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 are a producer of mobile computing hardware systems serving the business and medical mobility market. We offer a family of handheld computer products and a wide range of data collection and connectivity peripheral products for use with third-party vertical handheld computing applications software and devices. We also offer embedded Bluetooth and wireless LAN products. Our peripheral products work with many third-party mobile handheld devices including smart phones, handheld computers, tablet computers, ultra-mobile personal computers, and notebooks, adding data collection and connectivity capabilities to these devices. Our products are designed to enable the accessing, collection and processing of data by employees while mobile. Our products utilize popular Bluetooth and wireless LAN wireless connection technologies. Our plug-in and Bluetooth data collection products offer a variety of data collection technologies including laser and CMOS barcode scanning, linear and two dimensional barcode scanning, plus we offer RFID (radio frequency identification) and magnetic stripe readers.

We work with more than 200 software integration companies that are offering or developing vertical software applications for use with handheld computers. Healthcare has been a primary area of focus for our software integration partners and more than half of our handheld computer sales now come from organizations within the healthcare industry. Other vertical markets benefiting from our mobile solutions include hospitality, retail merchandising, automotive, government and education. These mobile solutions are designed to improve the productivity of business enterprises and service providers by automating manual tasks, improving the quality of information collected, and enhancing mobile productivity by processing and transferring information from remote locations and mobile devices to the business enterprise, and then if required, back to the remote locations and mobile devices.

We believe that growth in the mobile workforce, technical advances and cost reductions in mobile devices and networking technologies, and the pervasive use of the Internet are driving broader adoption of mobile computing. Our products are designed to address the growing need for mobile computing by today's mobile workforce by enabling them to access, collect and process data while mobile, thereby enhancing their productivity, allowing them to exploit time sensitive opportunities and improving customer satisfaction. We make available to original equipment manufacturers ("OEMs") the Bluetooth and wireless LAN wireless technologies that we incorporate in our own products through the sale of modules and plug-in cards that these manufacturers embed into their products, including driver and device management software that is designed to simplify the ability of mobile employees to get and stay connected with Wi-Fi as well as with Bluetooth. Overall, our products enable the integration of hardware, software and applications into complete mobile data collection and connectivity solutions.

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 first quarter of 2009 were $4.8 million, a decrease of 23% from revenues of $6.2 million in the first quarter of 2008.

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

º Mobile handheld computer products;
º Mobile peripheral products: data collection, connectivity and serial interface; and
º OEM embedded products.

Our mobile handheld computer products are designed to be durable devices that have features similar to heavier duty industrial handheld devices but at a significantly lower price. Our initial model, the SoMo® 650 (SoMo is derived from Socket Mobile), was introduced in June 2007 with initial volume shipments in September 2007, and features the Microsoft Windows Mobile Classic operating system, Versions 5 and 6. Windows Mobile is the industry standard OS for mobile applications, thereby enabling the SoMo to be compatible with a large number of business applications and giving users a familiar computing environment. Our mobile handheld computers are easy to customize for a particular application by adding peripherals. The SoMo products have an expected product life cycle of three to five years to address the needs of our customers who are deploying mobile solutions. The SoMo's features include wireless LAN and Bluetooth, a fast processor, a large, bright screen display enabling its use outdoors, large amounts of SDRAM and flash memory, extended battery life, programmable action buttons to activate peripheral devices, reinforced CompactFlash and SDIO card slots, and a durable case. The SoMo is available with multiple language support and includes our Bluetooth, wireless LAN and barcode scanning software. The SoMo 650 was specifically designed without an integrated mobile phone to serve the market for business mobility applications that do not depend on mobile phone connections such as medication dispensing in the healthcare market or serving tables in the hospitality market, many of which use Bluetooth or wireless LAN connections for data communications. In late 2008, we introduced the SoMo 650 Rx Model with an antimicrobial additive incorporated into its plastic case for the healthcare market designed to reduce the risk of the spread of bacteria from the use of handheld devices in a healthcare environment. In April 2009 we extended our line of antimicrobial products for the healthcare market to include our Cordless Hand Scanners and CompactFlash Scan Cards. We also announced our SoMo 650 Back Pack Broadband ExpressCard Adapter, which attaches to the back of our SoMo 650 and accepts pre-certified and approved Novatel Wireless ExpressCards to extend the functionality of the SoMo 650 to include anytime, anywhere, data connectivity over a wide area network (WAN). The SoMo 650 Back Pack will be available in the third quarter of 2009 in both a standard version and an antimicrobial version for use in healthcare applications. We also offer a SoMo 650 Dx Model without Bluetooth or wireless LAN for high security environments. Mobile handheld computer products represented approximately 32% of our revenue for the three months ended March 31, 2009, compared to 11% of our revenues in the same period one year ago.

