
<p>&nbsp;</p>
<p>&nbsp;</p>
<p align="center"><font face="Times New Roman, Times, serif" size="3">30</font>
</p>
<p style="PAGE-BREAK-BEFORE: always">
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a><a
name=sig></a></font></p>
<p align="center"><font face="Times New Roman, Times, serif" size="3"><b>SIGNATURES</b></font></p>
<P>&nbsp;</P>
<P>Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
  has duly caused this report to be signed on its behalf by the undersigned thereunto
  duly authorized.</P>
<P>&nbsp;</P>
<P align=center><font face="Times New Roman, Times, serif" size="3"><U>SOCKET
  COMMUNICATIONS, INC.<BR>
  </U>Registrant</font></P>
<P>&nbsp;
<TABLE cols=2 width="100%">
  <TR>
    <TD width="38%"><FONT face="Times New Roman, Times, serif" size=3>Date: August
      11, 2006 </FONT></TD>
    <TD width="21%">
      <CENTER>
      </CENTER>
    </TD>
    <TD width="41%">
      <DIV align=left><FONT face="Times New Roman, Times, serif"
      size=3><U>&nbsp;&nbsp;/s/ Kevin J. Mills</U></FONT></DIV>
    </TD>
  </TR>
  <tr>
    <td width="38%">&nbsp;</td>
    <td width="21%">
      <center>
        <font face="Times New Roman, Times, serif" size=3>&nbsp; </font>
      </center>
    </td>
    <td valign=top align=middle width="41%">
      <div align=left>
        <p><font face="Times New Roman, Times, serif" size=3>Kevin J. Mills<br>
          President and Chief Executive Officer</font><br>
          (Duly Authorized Officer and Principal Executive Officer)</p>
      </div>
    </td>
  </tr>
  <tr>
    <td width="38%" height="44">&nbsp;</td>
    <td width="21%" height="44">&nbsp;</td>
    <td width="41%" height="44">&nbsp;</td>
  </tr>
  <tr>
    <td width="38%"><font face="Times New Roman, Times, serif" size=3>Date: August
      11, 2006 </font></td>
    <td width="21%">
      <center>
      </center>
    </td>
    <td width="41%">
      <div align=left><font face="Times New Roman, Times, serif"
      size=3><u>&nbsp;&nbsp;/s/ David W. Dunlap&nbsp;&nbsp;</u></font></div>
    </td>
  </tr>
  <tr>
    <td width="38%">&nbsp;</td>
    <td width="21%">
      <center>
        <font face="Times New Roman, Times, serif" size=3>&nbsp; </font>
      </center>
    </td>
    <td valign=top align=middle width="41%">
      <div align=left><font face="Times New Roman, Times, serif" size=3>David
        W. Dunlap<br>
        Vice President of Finance and Administration and Chief Financial Officer
        <br>
        (Duly Authorized Officer and Principal Financial and Accounting Officer)
        </font></div>
    </td>
  </tr>
</TABLE>
<P>&nbsp;</P>
<P>&nbsp;</P>
<p align="center">31 </p>
<p style="PAGE-BREAK-BEFORE: always">
<hr width="100%">
<p><font face="Times New Roman, Times, serif" size="3"><a href="#TAB">(Index)</a></font>
  <font face="Times New Roman, Times, serif" size="3"><a
name=ind></a></font> </p>

<p align=center><font face="Times New Roman, Times, serif" size="3"><b>Index to
  Exhibits</b><br>
  <br>
  </font>
<table cellspacing=0 cellpadding=0 width=80% align=center border=0>
  <tr>
    <td valign=bottom width="10%" height=48>
      <p align=center><font face="Times New Roman, Times, serif" size=3>Exhibit
        <u>Number</u></font></p>
    </td>
    <td valign=bottom width="90%" height=48>
      <p align=center><font face="Times New Roman, Times, serif"
      size=3><u>Description </u></font></p>
    </td>
  </tr>
  <tr>
    <td valign=top width="10%" height=25>
      <p align=right>&nbsp;</p>
    </td>
    <td valign=top width="90%" height=25>
      <p>&nbsp;</p>
    </td>
  </tr>
  <tr>
    <td valign=top width="10%" height=30>
      <p align=center><font face="Times New Roman, Times, serif"
      size=3>31.1&nbsp;</font> </p>
    </td>
    <td valign=top width="90%" height=30>
      <p>Certification of Chief Executive Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.</p>
    </td>
  </tr>
  <tr>
    <td valign=top width="10%" height=12>&nbsp;</td>
    <td valign=top width="90%" height=12>&nbsp;</td>
  </tr>
  <tr>
    <td valign=top width="10%" height=30>
      <p align=center><font face="Times New Roman, Times, serif"
      size=3>31.2&nbsp;</font> </p>
    </td>
    <td valign=top width="90%" height=30>
      <p>Certification of Chief Financial Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.</p>
    </td>
  </tr>
  <tr>
    <td valign=top width="10%" height=12>&nbsp;</td>
    <td valign=top width="90%" height=12>&nbsp;</td>
  </tr>
  <tr>
    <td valign=top width="10%" height=30>
      <p align=center><font face="Times New Roman, Times, serif"
      size=3>32.1&nbsp;</font> </p>
    </td>
    <td valign=top width="90%" height=30>
      <p>Certification of Chief Executive Officer and Chief Financial Officer
        pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.</p>
