Greetings and welcome to the Socket Mobile fourth quarter 2009 management conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Byers of MKR Group. Thank you. Mr. Byers, you may begin.

Thank you, operator. Good afternoon and welcome to Socket's conference call to review financial results for its fourth quarter and year ended December 31, 2009. Online today are Kevin Mills, President and CEO of Socket and Dave Dunlap, CFO of Socket. Socket Mobile distributed its earnings release over the wire service at the close of market today. The release has also been posted on Socket’s Web site at www.socketmobile.com. In addition, a replay of today's call will be available at vcall.com shortly after the call's completion and a transcript of this call will be posted on Socket’s Web site within a few days. We have also posted replay numbers in today's press release for those wishing to replay this call by phone. The phone replays will be available for one week. Before we begin, I would like to remind everyone that this conference call may contain 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. Such forward-looking statements include, but are not limited to, statements regarding new mobile computer, data collection and OEM products, including details on the timing, distribution and market acceptance of the products, and statements predicting trends, sales and market conditions and opportunities in the markets in which Socket sells its products. Such statements involve risks and uncertainties, and actual results could differ materially from the results anticipated in such forward-looking statements as a result of a number of factors, including, but not limited to, the risk that Socket’s products may be delayed or not rollout as predicted, if ever, due to technological, market, or financial factors, including the availability of necessary working capital, the risk that market acceptance and sales opportunities may not happen as anticipated, the risk that Socket application partners and current distribution channels may choose not to distribute the new products or may not be successful in doing so, the risk that acceptance of new products in vertical application markets may not happen as anticipated, and other risks described in Socket’s most recent Form 10-K and 10-Q reports filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update any forward-looking statements. With that said, I would now like to turn the call over to Socket's CEO, Kevin Mills.

Thanks, Jim, and I would also like to thank everyone for joining us today. I will first provide an overview of 2009, followed by our current outlook for our markets and business for 2010. 2009 was a challenging year for many businesses, including Socket’s. Our lower revenue in 2009 reflects the impact of a difficult overall worldwide economy as well as the timing of upgrades and transition of some of our key products, which we now have completed. Despite these challenges, we made significant progress in a number of areas in 2009 that strengthened our business and outlook for 2010. We grew our SoMo business by 32% in 2009. While this was below our expectation, our current sales pipeline for potential SoMo units is the best it’s ever been. We have maintained our key development programs and completed upgrade transitions with several key products bringing new and enhanced products to the market. We significantly reduced our costs and have carefully managed our cash and working capital with a focus on returning to profitability. While sales of our SoMo grew 32% for the year, this was well below our expectation. Sales were impacted by delays or postponements in projects and deployments, which were results of the tight credit markets and a freeze in capital spending, especially our new capital equipment and program. The good news is almost none of the projects were lost to competition or alterative solutions and they remain viable and significant opportunities within an improving economy in 2010. Our data collection business was impacted by the poor economy with limited deployments throughout the year. This business was also impacted by the market transition towards 2D scanners, which is attracting increasing customers seeking for both service new requirements and to future proof their investment. In 2009, as we were…

: The drop in Bluetooth revenue in 2009 from $9.3 million to $3.3 million which represented 19% of our 2009 revenue was primarily due to the absence of significant Bluetooth OEM sales in 2009. As Kevin noted, our OEM business also was completing a transition of its wireless LAN products to the latest 802.11 a/b/g chip technology which is now being offered along with our Wi-Fi Companion software with Cisco’s CCX security extension. OEM sales are design win business, with our product transitioning completed, we are actively seeking new design wins and expect this business to grow over the next several years. Our data collection product family incurred a drop in revenue of $3.6 million from $9.2 million in 2008 to $5.6 million in 2009, representing 32% of our 2009 revenue. Lower data collection product revenue has been an industry-wide impact caused by business slowdowns in deploying or expanding new mobile systems and an upgrading mobile equipment used in these systems. As Kevin reported, we have maintained our key development programs for our data collection products during 2009, and have transitioned these products for growth in three major areas. First, with the release of our 2D cordless hand scanner this quarter, an area of growing customer demand because of the greater amounts of data that can be scanned with the 2D bar code scanner. Second with the release last quarter of the new highly ruggedized version of our cordless hand scanner; and third with a replacement of our entry-level non-laser bar code scanners with laser bar code scanners at new attractive entry price points. All of these changes are attracting good customer interest and our major contributor to our growing sales pipeline. Our third major product family is our SoMo family of handheld-computers; revenues grew 32% in 2009 from $4.7…

: Brian Swift – Security Research Associates: Yes, I guess my – kind of a general question, because your comments were basically given on the – pretty much on the year as a whole and in citing how much you were up or down from the various business segments. When you look at the economy, it looks like the – our economy as a whole, first quarter was kind of a low point and then it’s been gradually recovering from there. And yet your fourth quarter was your worst, other than your pipeline growing really nicely. What kind of comfort level can you give us from the standpoint that other than – obviously these series of numbers that you gave out related to your covenants on your bank line must relate to your forecast, the trend is in the wrong direction. So how do you respond to that?