Our mobile peripheral products consist of data collection, connectivity and serial interface products, which together represented approximately 49% of our revenues for the three months ended March 31, 2009 compared to 58% of our revenues for the same period one year ago.

Our data collection products enable the electronic collection of data from barcodes, radio frequency identification (RFID) tags, or magnetic stripes and consist of:

º barcode scanning products that plug into or connect wirelessly to handheld computers, tablet computers, ultra-mobile personal computers, notebook computers and smartphones that use Windows Mobile, Windows CE, Windows Vista/XP, RIM Blackberry, or Nokia E71 operating systems, and turn these devices into portable barcode scanners and RFID readers that can be used in various retail and industrial workplaces; Our cordless hand scanner and cordless ring scanner may also be connected wirelessly to a desktop computer, enabling mobile barcode scanning around a fixed workstation;
º RFID plug-in products that read radio frequency identification tags;
º a combination plug-in barcode scanner and RFID reader; and
º a plug-in magnetic stripe reader.

Our plug-in and Bluetooth cordless data collection products offer a variety of data collection technologies at several performance levels including laser and CMOS barcode scanning, linear and two dimensional barcode scanning and RFID reading, enabling solutions to be tailored to optimal price/performance levels. Our plug-in barcode scanners are available in both CompactFlash and SDIO form factors. We also offer a ring scanner worn on the index finger which connects to computing systems using the Bluetooth standard for short-range wireless connectivity. We have developed extensive barcode scanning and RFID reading 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. Data collection products represented approximately 36% of our revenues for the three months ended March 31, 2009, compared to 41% of our revenues for the same period one year ago.

Our connectivity products are connection devices that can be plugged into standard CompactFlash or Secure Digital SDIO expansion slots in handheld computers, tablet computers, ultra mobile personal computers, and notebook computers that use Windows Mobile, Windows XP/Vista, 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 computers, tablet computers, ultra-mobile personal computers, and notebook computers, smartphones and printers. Our connectivity products include:

º modems for telephone connections that connect over a cable;
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 5% of our revenues for the three months ended March 31, 2009, compared to 8% of our revenues for the same period 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. During 2008 we introduced a USB to serial connector to enable a serial connection through a USB interface and plan to introduce in the second quarter of 2009 a USB to Ethernet Adapter to reflect the growing use of USB as a connection technology for mobile products. Serial interface products represented approximately 8% of our revenues in the three months ended March 31, 2009, compared to 9% in the same period one year ago.

Our OEM embedded products consist of Bluetooth and wireless LAN modules and plug-in cards used primarily by OEMs of industrial grade 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. Our products use the Bluetooth 2.0 standard, and we plan to upgrade later in 2009 to the Bluetooth 2.1 + EDR standard, continuing our commitment to keep our products current with evolving technology standards. Our plug-in cards for connecting to local wireless networks during 2008 used the wireless LAN 802.11b/g (or Wi-Fi) standard and included extensive communications software designed to make these products easy to use. We 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 and are upgrading our plug-in cards and modules to incorporate the wireless LAN 802.11 a/b/g standard. In April 2009 we announced availability of our SDIO wireless LAN plug-in card with wireless LAN 802.11 a/b/g. OEM embedded products represented approximately 19% of our revenues for the three months ended March 31, 2009, compared to 31% of our revenues for the same period one year ago.