    </td>
  </tr>
</table>
<P>&nbsp;</P>
<P>&nbsp;</P>
<P>&nbsp;</P>
<P>&nbsp;</P>
<P>&nbsp;</P>
<P>&nbsp;</P>
<p align=center><font face="Times New Roman, Times, serif" size="3">32</font><font face="Times New Roman, Times, serif" size="3"><br>
  </font>
<p style="PAGE-BREAK-BEFORE: always">
<p align=center>
<br>
<hr width="100%">
<p align=left>
<p align=left>&nbsp;
</BODY></HTML>
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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>2
<FILENAME>exhibit311.htm
<DESCRIPTION>EXHIBIT 31.1
<TEXT>
<html>
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<title>Untitled Document</title>
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<body bgcolor="#FFFFFF">
<p align=left>
<p align=right><font face="Times New Roman, Times, serif" size="3">Exhibit 31.1
  </font>
<p align="center"><font face="Times New Roman, Times, serif" size="3"><b>CERTIFICATION</b></font></p>
<p>I, Kevin J. Mills, certify that:</p>
<p><font face="Times New Roman, Times, serif" size="3">1. I have reviewed this
  quarterly report on Form 10-Q of Socket Communications, Inc.;</font></p>
<p><font face="Times New Roman, Times, serif" size="3">2. Based on my knowledge,
  this report does not contain any untrue statement of a material fact or omit
  to state a material fact necessary to make the statements made, in light of
  the circumstances under which such statements were made, not misleading with
  respect to the period covered by this report;</font></p>
<p><font face="Times New Roman, Times, serif" size="3">3. Based on my knowledge,
  the financial statements, and other financial information included in this report,
  fairly present in all material respects the financial condition, results of
  operations and cash flows of the registrant as of, and for, the periods presented
  in this report;</font></p>
<p><font face="Times New Roman, Times, serif" size="3">4. The registrant's other
  certifying officer and I are responsible for establishing and maintaining disclosure
  controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
  and internal control over financial reporting (as defined in Exchange Act Rules
  13a-15(f) and 15d-15(f)) for the registrant and have:</font></p>
<p><font face="Times New Roman, Times, serif" size="3">(a) Designed such disclosure
  controls and procedures, or caused such disclosure controls and procedures to
  be designed under our supervision, to ensure that material information relating
  to the registrant, including its consolidated subsidiaries, is made known to
  us by others within those entities, particularly during the period in which
  this report is being prepared;</font></p>
<p><font face="Times New Roman, Times, serif" size="3">(b) Designed such internal
  control over financial reporting, or caused such internal control over financial
  reporting to be designed under our supervision, to provide reasonable assurance
  regarding the reliability of financial reporting and the preparation of financial
  statements for external purposes in accordance with generally accepted accounting
  principles;</font></p>
<p><font face="Times New Roman, Times, serif" size="3">(c) Evaluated the effectiveness
  of the registrant's disclosure controls and procedures and presented in this
  report our conclusions about the effectiveness of the disclosure controls and
  procedures as of the end of the period covered by this report based on such
  evaluation; and</font></p>
<p>(d) Disclosed in this report any change in the registrant's internal control
  over financial reporting that occurred during the registrant's most recent fiscal
  quarter (the registrant's fourth fiscal quarter in the case of an annual report)
  that has materially affected, or is reasonably likely to materially affect,
  the registrant's internal control over financial reporting; and</p>
<p><font face="Times New Roman, Times, serif" size="3">5. The registrant's other
  certifying officer and I have disclosed, based on our most recent evaluation
  of internal control over financial reporting, to the registrant's auditors and
  the audit committee of the registrant's board of directors (or persons performing
  the equivalent functions):</font></p>
<p><font face="Times New Roman, Times, serif" size="3">(a) All significant deficiencies
  and material weaknesses in the design or operation of internal control over
  financial reporting which are reasonably likely to adversely affect the registrant's
  ability to record, process, summarize and report financial information; and</font></p>
<p><font face="Times New Roman, Times, serif" size="3">(b) Any fraud, whether
  or not material, that involves management or other employees who have a significant
