Greetings and welcome to the Socket Mobile second quarter 2010 management conference call. (Operator instructions) It is now my pleasure to introduce your host, Jim Byers, MKR Group, for Socket Mobile.

Good afternoon and welcome to Socket's conference call to review financial results for its 2010 second quarter and six months ended June 30, 2010. 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 the market today. The release has also been posted on Socket's website 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 the Socket website 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 mobile computer, data collection and OEM products, including details on timing, distribution and market acceptance of products, and statements predicting trends, sales and market conditions and opportunities in the markets in which we sell our 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 our new products may be delayed or not rolled out 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 our application partners and current distribution channels may choose not to distribute the products or may not be successful in doing so; the risk that acceptance of our products in vertical application markets may not happen as anticipated; and other risks described in our 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 thank you for joining us today. Our second quarter revenue of $3.7 million reflects record quarterly sales of our SoMo handheld computer along with the sales of our scanning products and connectivity and service-driven revenue. In my quarterly overview, I'll mention the market dynamics for our SoMo handheld and scanning products and how we see these core elements of our business translating to growth going forward. I'll also discuss the outlook for our current markets and the business for the rest of 2010. I'll start with the SoMo and SoMo-driven barcode scanning solutions. We generated record quarterly SoMo sales of $1.7 million in Q2, which is a sequential quarterly increase of 19%. The SoMo continues to grow steadily, driven by the increasing number of applications that our software partners have developed over the past two years and are now deployed. While the market remains challenged and lacks any great sense of urgency due to the slow economy, we are seeing a steady increase in deployments of application solutions in various markets. Our record SoMo sales in Q2 reflect deployments to a solid base of current customers we've established. Epocal, our largest customer in the quarter, began the rollout of their product worldwide in Q2 and launched in a number of new markets, including the U.K., Germany, Italy and Japan. We expect our sales to continue to grow with this customer, as they continue to grow their business. Other major customers, Hospira and 3M, continue to actively market a SoMo-based solution. And we have potential sales opportunities that are under evaluation and testing. As we've noted previously, corporate sales deployments require software-based solutions which can involve lengthy processes as companies carefully test and evaluate the overall solution. I'm pleased to report that 3M after entering the market in…

Thank you, Kevin. As Kevin noted, our second quarter 2010 revenue was $3.7 million. Sales of handheld computer systems in the quarter achieved a new record high of $1.7 million up 19% from the previous quarter reflecting increasing sales of mobile computing solutions by a greater number of our applications partners. Offsetting that increase, our data collection product family revenue was down sequentially by about $340,000 to $1.1 million. Lower data collection product revenue reflects lower spending within the automatic data collection industry as given the different hosts of economy businesses have been cautious in moving forward with mobile systems deployment, upgrades and expansions of their mobile solutions. Despite the quarterly downturn, we remain optimistic about the long term prospects for these products and are pleased with the strong initial sales of our newest data collection product, our 2D barcode scanner, which works with within it's version of the Apple iPad, iPhone and iPod touch. This new product introduced last quarter represented approximately 3% of our second quarter revenue. In addition, we will begin shipping Apple compatible versions of our entry level laser barcode scanners September 1, increasing the performance and pricing choices available to users of Apple products. As Kevin has mentioned, we also are increasing selling activities by a number of our application partners in healthcare and hospitality. And our pipeline continues to signal growing revenue expectations. Our operating expenses in the second quarter of 2010 were $2 million, a reduction of 22% from the second quarter operating expenses a year ago of $2.6 million, and a reduction of 22% from the previous quarter, which is typically our most expensive quarter due to the cost of our annual audit in fast forward communications. Net loss for the second quarter was $575,000 or $0.15 per share, an improvement from…

(Operator Instructions) Our first question comes from (Peter Best) from SRA Capital Management.

I'm (inaudible) for Brian Swift and wanted to just get the sense of what the pipeline from SoMo business looks like.