: I think on the data collection, I think as I pointed out, we needed to realign the business because; a, there is a big trend to move to 2D and we didn’t have our 2D product ready yet because we were still in development; and then we had to realign our pricing to I would say make the 1Ds more attractive. We implemented a 30% cost reduction in the November time frame, but I think that many people don’t buy scanners until they have tested them, and this is the process that takes, I would say, a minimum of 60 days. And a lot of the deals that we had that we expected people to move to a lower cost 1D, they simply tested and they are now started to buy in January, and we certainly lost momentum in the data collection business. On the OEM business, and we had said in advance that we expected lower revenue. So obviously Q4 was disappointing, but I think that the data collection was probably the major contributor to dragging it down plus weather related. And we are seeing those opportunities moving forward in 2010.

And Brian by a way of addition, we track very closely the opportunities that either coming through our distribution channel or that we become aware of through, in some cases of direct contact with potential customers. There were no, what we would like to characterize as significant deals in the fourth quarter. The amount of SoMos that were held up through the winter delays, particularly in Europe, was probably would have increased our computer sales by at least 20% and would have made it the highest quarter results for the year. And that simply has pushed out into Q1. You combine that with the comment that Kevin made that we are in the final stages of working and closing a SoMo opportunity that falls under significant deal category, and those are the sorts of things that gave us a lot of comfort that you are going to see a return to growth in the first quarter in the SoMo category. We are seeing the same thing with data collection. Again, a lot of the growth in the pipeline is coming from both the newer products like the 7X. We are seeing a pick up in the entry level area. We have actually had to scramble to get additional inventory in build against that demand. So the changes that were made in Q4 are being evaluated positively by the markets and that is now showing up in combination of orders. Our data collection orders internally are actually ahead of our SoMo orders that may not last because SoMo has been stronger, but it is a much stronger start for the data collection area than we historically have seen. So these are just some of the observations that we have internally that suggest that we should return to a growth picture in the first quarter. Brian Swift – Security Research Associates: Okay. That was the lower levels of inventory at the distribution. How do you increase your – how do you significantly increase your revenues without them – what kind of delivery times are they quoting, which –

This brings up a kind of a bigger, I would say, concern is that throughout 2009 all of the supply chain has been stretched. As Dave pointed out, I would say, we are normally keeping about $2 million of reserves against about a $4 million inventory in the channels, which represented basically 65 days. And throughout the year that has been reduced, and lead times gets stretched out. I think we are good at scrambling, but certainly there is no ability in the system right now to instantly come up with big numbers. And we have been explaining these to customers and we expect that the orders will pick up because people need the product in the March/April time frame and the lead times really have gone out to five, six weeks. We still have very good relations with our supply base and they are very responsive. But it is not like before where there was a buffer in the distribution channel; that has largely gone away. But we will need to be built back up this year because it makes operating quite difficult for everybody. But I think as the economy improves, we will expect that buffer in the channels to build which will, I would say, reduce some of the pressures on our cash.

One of the hallmarks, Brian, of Socket’s sales team and the relationships with distribution channel is a very open and proactive line of communication. So we are tracking deals against individual customer situation. We are talking frequently with the distribution channels in regards to how we will fill and with that improvement in forecasting that’s happened as we moved through this last year, it’s also allowed us to anticipate the orders that we anticipate will be coming in and we have a study flow of inventory coming in from our suppliers as well. So it’s only the case where there is an unusual forecasted changed that we would probably get caught short, and we also would certainly work to expedite given that there is a regular flow of inventory that you often can expedite if you need to. Brian Swift – Security Research Associates: :

(Operator instructions) Our next question comes from the line of Bernard Fidel [ph] who is the private investor. Please proceed with your question.