  role in the registrant's internal control over financial reporting.</font></p>
<table cols=2 width="97%">
  <tr>
    <td width="38%"><font face="Times New Roman, Times, serif" size=3>Date: August
      11, 2006 </font></td>
    <td width="17%">
      <center>
      </center>
    </td>
    <td width="45%">
      <div align=left><font face="Times New Roman, Times, serif"
      size=3><u>By: &nbsp;&nbsp;/s/ Kevin J. Mills</u></font></div>
    </td>
  </tr>
  <tr>
    <td width="38%">&nbsp;</td>
    <td width="17%">
      <center>
        <font face="Times New Roman, Times, serif" size=3>&nbsp; </font>
      </center>
    </td>
    <td valign=top align=middle width="45%">
      <div align=left><font face="Times New Roman, Times, serif" size=3>Name:
        Kevin J. Mills<br>
        Title: President and Chief Executive Officer (Principal Executive Officer)</font></div>
    </td>
  </tr>
</table>
<p><font face="Times New Roman, Times, serif" size="3"><br>
  </font></p>
<p align=center><font face="Times New Roman, Times, serif" size="3"></font>
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<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>3
<FILENAME>exhibit312.htm
<DESCRIPTION>EXHIBIT 31.2
<TEXT>
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<body bgcolor="#FFFFFF">
<p align=right><font face="Times New Roman, Times, serif" size="3">Exhibit 31.2
  </font>
<p align="center"><font face="Times New Roman, Times, serif" size="3"><b>CERTIFICATION</b></font><br>
</p>
<p align="center">&nbsp; </p>
<p>I, David W. Dunlap, certify that:</p>
<p><font face="Times New Roman, Times, serif" size="3">1. I have reviewed this
  quarterly report on Form 10-Q of Socket Communications, Inc.;</font></p>
<p><font face="Times New Roman, Times, serif" size="3">2. Based on my knowledge,
  this report does not contain any untrue statement of a material fact or omit
  to state a material fact necessary to make the statements made, in light of
  the circumstances under which such statements were made, not misleading with
  respect to the period covered by this report;</font></p>
<p><font face="Times New Roman, Times, serif" size="3">3. Based on my knowledge,
  the financial statements, and other financial information included in this report,
  fairly present in all material respects the financial condition, results of
  operations and cash flows of the registrant as of, and for, the periods presented
  in this report;</font></p>
<p><font face="Times New Roman, Times, serif" size="3">4. The registrant's other
  certifying officer and I are responsible for establishing and maintaining disclosure
  controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
  and internal control over financial reporting (as defined in Exchange Act Rules
  13a-15(f) and 15d-15(f)) for the registrant and have:</font></p>
<p><font face="Times New Roman, Times, serif" size="3">(a) Designed such disclosure
  controls and procedures, or caused such disclosure controls and procedures to
  be designed under our supervision, to ensure that material information relating
  to the registrant, including its consolidated subsidiaries, is made known to
  us by others within those entities, particularly during the period in which
  this report is being prepared;</font></p>
<p><font face="Times New Roman, Times, serif" size="3">(b) Designed such internal
  control over financial reporting, or caused such internal control over financial
  reporting to be designed under our supervision, to provide reasonable assurance
  regarding the reliability of financial reporting and the preparation of financial
  statements for external purposes in accordance with generally accepted accounting
  principles;</font></p>
<p><font face="Times New Roman, Times, serif" size="3">(c) Evaluated the effectiveness
  of the registrant's disclosure controls and procedures and presented in this
  report our conclusions about the effectiveness of the disclosure controls and
  procedures as of the end of the period covered by this report based on such
  evaluation; and</font></p>
<p>(d) Disclosed in this report any change in the registrant's internal control
  over financial reporting that occurred during the registrant's most recent fiscal
  quarter (the registrant's fourth fiscal quarter in the case of an annual report)
  that has materially affected, or is reasonably likely to materially affect,
  the registrant's internal control over financial reporting; and</p>
<p><font face="Times New Roman, Times, serif" size="3">5. The registrant's other
  certifying officer and I have disclosed, based on our most recent evaluation
  of internal control over financial reporting, to the registrant's auditors and
  the audit committee of the registrant's board of directors (or persons performing