The pipeline actually continues to be strong. The pipeline really hasn't been the issue. The issue has been the rate of deployment. As both Dave and myself mentioned, the rate of deployment has been, I would say, steady, but slow. In Q2, we had a record level of SoMo, and really we had no new customers, if you will, starting to deploy. Epocal was strong, but they'd been in strong in Q1. Everything else basically came from established customers. We basically highlighted three, I would say, customers in our discussion, though we feel that they have large potential and are close to deploying and those are companies like 3M that launched a product in Q2 and is receiving a first wave of feedback. This is looking quite strong. Hospira now have a fully trained and up and running sales force. They have a number of opportunities. We're in discussion with a large long-term healthcare provider. They've already begun their trial. We're expecting an answer at the end of August. That would be a substantial deal, I would say the equivalent of another good Samaritan-type customer for us who has been our largest installed base right now. So I will overall say that the pipeline is healthy and the rate of deployment is improving, but I wouldn't describe it as being urgent.

Looking at the handheld portion and your move to the wireless platform providers such as Apple and the RIM, how do you see that developing from a platform mix? You said you're across all platforms now? Which one do you think is going to be the dominant? You're somewhat leaning towards Apple conversation? Could you just add a little more color on that?

Absolutely. Let me just first say that really we see that we have two elements to our business. We have our SoMo handheld business, which is very much a solutions-driven business, and we have our cordless scanning business which is very much a peripheral business. So to answer your question on the peripheral side, obviously we feel that there is a lot of pent-up demand and there is a lot of developers on the Apple side. So up until the release of OS 4, it wasn't possible to support any application with commercial grade scanner. And the reason I say commercial grade scanner is obviously with a camera you could read barcode. But realistically, 5 to 10 barcode today is a realistic number to scan with the camera. When you're talking about book resellers, they're going to scan maybe 200 books. Therefore they need a real scanner. So we feel that there is a lot of demand. There is a lot of developers who would like to enable on the iPhone. And I think that you'll see a lot of activity in the next six months on the iPhone market. How it pans out over time I think is anyone's guess. But certainly, I think everyone would agree that Apple certainly has the mindshare right now, and we'll be with them. For us in the end, it doesn't matter. We support all platforms, and we're happy to be able to support Apple in the short term.

And then you briefly touched on the covenant issue with Silicon Valley Bank. Is there any more color you could provide to that?

Well, we've set up with the bank financial covenants, which gives the bank an opportunity to revisit the continuation of the line availability if we are not exceeding those financial covenants. And we both have been mutually setting covenants that are designed to really get better, if you will, in terms of operating results each quarter. And a lot of that is just driven by a combination of revenue growth and cost reductions. In the second quarter, the covenant was basically a cash from operations breakeven covenant that could be achieved at a loss of about $300,000. And we actually were able to reduce cost more than that original forecast was based on. So we actually would have done better than that at that level. But also, that would set an expectation of revenues in the low $4 million, and we wound up in the $3.7 million range. So timing of deal became important here. And as a result, we worked greatly off that covenant, but we were on the wrong side of the covenant by a few hundred thousand dollars. In our view and having had a long-time relationship with the bank, we've managed well to do all of the things that the bank is really looking for to ensure the protection of their line, including the cash we maintain and the relationships we have with our distributors which obviously ties to the collection of receivables. And because we've done all that well in the past, the bank has enabled us to continue the use of the line. In some cases we've reset covenants. But we have asked them again, to just consider a waiver, given that we think that we've remained in place with virtually everything they are looking for us to do with the exception of just hitting that threshold. We just reported to the bank today the results, and we will expect to hear back from them within a week, and we will file Form 8-K with the outcome of that decision as soon as we hear from the bank.

Final question. How do develop the market I guess faster? Is there a need for you to go out to 3M and try and help close the deals faster? I mean is there something you can accelerate the deal closure because it seems like the pipeline is there, and you've got some pretty big customer potential. But any color you could give would be great.

