MOBILITY ELECTRONICS INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM TO

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COMMISSION FILE NO.:
0-30907
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MOBILITY ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 86-0843914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7955 EAST REDFIELD ROAD 85260
SCOTTSDALE, ARIZONA (Zip Code)
(Address of principal executive offices)

(480) 596-0061
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as computed by reference to the average of the closing bid and
asked prices of such stock, as reported by the Nasdaq, on March 28, 2002 ($1.50)
was $23,504,225. Shares of voting stock held by each officer and director and by
each person who owns 10% or more of the Company's outstanding voting stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

The number of shares outstanding of the registrant's common stock as of
March 28, 2002 was: 15,669,483 shares of common stock.
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Portions of the registrant's definitive Proxy Statement relating to its
Annual Meeting of Stockholders to be held on May 22, 2002 are incorporated by
reference into Part III hereof.
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TABLE OF CONTENTS

1

PART I

DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements under the captions "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
constitute "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors, which may
cause the actual results, performance or achievements of the Company, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following:

- loss of, and failure to replace, any significant customers;

- timing and success of new product introductions;

- product developments, introductions and pricing of competitors;

- timing of substantial customer orders;

- availability of qualified personnel;

- performance of suppliers and subcontractors;

- market demand and industry and general economic or business conditions;

- the "Risk Factors" set forth in our Registration Statement on Form S-1
(No. 333-30264), dated February 11, 2000; and

- other factors to which this report refers.

ITEM 1. BUSINESS

THE COMPANY

Mobility Electronics' mission is to provide innovative mobile computing
solutions for notebook computer, PDA, pocket PC, Tablet PC and other mobile
computing device users. We currently pursue this mission through the design,
development and marketing of products and technologies in four major categories:
power products and accessories, Split Bridge(TM) technology and related CardBus
docking products, expansion products, and handheld connectivity and accessory
products. For the year ended December 31, 2001, our revenues were derived
primarily from sales of power products and accessories and expansion products.

Our major competitive advantage is the development and marketing of unique
products that combine proprietary technology with innovative features and
capabilities. We offer our solutions through a broad range of distribution
channels and we have significant technology and intellectual property in each of
our product categories.

Our objective is to be the leading provider of a broad range of innovative
mobile computing products and technologies. Key elements of our strategy
include:

Leverage Technological Leadership. We intend to continue to exploit the
development and use of our Split Bridge(TM) technology, power product
technology, expansion technology, CardBus technology, and handheld technology
and invest in research and development of appropriate related advanced
technologies. We intend to use this technological leadership position to develop
and market highly differentiated products.

Maximize Penetration in the Mobile Computing Market. We intend to
capitalize on our current strategic position in the mobile computing market by
continuing to introduce high-technology products that suit the needs of a broad
range of users in each of our major product areas. It is our goal to be a market
leader in each of the product solution categories in which we will compete, and
to offer mobile users unique, innovative solutions that provide value-add that
previously did not exist. To effectively leverage our product portfolio, we also
intend to actively pursue corporate and product branding initiatives.

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Establish Licensing and Strategic Partnerships. We have licensed and
intend to continue to license our Split Bridge(TM) technology and to enter into
strategic alliances in order to realize the market potential of the technology.
These activities will specifically include exploiting existing licensing and
strategic relationships we currently have with 2C Computing, Inc. Cybex Computer
Products Corporation, LSI Logic Corporation, Philips Semiconductors, Inc., Molex
Incorporated, National Instruments Corporation and others, as well as expanding
current strategic partnerships and establishing a wide variety of additional
relationships.

Broaden Distribution Capabilities Worldwide. We currently sell our
products worldwide through distributors, value-added resellers, retailers and
private label partners. We believe that broadening the distribution of our
products through strategic alliances with a variety of companies within the
computer industry is a critical element in establishing our technology and
products as industry standards.

Expand OEM Relationships. We intend to provide a broad range of products
for computer original equipment manufacturers, or OEMs, by partnering with OEMs
globally in a manner that meets their current and future connectivity and remote
PCI bus requirements. We will also work with both OEMs and other industry
partners, such as chip makers and power product technology partners to design
and implement solutions that can meet the integrated requirements of OEMs.