  the equivalent functions):</font></p>
<p><font face="Times New Roman, Times, serif" size="3">(a) All significant deficiencies
  and material weaknesses in the design or operation of internal control over
  financial reporting which are reasonably likely to adversely affect the registrant's
  ability to record, process, summarize and report financial information; and</font></p>
<p><font face="Times New Roman, Times, serif" size="3">(b) Any fraud, whether
  or not material, that involves management or other employees who have a significant
  role in the registrant's internal control over financial reporting.</font></p>
<table cols=2 width="96%">
  <tr>
    <td width="38%"><font face="Times New Roman, Times, serif" size=3>Date: August
      11, 2006 </font></td>
    <td width="21%">
      <center>
      </center>
    </td>
    <td width="41%">
      <div align=left><font face="Times New Roman, Times, serif"
      size=3><u>By: &nbsp;/s/ David W. Dunlap&nbsp;&nbsp;</u></font></div>
    </td>
  </tr>
  <tr>
    <td width="38%">&nbsp;</td>
    <td width="21%">
      <center>
        <font face="Times New Roman, Times, serif" size=3>&nbsp; </font>
      </center>
    </td>
    <td valign=top align=middle width="41%">
      <div align=left><font face="Times New Roman, Times, serif" size=3>Name:
        David W. Dunlap<br>
        Title: Vice President of Finance and Administration and Chief Financial
        Officer (Principal Financial Officer) </font></div>
    </td>
  </tr>
</table>
<p><font face="Times New Roman, Times, serif" size="3"><br>
  </font></p>
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<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>4
<FILENAME>exhibit321.htm
<DESCRIPTION>EXHIBIT 32.1
<TEXT>
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<p align=right><font face="Times New Roman, Times, serif" size="3">Exhibit 32.1</font>
<p align="center">CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
  OFFICER <br>
  PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 </p>
<p><font face="Times New Roman, Times, serif" size="3"><br>
  I, Kevin J. Mills, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
  to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report
  of Socket Communications, Inc. on Form 10-Q for the quarter ended June 30, 2006
  fully complies with the requirements of Section 13(a) or 15(d) of the Securities
  Exchange Act of 1934 and that information contained in such Quarterly Report
  on Form 10-Q fairly presents in all material respects the financial condition
  and results of operations of Socket Communications, Inc.</font></p>
<table cols=2 width="43%" align="center">
  <tr>
    <td width="41%">
      <div align=left><font face="Times New Roman, Times, serif"
      size=3><u>By: &nbsp;&nbsp;/s/ Kevin J. Mills</u></font></div>
    </td>
  </tr>
  <tr>
    <td valign=top align=middle width="41%">
      <div align=left><font face="Times New Roman, Times, serif" size=3>Name:
        Kevin J. Mills<br>
        Title: &nbsp&nbspPresident and Chief Executive Officer <br>
        &nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp(Principal Executive
        Officer)<br>
        Date: &nbspAugust 11, 2006</font></div>
    </td>
  </tr>
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<p>&nbsp;</p>
<p>I, David W. Dunlap, certify, pursuant to 18 U.S.C. Section 1350, as adopted
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
  Report of Socket Communications, Inc. on Form 10-Q for the quarter ended June
  30, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the
  Securities Exchange Act of 1934 and that information contained in such Quarterly
  Report on Form 10-Q fairly presents in all material respects the financial condition
  and results of operations of Socket Communications, Inc.</p>
<p></p>
<table cols=2 width="45%" align="center">
  <tr>
    <td width="41%">
      <div align=left><font face="Times New Roman, Times, serif"
      size=3><u>By: &nbsp;&nbsp;/s/ David W. Dunlap&nbsp;&nbsp;</u></font></div>
    </td>
  </tr>
  <tr>
    <td valign=top align=middle width="41%" height="105">
      <div align=left><font face="Times New Roman, Times, serif" size=3>Name:
        David W. Dunlap<br>
        Title: &nbsp&nbspVice President of Finance and Administration <br>
        &nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbspand Chief Financial
        Officer <br>
        &nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp(Principal Financial
        Officer)<br>
        Date:&nbsp&nbsp&nbsp&nbspAugust 11, 2006</font></div>
    </td>
  </tr>
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<p>&nbsp;</p>
<p align=center>&nbsp;
<p align=center>&nbsp;
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