Our revenues by product family for the three months ended March 31, 2009 and 2008, and the corresponding increase or decrease in revenues for the comparable periods are shown in the following table:

  (revenues in thousands)                      Three months ended March 31,         Increase
  Product family:                                2009                 2008         (Decrease)
    Mobile handheld computer products     $   1,541     32 %    $   675    11 %       128 %
    Mobile peripheral products:
      Data collection                         1,714     36 %      2,505    41 %       (32 %)
      Connectivity                              236      5 %        469     8 %       (50 %)
      Serial interface products                 362      8 %        572     9 %       (37 %)
    OEM embedded products                       919     19 %      1,949    31 %       (53 %)
      Total                               $   4,772    100 %    $ 6,170   100 %       (23 %)

Our mobile handheld computer product revenues in the first quarter of 2009 were $1.5 million, an increase of 128% compared to revenues of $0.7 million in the first quarter of 2008. We began shipping our first mobile handheld computer, the SoMo 650, to customers through 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. 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. In late 2008, we introduced the SoMo 650 Model Rx with an antimicrobial case for the healthcare market designed to reduce the risk of the spread of bacteria from the use of handheld devices in a healthcare environment, and the SoMo 650 Model DX without Bluetooth or wireless LAN for high security environments. Increased revenues from our mobile handheld computer products in the first quarter of 2009, compared to the same quarter one year ago, reflect higher sales volumes due to a growing customer base with larger average unit deployments. Although the comparable first quarters indicate substantial growth in our mobile handheld computer revenues, we believe this growth has been slowed by the worldwide economic slowdown, as our customers are taking longer to make their deployment decisions. In the first quarter of 2009 mobile handheld computer revenues grew by 2% compared to the previous fourth quarter of 2008. In the fourth quarter of 2008, our mobile handheld computer revenues were flat compared with the previous third quarter.

Our data collection product revenues in the first quarter of 2009 were $1.7 million, a decrease of 32% compared to revenues of $2.5 million in the first quarter of 2008. Revenue decreases of $0.4 million were from reduced sales of our Cordless Hand Scanner, revenue decreases of $0.3 million were from reduced sales of our SDIO In-Hand Scan card, and additional decreases were from reduced sales of our primary scanning product, the CompactFlash In-Hand Scan card. Our data collection product revenues have been slowed in the first quarter 2009 by the worldwide economic slowdown.

Our connectivity product revenues in the first quarter of 2009 were $236,000, a decline of 50% compared to revenues of $469,000 in the first quarter of 2008. The decline resulted from reduced sales volumes of our Modem plug-in products and Ethernet plug-in products due to reduced corporate deployment of these wired connection solutions and the effects of the worldwide economic slowdown.

Our serial interface product revenues in the first quarter of 2009 were $362,000, a decrease of 37% compared to revenues of $572,000 in the first quarter of 2008. Revenue decreases were from reduced sales of our standard serial PC card products. Our standard serial PC card products are primarily sold to connect peripheral devices or other electronic equipment to notebook computers. Sales of our CompactFlash card product and cordless Bluetooth serial adapter product were flat in the comparable periods.

Our OEM embedded product revenues in the first quarter of 2009 were $0.9 million, a decrease of 53% compared to $1.9 million in the first quarter of 2008. Revenue decreases of $1.0 million in sales of our Bluetooth modules were from reduced shipments to our OEM customers due to last-buy purchases beginning in the third quarter of 2008, the majority of these shipments made in the latter half of 2008, with final remaining shipments completed in the first quarter of 2009. Increases in sales of our wireless LAN modules and wireless LAN plug-in cards were offset by declines in sales of our Bluetooth plug-in cards. Lower Bluetooth plug-in product revenues reflect lower overall requirements for these products by our OEM customer group.

Gross Margins
Our gross margins for the first quarter of 2009 were 47% compared to 49% in the comparable period one year ago. 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 first quarter of 2009 compared to the same period one year ago are due primarily to increased sales of our mobile handheld computer, which comprised 32% of our revenues in the first quarter of 2009 compared to 11% in the first quarter last year, at margins below our average product margins. Additional margin declines in the first quarter of 2009 are due to our fixed overhead costs, which comprise a greater portion of the overall revenues and cost of goods sold due to lower revenues in the first quarter of 2009 compared to the same quarter one year ago.