I think the difficult part in all this is that first of all, in most situations, Zebra buying the application, and not necessarily the hardware that runs the application, the hardware part of it. So most of the effort goes into evaluating the software. That's one. The other thing is, I think the slowness reflects the cautiousness that people are, and the way they are spending their money. Certainly for the last, I would say eighteen months we have really seen people minimize any purchases. So I think we were in the unfortunate position of, we didn't have a big install base when this recession started. So we didn't really have, I would say a base that was supporting us that we could just service. We had just entered the market. We have grown with the SoMo most quarters, right, and we've steadily grown up because people desperately need the solutions. As people, I would say loosen the purse strings, we would expect that to accelerate. I don't know that there is a lot we could do. I would say, our hardware typically represents maybe 30% to 40% of the overall value of the deal. And so even if we reduced our price in half, it's not enough for people to go ahead and buy now. And I would just say, we'd ask you to be (patient). We see more activity, we see more people buying. And actually, I wouldn't even say we see more activity. We've seen a lot of activity for the 18 months; we just haven't seen people buying. Now we're starting to see people buy. And I believe it's certainly coming. It's been a long time coming, and we've basically stretched everyone's patience including our own. I think we're close, but I don't think there's anything we can do in the short term.

(Operator Instructions) Our next question comes from the line of (Bernard Fidel with a Private Investor).

Would you elaborate a little bit about that approximate $5 million potential deal that's being evaluated in August?

Yes, sure, be happy to.

Is it a medical thing, or…

Absolutely. Just for the benefit of everyone else, I know you probably know the story already. But our largest customer is Good Samaritan; it's a long-term care facility. They use today probably 3,500 SoMos on a day-to-day basis at 24 hours a day, seven days a week and to monitor the behavior and routines of their various, I would say residents. This is almost an identical application. It's another large long-term healthcare provider. They want to use the SoMo for their basically going forward plans. They've bought units. They are currently going through a trial, and we expect to get an answer. They have a requirement for more than 5,000 units. And again, like Good Sam, it took us about a year to deploy these units. They're now in situation; we have a happy customer at Good Sam. This is basically a repeat of that and we're quite hopeful on the outcome.

Yes, in other words, in the event that they did do this, more than $5 million dollars of worth, when would they start not deploying in…

Well, what they've indicated is that they would like to start deploying in Q4. And again, as we have some experience, if I look at the Good Sam situation, it took essentially a year to deploy to get all units, maybe 10 months. I would expect a similar type rollout. So it would add 500 to maybe 800 units a month, which would basically be a big number on a quarterly basis for the I would say next, say Q4 to Q2 next year, you’d be talking several thousand units and that would basically double our SoMo business in that timeframe. So we’ve worked hard. Again, we do have a reputation now in the healthcare, particularly in long term healthcare. So we remain hopeful, and so far so good.

If my math is correct, if they start deploying in the fourth quarter that means we will see this go on for the five quarters. That would be like $1 million a quarter.

That would be above (rise). So the issue you have is that, really if you look at our Q2 results, we were essentially about $400,000 short in terms of being cash positive, and I would say being in control of our destiny. Certainly an order like this would put us on the right side of that.

You were profitable, weren’t you?

Well again, it depends whether it's at 800 or 1200, but yes, it puts you into profitable territory. And as you know, we have basically reduced our cost to try and get close, and we remain closer. We closed the gap by almost $400,000 between Q1 and Q2. We’re still 400,000 to 500,000 away, and this would certainly get us home.

Now how does the third quarter look? You expect to see growth as compared to the second?

I think that we have a few elements of the business. I think that there’s more certainty on the SoMo because A) We’re closer to the customer and we can see it. We just recorded a record quarter, so we expect that trend to continue. I think the variable is on the plug-in business. It has continued to fade. I would say long term we expect it to go away. (inaudible) is judging how quickly it goes away. We’ve been more aggressive in our forecast for it to go away and a little bit more optimistic on the cordless side. But again, we don’t expect Q3 to be a knock out of the park kind of quarter, but I think we would accept to basically close that $400,000 gap and get the cash breakeven, which is really where we need to be. And from there I think we can do that entering Q4. It’ll put us in awfully good shape.