Hi, fellows. Okay, well I am not concerned any more of the last year 2009, because that’s history. And what I do is I am looking for some questions for the future which I think is most significant for the investor here. Now Kevin, you did mention that you expect to be profitable in this year, 2010, is that correct?

That is correct.

Okay. Could you tell me at what point do you expect to be profitable, would that be the second quarter, third quarter or –?

: :

Our previous caller Dr. Fidel, Brian Swift, mentioned the bank covenant which I had addressed. Generally, he was looking at how that was set. Generally, the bank looks at our going forward plans and they have set these thresholds at the levels that generally create cash break-even operations for us. And that’s with our planned expenditures which include research and development, it includes restoration of some of the cost reduction programs that phased in over time. Profitability is not whole lot higher than those numbers. First, we have the ability by continuing cost reduction programs to lower the profitability point. But for example, with the second quarter of about $5.5 million of threshold, you can judge that the profitability level would be somewhere around $6 million. So the key for us is how quickly we can grow the business back to the $6 million level or above, and as we continue to grow to make sure the bottom line continues grow along with the other programs that will comes back fully into play.

So it is basically feasible that if things go well that you could be profitable even at the second quarter?

Yes, we would need to hit something in the $6 million level or curtail costs to bring that down.

:

That is a fair statement.

:

Yes. One other things we do is that we have a CRM system and as we interact with potential customers we track our activities and those activities include the initial contact, the e-mail back and forth, their requirements, their timing, the application and various other things. So this is something that we have a system to track, and we can look to see what’s the expected pipeline is and the timing of various deals. Even though, as I mentioned, through 2009, we’ve tracked a lot of deals that aren’t lost but didn’t close, and we’ve continued to add deals as other customers have come in. So, yes, as we start the year, the pipeline is at twice the level it was at this time last year. And the difficult in this is determining the ways of close. And customers get through a testing period, and they will I would say prototype and do pilot runs, and then they often have to go out and talk to the person who has the money that they would like to deploy this. And I think we’ve a lot of deals stuffed in that space where the CFO or the Accountant or Controller has basically said to their respective teams, “We understand it’s a good idea, but money is tight. Can we wait six months? Wait till things improve.” And we feel that once that starts to loosen up, we should be able to catch up pretty quickly.

Now, you’ve mentioned something about that is a large order in the hospitality area like you’ve want to close in the first quarter, was it?

Yes, that is correct.

What is considered a significant order?

I would say anything – I would say that we would be raising over 500 units as being significant. So that’s actually –

(inaudible) go through?

$250,000 to $300,000. So that would represent certainly more than 5% of the quarter’s revenue. But again, this particular customer hasn’t made up their exact mind on the quantity, but it could be in the 800 unit range. They would be talking about maybe $400,000, which goes a long way to cover –

Yes, it’s significant. Now you said it is going to be a rollover buyout, you couldn't – if it weren't for the bad weather in Europe as you would have had a 20% increase in the SoMo, which is why it’s still over into the first quarter, am I correct?

Yes, that’s correct. As you know, we count revenue based on sales out of distribution.

That should really be quite significant for the first quarter then.

Yes, we expect some. We were disappointed in Q4, a lot of the shipments that we shipped after December 15 didn’t make it to distribution because of poor weather. And that happened essentially between December 15 and December 24, and most of Europe was closed thereafter. So that certainly impacted our revenue and we will take that up in Q1.

Well, we really should hire our Vice President, Al Gore with his bad weather.

Yes, we should. Well, if we could control the weather, I tell you we could control a lot of things.

Right. Okay, now, for the first quarter you expect to be cash break even, is that it?

I think we will be close to cash break even. I don’t know that we will get all the way. I think we will be cash positive from operations as of March. Historically, January is the worst month of the year, and not a lot happens, everyone goes into a planning phase; and generally speaking it is a poor month. For us, and certainly in the US, our bookings in January were up 30% over the same period last year. So in that respect, bookings in January at least started off as being solid. But generally speaking, people do not take a lot delivery in January. As often, people either have money, they want to spend in Q4 or they haven’t got their money to spend in the New Year.

It sounds it’s quite significant. So what about February? How is that doing?

It’s okay. But it’s still relatively early in terms of the quarter. So we expect to book kind of 30, 30, 40, which is our normal pattern. And right now I would say, February isn’t great, isn’t bad. It’s kind of neutral. But, again, we are expecting this order that we talked about, and certainly if we got that, then February would also be ahead of where we were this time last year by a similar amount.