Pursue Strategic Acquisitions. We intend to evaluate opportunities to
acquire complementary businesses, technologies and products that can benefit
from a broad portfolio of technologies. We also plan to pursue acquisitions that
will enable us to offer products and features, in keeping with our mobile
computing solutions mission, to better serve our customers or to more fully
realize the market potential of our technology base, to more rapidly develop and
bring to market advanced technology, to expand distribution capabilities and to
penetrate other targeted markets or geographic locations.

In February 2002, we acquired Portsmith, Inc., an industry leader in
providing connectivity solutions for handheld computing devices. This
acquisition provides us with an entrance into the rapidly growing handheld
computing device market and reinforces our focus on delivering powerful mobile
computing solutions. Portsmith currently provides a range of Ethernet, modem,
and other connectivity products for the most popular handheld devices such as
Palm, Handspring Visor, Compaq IPAQ, and other mainstream PDA products, and
intends to undertake a number of important product development programs that
expand on these solutions.

On March 25, 2002, we announced our execution of a definitive agreement to
acquire iGo Corporation, a leading mobile computer solution provider. The
closing of this transaction is subject to certain material conditions precedent
being satisfied, including without limitation, approval by the iGo stockholders
and the declared effectiveness by the Securities and Exchange Commission of a
registration statement, which registers the issuance of the shares of our common
stock to be issued to the iGo stockholders in such transaction.

We were formed as a limited liability company under the laws of the State
of Delaware in May 1995, and were converted to a Delaware corporation by a
merger effected in August 1996, in which we were the surviving entity. We
changed our name from "Electronics Accessory Specialists International, Inc." to
"Mobility Electronics, Inc." on July 23, 1998. Our principal executive offices
are located at 7955 East Redfield Road, Scottsdale, Arizona 85260, and our
telephone number is (480) 596-0061. Unless otherwise indicated in this Report,
references to "Mobility," "us," "we" and "our" refer to Mobility Electronics,
Inc. and shall include our predecessor, Electronics Accessory Specialists
International, L.L.C.

INDUSTRY BACKGROUND AND THE MOBILITY SOLUTIONS

PCI COMPUTER ARCHITECTURE AND SPLIT BRIDGE(TM) TECHNOLOGY

Today the most prevalent computer architecture, which is incorporated into
virtually all computer systems and in many related embedded processor
applications, uses the peripheral component interface, or PCI, bus. However, the
PCI bus has a number of key limitations, most notably a constraint on the number
of lines, or circuits, and loads that can be attached to it. Historically, these
limitations have been mitigated to some extent by attaching a bridge chip to the
PCI bus, which in turn permits a number of additional loads or peripherals to be
attached to a secondary PCI bus, which is also connected to the bridge chip.
This procedure
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has the major limitation of requiring the secondary PCI bus to be located on the
main PCI bus printed circuit board, or PCB, or attached physically by a
connector which enables extension of the secondary PCI bus to a maximum of
approximately three inches from the main PCB. Consequently, the industry today
faces a number of physical and electrical constraints when designing a computer
system, and has been unable to move the secondary PCI bus more than a few inches
from the primary PCI bus. Additionally, traditional communication protocols,
such as USB, IEEE 1394, Ethernet and SCSI, which attempt to address these
limitations, have numerous disadvantages since they generally require a
processor, extensive software and other related items.

Our Split Bridge(TM) technology addresses the limitations of traditional
PCI bus technology and architecture by allowing the primary PCI bus of most
portable computer models to be extended to a remote location. This is
accomplished through the use of our Split Bridge(TM) chips, which are like any
other bridge chip, except they are divided into two halves separated by a high
speed link. This allows one or more Split Bridge(TM) chips to be attached to the
primary computer PCI bus, with the mating Split Bridge(TM) chips installed at a
remote location along with the secondary PCI bus. Consequently, our Split
Bridge(TM) technology eliminates the requirement of having the secondary PCI bus
on the primary PCI bus PCB, and thus eliminates many of the electrical
constraints thereon. Additionally, Split Bridge(TM) technology substantially
reduces the physical space requirements on the primary PCB by eliminating the
need for multiple traditional bridge chip connections and allows the connecting
cable to be small and flexible. The first generation Split Bridge(TM) chips were
designed for distances of up to 15 feet. We believe future generations may
extend this distance substantially.