Now, you know one thing you people never mentioned, you also sell warranties with the SoMo, does that bring you an income?

The warrantee is sold over a three-year period. And therefore, we take one-twelfth of it each quarter, and that has been building nicely. So our warrantee and services probably combined to the tune of $200,000 last quarter, and that's the combination of warrantees that we've sold plus servicing product. We also have people now starting to buy accessories like batteries. Again, the batteries are like tires in a car. They wear out. They're good for, depending on usage, 50,000 miles, but in an ideal situation, probably two years, maybe three years. In aggressive situations like healthcare like Good Sam where the UPS 7/24 hours, it can be as short as nine months. So you have those factors coming in. So services as a category and warrantees is continuing to build.

In other words, that's getting an increasing income from those warrantees?

Absolutely.

Now the government has in the part of the stimulus program, they're giving emphasis of about $1 billion for healthcare, electronic aspect of it. I understand they were grants.

We actually did apply and we have an application pending for doing a follow-on product to the SoMo. And the total grant application I think, if awarded, would bring probably something, and Dave will probably correct me, about $4 million in terms of funding into the company to help support the medical records initiative, et cetera. So we have applied. I believe the cut-off date was February of this year. We've made all the applications. We did our review with the state of California. Our application is in there, but it's the government. So having said all that, we expect an answer sometime in Q3. In our plans, we have not baked in any expected funds from the government. So this would basically be a bonus for us and basically accelerate the development and allow us to do extra developments we couldn't do without this money. So the bill I believe forces the government to make their minds up by September. They can ask themselves an extension. So we certainly did all the work to apply, and we're certainly in the running, but I can't give you any more color than that.

There is one division that was quite profitable in the past, OEM.

There is two things. One is that it has certainly changed. It was a bigger portion of our business. We developed what we call core technology whether it be for Bluetooth or wireless LAN, all those things, that we offset our cost by selling that to people who need this capability but don't want to have a world-class engineering team in their own building. So we leverage ours. We had a long run in wireless LAN and Bluetooth. Bluetooth I would say has got to the point where it's no longer a complicated technology for many people if you are doing what I would call pretty standard stuff. Wireless LAN continues to be highly complicated. We are in a transition right now. We really finished the design cycle probably four years ago. From that design cycle, we generated I would say a total of $6 million to $8 million on wireless LAN. We've just completed a new design cycle. We're just starting this process. It's about a one-year process. And then if you get design wins from third parties, you expect five to six-year life on that. Wireless LAN, which has entered the design cycle, we will know more about how well we will do with that over the next two quarters. But the design cycle was primarily done for the benefit of our next generation SoMo. So we have designed for our next-generation SoMo wireless LAN portion and we're in the process of trying to leverage that. But the primary purpose was that we'd have a follow-on product to the SoMo.

The OEM business gives us some corollary benefits when it comes to our SoMo handheld computer and our barcode scanners, because we find that some of our OEM customers are interested in also deploying solutions that include these other products. We do report externally the sale of handheld computers not by who sells them or type of customer. So we do that in total. So in fact in the second quarter, the growth in the handheld computers was helped by contributions from OEM customers as well. So in addition to the wireless LAN technology contribution, and we do continue to provide Bluetooth products as well, you will see our OEM team bringing business in the direction of scanning and handheld computers as well.

And maybe just to add a little bit here just to make sure there is no confusion, our large customer, Epocal, we will move over to an Epocal-branded version of our SoMo. So they carry their name for their marketing purposes. And once we put someone else's name on the SoMo or another product, they provide a firm for cash, they sign a contract, there is a commitment of unit. They go over into this OEM, or ODM actually, category. And we have some customers who will do that, because they want greater brand recognition. It's good for us in that we get a greater certainty on the supply chain. And Epocal, starting in Q3, will start to move over into that category.

Now, in the third quarter, how do you see the standards for the iPhone? Should that increase over the second quarter?