And orders to date, Dr. Fidel, are tracking – the ship of orders in the quarter are tracking at where we are in a linear basis for the quarter. So we are about half way to our first quarter goal and we are about half way through the quarter. So if we do find as we expect that the second half of the quarter is much stronger, that would pick up the pace and will certainly be positive for us.

Well, one last question. Are there any other large orders that you expect in the near future?

Yes, I think I highlighted Epocal. We are working with them closely. They were just acquired by Inverness Medical. And they are putting their requirements together and we would expect them to be a driver of the business. As part of this, I would say we would expect to book a large order through stocks delivering through the end of 2010 and 2011. So I think we would be able to have a more definitive plan as regard to Epocal. But bearing in mind they only got purchased in November 2009. And as we pointed out in the call, they were purchased for $0.25 billion, $255 million subject to meeting certain requirements. They have three large plans and we would be able to tag those plans as they start to deliver more product.

What happened to England, that they were testing the SoMo in the hospitals?

We have a lot of hospitals continuing to test. I think the pace of deployment has been much slower than we expected. And we haven’t either lost any of the deals, it’s just that the testing has gone on longer and we still expect them to contribute significantly this year. We are also seeing a similar situation is Germany. And again, certainly UK’s economy has only started to come out of recession. And again, health care I wouldn't say, though, the quickest when it comes to spending money, but we are seeing continued test and we are pretty hopeful that as the money does roll we will be part of their plan.

The trends continued to multiply, Dr. Fidel. For example, Kevin mentioned 60 hospitals in Germany. Many of those hospitals are still in early stages of deployment. So the volume of business into those hospitals and the expansion beyond the 60, all will likely continue to accelerate some activity in northern Europe. Kevin mentioned the National Health Service in his remarks. That's the lot of the UK business that we've talked about is involved with that discussion. You recall there was a press release last fall where we announced that a distributor, Dakota, was working with – in getting health care applications involving our products into the National Health Service system. That has continued forward and many of these opportunities that we are seeing today are result of some of the work on the part of the distributor, which is Dakota that we talked about last fall, so each one of these areas is continuing to grow. The other thing that’s significant, again as Kevin mentioned, is that we are seeing orders coming in now for the 7X, which is a new product area and we are seeing a nice pickup in entry level orders for entry level products. It seemed like the fourth quarter, people needed to take that time to evaluate the restructuring of our data collection product lines and so we did see a drop in the sales in the fourth quarter but the activity in the first quarter has been at a substantially increased pace, and we anticipate that, again, the changes that we made in the fourth quarter will substantially benefit the first quarter and beyond.

So you expect in the first quarter, a record sales on the SoMo, that’s fair?

I think that would be fair. Yes.

Okay. Well, the way it looks to me is that we're starting the year we’re off at – also in the year we are cash break-even, and you expect to turn profitable by the end of the year?

That’s a fair assumption.

Okay.

Right. Thank you very much.

Okay.

We do have a follow-up question from the line of Brian Swift. Please proceed with your question. Brian Swift – Security Research Associates: Yes. I’ve got a couple things. In the larger potential deals, like with Hospira and Epocal were those go through distribution or would they be direct. Do you have any direct type of account?

Interesting question. Currently, they all are going through distribution, right? And our requirement is to – our preference is to sell through distribution because it gives us good leverage and gives good flexibility to our partners in growth. That’s the general trend. In the case of Epocal, I think they have some requirements and we are in discussion with them to do an OEM-type deal. But it’s early stage. We would expect certainly through Q1 that it all go through distribution. One of their requirements is that they shift from their facilities in the US to customers overseas, which doesn’t setup well through distribution because we have some legal requirements in terms of the radio and configuration. And it’s not possible to legally ship a product that’s configured for an overseas deployment through a US distribution channel. So right now the plan is distribution as they service North America, but there is a good possibility that we will enter into an OEM-type arrangement with them as they try and service a worldwide requirement. Does that answer your question? Brian Swift – Security Research Associates: I see. But that was kind of a unique case and is essentially you're going to try to service this market through your –

We have good distribution partners and for the likes of Hospira, for example, they generally will use local distribution to buy both the SoMo and the RFID plug-in scanner on an as-need basis. And their business model would be that as they sell their software to a given hospital that hospital may deploy 100 units, right? And as they buy those units, they will get their training and then they’d be delivered locally to wherever the hospital is, in Kentucky or Virginia or wherever it is. And so distribution works well because ultimately it provides the buffer that we talked about. So there is a product available in the channel. They don’t have to wait too long, etcetera. So our distribution strength is a big plus when we go into these deployment phases.

