This Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements forecasting 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 develop, introduce and market future products; the change in gross margins between current and future products; our ability to effectively manage and contain our operating costs; events in the U.S. and world economy, financial markets and credit markets; the availability of announced third party handheld computer hardware and software that our products are intended to work with; product delays associated with new model introductions and product changeovers by the makers of products that our products are intended to work with; continued growth in demand for handheld computers; market acceptance of emerging standards such as Bluetooth and Wireless LAN and of our related connection, data collection, and mobile handheld computer products; the ability of our strategic relationships to benefit our business as expected; our ability to enter into additional distribution relationships; or other factors described in this Form 10-Q including "Part II, Item 1A. Risk Factors" and recent Form 8-K and Form 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.

You should read the following discussion in conjunction with the interim condensed financial statements and notes included elsewhere in this report, the Company's annual financial statements in the Form 10-K, and other information contained in other reports and documents filed from time to time with the Securities and Exchange Commission.

Revenues

We produce mobile computing products which are combined with third party application software to create mobile system solutions that serve the Business Mobility market. Mobile systems solutions typically consist of a handheld computer, data collection and connectivity peripherals, and third party vertical applications software. We have historically offered a wide range of data collection, connectivity peripheral, and embedded products for use with mobile computing devices offered by third parties. In January 2007, we began doing business as Socket Mobile to emphasize our commitment to mobile computing, and formally changed our name to Socket Mobile, Inc. in April 2008. In June 2007, we introduced our first mobile handheld computer, the SoMo™650, and began offering this mobile handheld computer and our peripherals for use with third party vertical applications software. Our data collection and connectivity peripheral products are used with a variety of handheld computers, including our SoMo 650 mobile handheld computer, and with tablet computers, notebook computers and handheld computers with integrated phones that use Windows Mobile, Windows XP, Windows Vista, RIM Blackberry, Palm, Symbian 60 and Symbian 80 operating systems.

Our overall company brand identity and positioning goal is to become the leading provider of easy-to-deploy Business Mobility systems and peripherals. The guiding principles that we follow in developing our mobile handheld and peripheral products for the Business Mobility computing market are stable and expandable computing devices with industry standard expansion form factors, compact design, low battery power consumption to extend time between charges, ease of use, interoperability, and quality. Our focus is business customers in the mobile marketplace. Our mobile handheld computing products have been designed to address the Business Mobility market for a handheld computer that is positioned between a consumer-oriented handheld device and a heavy duty industrial device. Our mobile handheld computer is easy to customize and integrate with peripherals and information systems and has an expected product life cycle of three to five years which meets the needs of businesses for longer deployments than have been available with most consumer-oriented handheld devices.

We work with more than 200 software integration companies that are offering or developing vertical application software for use with handheld computers. Examples of these vertical applications include patient medication administration within the health care industry, retail merchandising such as managing inventory on retail store shelves, sales and field force automation involving the collection and processing of orders or service information from remote locations by sales and service personnel, asset management and inventory control for assets having bar codes or radio frequency identification tags, and mobile point of sale applications. These mobile solutions are designed to improve the productivity of business enterprises by automating manual tasks, improving the quality of information collected, and enhancing mobile productivity by processing and transferring information from remote locations and mobile devices to the business enterprise, and then if required, back to the remote locations and mobile devices.

Most of our products, except our OEM embedded products, are sold through distributors and resellers that serve business customers. Our OEM embedded products are sold directly to the manufacturers of devices in which our products are embedded. The geographic regions we serve include the Americas, Europe, the Middle East, Africa and Asia Pacific. Total revenues for the three and nine months ended September 30, 2008 were $8.0 million and $21.7 million, respectively, which represented increases of 48% and 26% from revenues of $5.4 million and $17.3 million, respectively for the corresponding periods one year ago.

Our revenues in the comparable three and nine month periods may be classified into three broad product families:

º Mobile handheld computer products;
º Mobile peripheral products, including
- Data collection products,
- Connectivity products,
- Serial interface products, and
º OEM embedded products.