Research and Development Expense
Research and development expense in the first quarter of 2009 was $0.8 million, a decrease of 35% compared to $1.2 million in the first quarter of 2008. Two thirds of the reduction in research and development expense in the first quarter of 2009 was due to reduced personnel costs as the result of the reduction-in-force action initiated in the fourth quarter of 2008 and reductions in employee compensation during the first quarter of 2009. In the fourth quarter of 2008 the Company initiated a range of expense reductions across all departments and functional expense categories in response to the worldwide economic slowdown, with additional reductions following in the first quarter of 2009. Additional reductions in research and development expense in the first quarter of 2009 were from reduced development fees due to a reduction in product development activities, and reduced equipment costs related to the reductions in product development activities. Research and development expense in the second quarter of 2009 are expected to continue at levels similar to the first quarter.

Sales and Marketing Expense
Sales and marketing expense for the first quarter of 2009 was $1.4 million, a decrease of 27% compared to $1.9 million in the first quarter of 2008. Over half of the reduction in sales and marketing expense in the first quarter of 2009 was due to reduced personnel costs as a result of the reduction-in-force action initiated in the fourth quarter of 2008 referred to above and reductions in employee compensation during the first quarter of 2009. Additional notable reductions in sales and marketing expense in the first quarter of 2009 were in the categories of advertising and promotion expense, travel, outside services, and equipment costs. Sales and marketing expense in the second quarter of 2009 is expected to continue at levels similar to the first quarter.

General and Administrative Expense
General and administrative expense for the first quarter of 2009 was $642,000, a decrease of 20% compared to $805,000 in the first quarter of 2008. Two thirds of the reduction in expense in the first quarter of 2009 was due to reduced payroll costs primarily from reductions in employee compensation. Additional reductions in general and administrative expense in the comparable first quarter periods were primarily in reduced consulting and professional fees. General and administrative expense is expected to decline in the second quarter of 2009 from first quarter levels due to the absence of professional fees expense related to the costs of our annual audit which are expensed in 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. Such amount has now been fully amortized. Amortization charges for the three months ended March 31, 2009 and 2008 for all acquired intangibles were $32,000, but will be $15,000 per quarter going forward until fully amortized.

Interest Income and Expense
Interest income reflects interest earned on cash balances. Interest income in the first quarter of 2009 was $350 compared to interest income of $12,000 in the comparable period one year ago. Lower interest income in the first quarter of 2009 reflects lower average cash balances combined with lower average rates of return.

Interest expense in the first quarter of 2009 was $65,000 compared to interest expense of $13,000 in the same period 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, and in 2008 also included interest related to a term loan outstanding during 2008, the balance of which was paid back in full at the end of 2008 in conjunction with a new credit line agreement. Higher interest expense in the first quarter of 2009 is due to higher average balances outstanding on our bank lines of credit at higher overall interest rates compared to the same quarter one year ago. Interest expense in the second quarter of 2009 is expected to continue at levels similar to the first quarter.

Taxes
Deferred income tax reflects the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Deferred tax expense of $8,000 in each of the three month periods ended March 31, 2009 and 2008, and the corresponding deferred tax liability shown on the Company's balance sheet, is related entirely to the deferred tax liability on the portion of the Company's goodwill amortized for tax purposes. Due to the indefinite characteristic of this deferred tax liability, it cannot be offset against deferred tax assets, and furthermore, this deferred tax liability may never reverse. The Company maintains a full valuation allowance for all other components of deferred tax assets. The Company has not generated taxable income in any periods in any jurisdiction, foreign or domestic.

Liquidity and Capital Resources
We were unprofitable in the first quarter of 2009 and in each of the quarters in fiscal years 2008, 2007, and 2006. We were profitable in two quarters in 2005, but unprofitable for fiscal year 2005. Fiscal year 2004 was the only 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. We may continue to be unprofitable in the foreseeable future. Historically we have financed our operations through the sale of equity securities, equipment financing, and revolving bank lines of credit. Since our inception we have raised approximately $39 million in equity capital to fund our operations.

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