Yes, we would expect to increase over the second quarter. But I think we need to be cautious here, because we will be primarily supplying people who want to write applications in the short term. There are a lot of mobile phones out there. Well, one of the things that's quite surprising with the Apple market is they have 200,000 developers, and it's difficult to develop an application that uses a barcode scanner without buying a barcode scanner. So you will have an opportunity to sell to that community in the short term as people develop applications. After they're developed, they will be sold and the ones that are successfully sold and deployed will drive the demand for our scanners. So I would say between now and the end of the year, the opportunity will be primarily in the developer and early adopter market. Well, in 2011, for the successful applications, the numbers could be quite serious.

200,000, it could be quite significant.

It's a big community. Depending on the scanner types they buy, let's say an additional 1,500 cordless would close the gap nicely based on our loss that we had last quarter. And again, we feel very positive we've been written-off on a few of the more important iPhone and iPad blogs. People are finding the product. We were surprised in Q2 at the rate of pickup of our 2D scanners. As Dave mentioned, we'll only ship at the end of August. So there is time, but there is not a lot of time.

As you said, you've been getting a lot of publicity and write-up and everything on the scanners, et cetera. I remember about two years ago in the PC journals and magazines, et cetera, you had the SoMo, and they said, Product of the Year, et cetera, et cetera, et cetera. I don't read PC things. But I know in a library in Pittsburg, I saw that there is at least four, five or six of them. It may be advantageous that when these releases come out about the Apple, the 2D, et cetera, et cetera, is to send it to some of those editors there, and they could do a story on that. I would imagine they would jump at it.

Well, yes, we are doing that. But I think things have changed. I don't know if you noticed, but now we have the ability to follow-up on Twitter. And again, a lot of these editors and people who write blogs are experts in an area and prefer to get their information via Twitter. And we have basically set that up. And as we launch into the Apple market, we will be communicating to that community via Twitter and other things, which are, I would say, more current and faster moving than the traditional magazine. So your suggestion is well taken. We have made adjustments, because it's a fast-moving community. But we are getting the word out and we are being followed by a number of influential bloggers to the Apple community, which is why you're beginning to see these releases and these notifications coming to say we're now able to support Apple. That information is getting out, but via Twitter, Tightfeed and then written up. We've also, I would say, increased our focus on the MARCOM area. So it's not exactly magazines, but the effect is the same and maybe a little bit faster.

Well, to me, it seems you're right at the edge of everything falling into place.

I think we're fairly close. I would describe it as being fairly close.

I just want to summarize what I got out of this what you people have said and see I'm misinterpreting anything is that in the third quarter we should see growth and you would fill in the efficiencies of anything like that and that we should get record growth again in the SoMo and growth in the handheld computer. And then there is a possible real big deal. Was it $5 million?

We don't know the exact number, but more than 5,000 units, which would put it in the, I would say, $3 million to $4 million range.

Okay. So $4 million range. And over a period of time of four quarters, it's equal to like $1 million. And if you were at a $1 million through each one of those quarters, you actually would become profitable, but that's assuming that there is no growth in any other areas.

I think you summarized it well. In Q3, I think we'll see steady growth, but I think that with the combination of some of these big deals and what we've done on the Apple community, we could see much more accelerated growth in Q4. And I think you're correct in assuming that we're desperately close.

Are there any other big deals in the background?

There are, but again, I think we basically could chat here for a while. I mean we should take this offline.

But there are big deals around those?

Absolutely. We mentioned two of them. Both Hospira and 3M, we are seeing, I would say, sizeable and credible opportunities in both areas.

I also want to compliment you people for one thing. I like the idea that you keep the shareholders informed. You put out the statements every couple weeks of any new products or things in that area.

Yes, I can assure you we're working hard to do that and we appreciate you saying so.

At this time, we have no further questions. I'd like to turn the call back over to management for any closing comments.

In closing, we'd just like to thank everyone for their time today, for their continued support, and we look forward to reporting after the next quarter. Thank you.

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.