Our mobile handheld computer products have been designed to address the Business Mobility market for a handheld computer that is positioned between a consumer-oriented handheld device and a heavy duty industrial device. Our initial model, the SoMo 650 (SoMo is derived from Socket Mobile), was introduced in June 2007 and featured the Microsoft Windows Mobile 5.0 for Pocket PC operating system to ensure a high level of mobile application compatibility and to give workers a familiar computing environment. We began offering Windows Mobile 6 Classic and multiple language support for the SoMo 650 in the second quarter of 2008 giving customers a choice of operating systems and languages to best fit their needs. The SoMo 650 is easy to customize and integrate with peripherals and information systems and has an expected product life cycle of three to five years which meets the needs of businesses for longer deployments than have generally been available with most consumer-oriented handheld devices. Our mobile handheld computer's features include Wireless LAN and Bluetooth, a fast processor, a large, bright screen display, large amounts of SDRAM and flash memory, extended battery life, programmable action buttons to activate peripheral devices, reinforced CompactFlash and SDIO card slots, and a durable case. Additional models are in development that will run the Windows Mobile 5 or Windows Mobile 6 Classic operating system, add additional multiple language support, enable extended outdoor use, and offer specialized capabilities oriented to the needs of specific vertical markets. In the fourth quarter of 2008, we expect to begin shipping a radio-free configured model, our SoMo 650 DX, for high security applications such as those found in the government and financial markets, and our SoMo 650 Rx model with an antibacterial case targeted toward healthcare and other markets that involve hygiene-sensitive environments. The SoMo 650 was specifically designed without an integrated mobile phone as most solutions involving our products use Bluetooth or Wireless LAN connections for data communications and do not require an integrated mobile phone. Mobile handheld computer products represented approximately 19% and 15% of our revenues for the three and nine month periods ended September 30, 2008, respectively, compared to 8% and 3% of our revenues for the same periods one year ago.

Our mobile peripheral products consist of data collection products, connectivity products, and serial interface products, which together represented approximately 44% and 50% of our revenues for the three and nine months ended September 30, 2008, respectively, compared to 64% and 71% of our revenues for the same periods one year ago.

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

º bar code scanning products that plug into or connect wirelessly to handheld computers, tablet computers, notebook computers, and handheld computers with integrated phones that use Windows Mobile, Windows XP, Windows Vista, Windows Tablet, RIM Blackberry, Palm, or Symbian 60 or Symbian 80 operating systems, and turn these devices into portable bar code scanners that can be used in various retail and industrial workplaces;
º plug-in radio frequency identification products that read radio frequency identification tags;
º a combination plug-in bar code scanner and radio frequency identification reader; and
º a plug-in magnetic stripe reader.

We have developed extensive bar code scanning software called SocketScan that supports all of our data collection products, and have software developer kits that assist third party developers in integrating our SocketScan software and our hardware products into their applications and solutions. Our bar code scanning products include CompactFlash and SDIO plug-in bar code scanners for linear and two-dimensional bar code scanning, along with a cordless handheld bar code scanner and a ring scanner worn on the index finger, both of which connect to computing systems using the Bluetooth standard for short-range wireless connectivity. Data collection products represented approximately 34% and 38% of our revenues for the three and nine months ended September 30, 2008, respectively, compared to 46% and 52% of our revenues for the same periods one year ago.

Our connectivity products are connection devices that can be plugged into standard expansion slots in handheld computers, tablet computers, and notebook computers that use Windows Mobile, Windows XP, or Windows Tablet operating systems. These products allow users to connect their devices via Ethernet or telephone to communicate with other networks and devices such as desktop computers, other handheld, tablet, and notebook computers, handheld computers with integrated phones, and printers. Our connectivity products include:

º modems for telephone connections that connect over a cable, and a cordless modem that utilizes Bluetooth wireless technology to connect a telephone to a Bluetooth-enabled computer or other device;
º Ethernet cards for local area network connections that connect over a cable; and
º accessory products such as batteries and cables.

Connectivity products represented approximately 6% of our revenues for both the three and nine months ended September 30, 2008, respectively, compared to 9% and 11% of our revenues for the same periods one year ago

Our serial interface products enable the connection of a mobile computer to electronic devices either as a plug-in card (one, two or four ports) connecting over cables, or wirelessly over a Bluetooth network. Our serial interface products are used primarily with Windows XP and Windows Vista based devices. We recently introduced a USB to serial connector to enable a serial connection through a USB interface, and we expect to introduce a USB to Ethernet adapter in the fourth quarter of 2008. Serial interface products represented approximately 4% and 6% of our revenues in the three and nine months ended September 30, 2008, respectively, compared to 8% of our revenues for each of the same periods one year ago.

Our OEM embedded products consist of Bluetooth and Wireless LAN modules and plug-in cards used primarily by OEMs of handheld computers and other devices to build wireless connection functions into their products using the Bluetooth and Wireless LAN standards for wireless connectivity. Our plug-in cards and modules using the Bluetooth standard for short-range wireless connectivity include extensive communications software enabling the use of these products, as do our plug-in cards for connecting to local wireless networks using the Wireless LAN 802.11b/g (or Wi-Fi) standards. We have recently added Cisco Compatible Extensions (CCX) 4.0 certification to our Wireless LAN software to enable our Wireless LAN products to be compatible with a Cisco Wireless LAN infrastructure. Bluetooth and Wireless LAN connection functions are being built into many third party mobile devices, which may reduce the demand for our plug-in products through expansion slots but may increase the demand for our Bluetooth and Wireless LAN modules and embedded plug-in cards. OEM embedded products represented approximately 37% and 35% of our revenues for the three and nine months ended September 30, 2008, respectively, compared to 28% and 26% of our revenues for the same periods one year ago.