And the only exception, Brian, is our OEM business. We’ve always purchase it direct. You’ve got pre-order customers and their requirements are generally unique enough that it's not a logical step to stock those component parts that go into other manufacturers products in the distribution channel. That number is now at a lower point, 19%. As we move through this next year and couple of years, we expect that number could easily grow although it will be in competition we would have liked to think with growth in our other product families as well. We do ship directly to OEM customers. Brian Swift – Security Research Associates: All right. Yes, well the distribution is good, I guess, except when they carry on unusually low levels of inventory.

And again, just going back to that point. Between our inventory and distribution, the last year at this point there were $6 million in inventory, now there is $3 million. So this will get corrected. I don’t think the current levels are the right levels and certainly if there is any pickup in business. So we would essentially see an improvement in that.

For those of you who like to track this area on the balance sheet, we report deferred income on shipments to distributors. That is the net of our selling price and our cost of goods. So it essentially is the profit margin if you just for ease assume a 50% profit margin on these products, then you would see that at the end of 2008 there was about $4 million in the channel and about $2 million in the channel at the end of 2009. So each time we report on a quarterly basis, you will see how those numbers were fluctuating. We’ve also now because it’s becoming more significant broken out our deferred service revenue, and as you know we are offering extended warranty and service contracts on a number of our major products, data collection and SoMo. And we recognize the revenue – we get paid upfront and we recognize the revenue over the service period, which for our premium SocketCare service is three years. So as we move forward, you will see deferred service revenue is also being a balance sheet element and that will come in over time.

Okay. And just maybe to finalize on distribution, as a company, philosophically, we are very much a distribution company, and distribution is every effective from a cost delivery point of view provided your shipping, what we call standard products, which is what we primarily ship SoMo and our plug-in scanners. When the products become unique to a customer, then they really are more suited to OEM, which is why we do our Wireless LAN and other things. And again, we would expect that over time to be about 25% of our business with 75% being pure two-tier distribution. Brian Swift – Security Research Associates: Okay. You described the – your UK and Germany – what's your – programs you are going as far as trials on hospitals. What’s happening domestically here in terms of what kind of penetration or is that something that's still in the future that like –

Again, I think it’s been slow in the US. I think that we can give the example of Hospira. They essentially bought up a company to go after a specific medication dispensing market. We had high hopes for them at the beginning of 2009. We had discussions with them in 2008, 2009. But nothing really happened. In our more recent discussions, I think some of the reasons things didn’t happen is there still is confusion on the impact of the stimulus program and who pays for what and what are the benefits? And they recently, I would say, trained their sales people and now have a more concrete plan to attack its medication dispensing opportunity. The stimulus money is being used to incentivize that. And I still think that the overall electronic health record, there is plenty of opportunities. I think things have just been slow due to the uncertainty and as the uncertainty increases I think some of that will pick up. We're tracking many, many applications in health care in the US. But they have been moving slower than we originally expected. In Europe I think that we probably had lower expectation beginning 2009 and they have been much steadier. But it is a government run program and there hasn’t been the stimulus money. And they have systematically gone down the path to deploy certain applications, whether it be the doctor monitoring system that I believe where you can page doctors. We have a lot in the food services business within hospitals where people are using the SoMo to order lunch and dinner and various other hospital meal, as well as a doctor related activity. So I think the US will catch up this year, but it is slower than we originally expected. Brian Swift – Security Research Associates: Do you think it will follow the same pattern, do some test marketing or test out the operations of the device and then deploy after some –

Well, I think actually we're further along in the US in that a number of people have done their test marketing and actually have, I would say, validated their applications. And it’s a little bit slower I think because of lack of funding as opposed to technical issue and some uncertainty relative to the flow of money. So, again, I think once it starts to go, it will actually go quicker because in all of these things I would say probably 50% plus is technical related issues and there is 50% related to administrative and money related issues. And unless both sides are, I would say, put to bed, nothing really happens. People have done a lot of work on the technical side and now we are stalled. And when we get some clarity I think things will move quickly. Brian Swift – Security Research Associates: Okay. All right, that’s just from me. Thanks.

All right. Thank you very much Brian.

There are no further questions in the queue. I would like to turn the call back over to management for closing comments.

Thank you very much. We would just like to close by thanking everyone for participating in today’s call and to wish you a good day. Thank you.