Our revenues by product family for the three and nine months ended September 30, 2008 and 2007, and the corresponding increase or decrease in revenues for the comparable periods are shown in the following table:

(revenues in                   Three Months Ended                             Nine Months Ended
thousands)                        September 30,                                 September 30,
                                                 Increase                                       Increase
Product family:        2008         2007        (Decrease)           2008          2007        (Decrease)
  Mobile handheld
computer products    $ 1,512      $   448             238 %       $  3,219      $    515             525 %
  Mobile
peripheral
products:
    Data
collection             2,727        2,522               8 %          8,288         9,027              (8 %)
    Connectivity         483          498              (3 %)         1,389         1,921             (28 %)
    Serial
products                 326          437             (25 %)         1,303         1,358              (4 %)
  OEM embedded
products               2,971        1,519              96 %          7,482         4,451              68 %
    Total            $ 8,019      $ 5,424              48 %       $ 21,681      $ 17,272              26 %

Our mobile handheld computer product revenues in the three and nine months ended September 30, 2008 were $1,512,000 and $3,219,000, respectively, compared to $448,000 and $515,000, respectively, in the comparable periods one year ago. We began shipping our first mobile handheld computer, the SoMo 650, to customers in our distribution channel in the second quarter of 2007. In the third quarter of 2007, we completed our objectives of ramping up production and fully stocking our distribution channel to enable the commencement of widespread customer evaluation, qualification, and deployment. Increased revenues for our handheld computer in 2008 reflect higher sales volumes due to a growing customer base with larger average unit deployments.

Our data collection product revenues in the three and nine months ended September 30, 2008 were $2.7 million and $8.3 million, a increase of 8% and a decrease of 8% compared to revenues of $2.5 million and $9.0 million, respectively, in the comparable periods one year ago. Increases totaling $0.6 million in the comparable three month periods were due to increased sales volumes of our Cordless Hand Scanner, our CompactFlash In-Hand Scan card, and our Cordless Ring Scanner. Partially offsetting these increases were declines in sales volumes of our SDIO In-Hand Scan card between the comparable three month periods. Decreases of $0.9 million between the comparable nine month periods were from declines in sales volumes of our CompactFlash In-Hand Scan card, our SDIO In-Hand Scan card, and our Cordless Ring Scanner, and were partially offset by increases in sales of our Cordless Hand Scanner. Data collection revenues in the first nine months of 2008 were slowed in the first quarter but began to recover in the second quarter due in part to delayed availability of new handheld computer models originally announced by a major handheld computer manufacturer in the third quarter of 2007, which did not begin shipping until February 2008. Such announcements and delayed timing of product availability typically slow customer deployments of our peripheral products because of the time needed by customers to evaluate or adopt the new handheld computer models.

Our connectivity product revenues in the three and nine months ended September 30, 2008 were $483,000 and $1,389,000, respectively, declining 3% and 28% compared to revenues of $498,000 and $1,921,000, respectively, in the same periods one year go. Declines between the comparable three month periods were from reduced sales volumes of our Ethernet plug-in products. Declines between the comparable nine month periods were from reduced sales volumes of our Modem plug-in products and Ethernet plug-in products. Reductions in connectivity product revenues are due to reduced corporate deployment of these wired connection solutions in 2008.

Our serial interface product revenues in the three and nine months ended September 30, 2008 were $326,000 and $1,303,000, respectively, a decline of 25% and 4% compared to revenues of $437,000 and $1,358,000, respectively, in the comparable periods one year ago. Revenue declines between the comparable three months were from declines in sales volumes of our standard serial PC card products, our CompactFlash card product, and our cordless Bluetooth serial adapter product. Revenue declines between the comparable nine months were from declines in sales volumes of our CompactFlash card and cordless Bluetooth serial adapter products, partially offset by increases in sales of our standard serial PC card products. Our standard peripheral connection cards are primarily sold to connect peripheral devices or other electronic equipment to notebook computers.

Our OEM embedded product revenues in the three and nine months ended September 30, 2008 were $3.0 million and $7.5 million, respectively, an increase of 96% and 68% compared to $1.5 million and $4.5 million, respectively, in the comparable periods one year ago. Revenue increases of $0.8 million and $2.4 million in sales of our Bluetooth modules in the three and nine months of 2008 were due to a recovery in market conditions that existed in early 2007. In the first quarter of 2007 our customers in the industrial ruggedized market segment experienced pronounced increased competition due to a short-term aggressive price discounting by a major competitor, a trend which adversely affected our related Bluetooth module revenues in the first quarter of 2007, but improved steadily in the following second, third, and fourth quarters of 2007, and through the first nine months of 2008, following cessation of the aggressive discounting by the competition. Additional revenue increases of $0.6 million and $0.7 million in the three and nine month periods were from increased sales volumes of our Wireless LAN plug-in card products. Partially offsetting the increase between the nine month periods was a decline in revenues related to our Bluetooth plug-in cards primarily due to this wireless technology becoming increasingly a standard feature built-in by handheld computer manufacturers.

Gross Margins
Gross margins in the three and nine month periods ended September 30, 2008 were 46% and 48% compared to margins of 48% and 49%, respectively, in each of the comparable periods in 2007. We generally price our products as a markup from our cost, and we offer discount pricing for higher volume purchases. Reductions in overall margins in the three and nine month periods of 2008 compared to the same periods one year ago are due primarily to discounts on volume purchases of our Bluetooth modules by customers in our OEM embedded business segment and increased sales of our mobile handheld computer which began shipping late in the second quarter of 2007. Margins on our mobile handheld computer products are currently below our average product margins. We expect our overall margins to improve in the fourth quarter from third quarter 2008 levels due to an anticipated change in product sales mix.

Research and Development Expense
Research and development expense for the three months ended September 30, 2008 was $1,102,000, a decrease of 2% compared to research and development expense of $1,123,000 in the corresponding period one year ago. Research and development expense for the nine months ended September 30, 2008 was $3.4 million, a decline of 8% compared to research and development expense of $3.7 million in the corresponding period one year ago. The decrease from the comparable three months is attributable to reductions in equipment costs and consulting and professional fees partially offset by increased outside services expense. Decreases of $0.2 million between the comparable nine month period was attributable to the costs incurred in the first quarter of 2007 related to the development of our SoMo 650 mobile handheld computer, the development of which was begun in the fourth quarter of 2006, with the majority of the development expense concluded by the end of the first quarter of 2007. Additional decreases from the comparable nine months were from reductions in consulting and professional fees related to fewer projects requiring the use of external technical expertise, and from reductions in equipment costs due to higher amounts of depreciation expense related to capitalized tooling in the first quarter of 2007. Partially offsetting these decreases were increases in personnel costs from staffing in-house expertise for technical skills formerly obtained from outside consulting and professional service providers. Research and development expenses in the fourth quarter are expected to remain at levels comparable to the third quarter of 2008.

Sales and Marketing Expense
Sales and marketing expense for the three month period ended September 30, 2008 was $2.0 million, an increase of 10% compared to sales and marketing expense of $1.8 million in the corresponding period one year ago. Sales and marketing expense for the nine month period ended September 30, 2008 was $5.9 million, an increase of 6% compared to sales and marketing expense of $5.5 million in the corresponding period one year ago. Increases between the comparable three and nine months were primarily from increased personnel costs due to the additions of key personnel beginning in the second quarter of 2007, including our Senior VP of Sales & Marketing, as we added sales resources in North America to begin selling our new SoMo 650 mobile handheld computer, which began shipping late in the second quarter of 2007, and to recruit and develop new third party channel partners. Additional increases between the comparable three and nine month periods were from higher levels of advertising and promotional expense, offset by reductions in outside services and travel expense. Sales and marketing expense is expected to increase in the fourth quarter of 2008 from third quarter levels due to increased personnel costs and promotional activities.

General and Administrative Expense
General and administrative expense for the three months ended September 30, 2008 was $610,000, an increase of 8% compared to general and administrative expense of $566,000 in the corresponding period one year ago. General and administrative expense for the nine month period ended September 30, 2008 was $2.0 million, a decrease of 3% compared to general and administrative expense of $2.1 million in the corresponding period one year ago. Increases between the comparable three months were from increased facility and compensation related expenses. The decrease between the comparable nine month periods was primarily from reduced stock-based compensation expenses as older grants with higher valuations compared to more current grants, became fully expensed. General and administrative expenses are expected to increase in the fourth quarter of 2008 from third quarter levels due primarily to increased consulting and professional fees related to the audit of our annual financial statements, historically charged during the fourth and first quarters.

Amortization of Intangibles
In July 2004 we acquired a patent which covers the design and functioning of plug-in bar code scanners, bar code imagers, and radio frequency identification products. The patent was purchased for $600,000 and has been capitalized as an intangible asset. The patent is being amortized on a straight line basis over a ten-year period. Intangible assets of $571,000 remaining from a prior acquisition in 2000 consist of developed software and technology with estimated lives at the time of acquisition of 8.5 years. Amortization charges for the three and nine months ended September 30, 2008 for all acquired intangibles were $32,000 and $95,000, respectively, compared to $34,000 and $101,000 for the same periods one year ago.

Interest Income and Expense
Interest income reflects interest earned on cash balances. Interest income of $3,500 and $19,600 in the three and nine month periods ended September 30, 2008, . . .