The following summarizes the advantages of Split Bridge(TM) architecture:

- Gigabit speed

- Bi-directional

- PCI superset (transfers bus, not data)

- Full PCI bus compatibility

- No processor requirements

- No storage requirements

- Minimal size, heat and power requirement

- Highly upgradeable technology migration path

- Small, flexible cable

- Cost effective

The introduction of Split Bridge(TM) technology now enables architectural
designs of computer systems and applications that previously were not feasible.
The implementation of such new solutions can potentially include replacing
current bridge chips with Split Bridge(TM) chips, integrating Split Bridge(TM)
technology into other chips and technologies or using Split Bridge(TM)
technology to create new products and product categories in a variety of
potential applications. We have licensed our Split Bridge(TM) technology to a
number of industry parties, including Cybex Computer Products Corporation, 2C
Computing, Inc., LSI Logic Corporation, Philips Semiconductors, Inc., Molex
Incorporated, MiTac International Corporation, National Instruments Corporation,
Asustek Computer Inc., Innolabs Corp. and Intel Corporation.

SPLIT BRIDGE(TM) DOCKING PRODUCTS

The portable computer market, which is a rapidly growing segment of the
personal computer industry, could benefit from solutions that address the
inherent limitations on PCI bus architecture. Demand in this market has been
fueled by advances in computer technology and the demand for computer mobility.
According to IDC, a leading industry source, the market for portable computers,
excluding handheld devices, is expected to grow at a compounded annual growth
rate of 10.5% from 26.1 million units in 2001 to approximately 43.0 million
units in 2005. Coupled with this trend toward portability, there has been an

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increased demand for portable computers in small and light form factors to
accommodate the user's desire for greater portability convenience when traveling
and/or working in mobile settings.

Although portable computers provide users maximum portability and
flexibility in mobile settings, portable computers alone are insufficient in
providing users an ideal computing environment for prolonged usage in a fixed
setting, when compared to the comfort of a traditional desktop setup. As a
result, portable computing OEMs created docking products, port replicators and
docking stations, that when used with a portable computer create a workstation
that resembles the setup of a desktop computer. Port replicators are simple
devices that provide users with a cable management system for peripherals such
as full-sized keyboards, power cords, mice and monitors. Docking stations
include basic port replicator features, as well as more advanced capabilities
such as networking, PCI card slots and storage expansion devices. Attaching and
releasing a portable computer from a port replicator or docking station is
typically a one-step procedure that takes seconds to complete compared to the
burdensome task of attaching or releasing each external devices separately. More
important, when used with a full sized keyboard, external mouse, and an external
monitor properly positioned at an ergonomically correct distance, a workstation
is created to maximize user comfort and productivity.

To date, there has not been a provider of a broadly compatible docking
solution for use with many brands and models. OEMs have historically designed
port replicators and docking stations that restricted use only within their own
brands, and in many cases, for use with only a select number of models. OEM
designed port replicators and docking stations connect to their respective
portable computers via a mechanical connection, which often limits user
flexibility in user workstation setup. The majority of the mechanical port
replicators and docking stations offered by portable computing OEMs also
restrict access to the ports of the notebook given that their respective devices
are designed to merely replicate ports resident on the respective notebook
attached to the device.

Additionally, many leading portable computer OEMs are removing mechanical
docking connectors from "value" priced portable computers, i.e., portable
computer models typically priced below $1,499 which computers are marketed as
ideal solutions for individuals, education users, and small and medium sized
business use. As a result, these users do not have a docking product option
offered by the respective portable computer OEM.

We believe that the incorporation of our Split Bridge(TM) technology in
CardBus interfaced docking products can provide docking product users greater
functionality and value compared to docking products offered by portable
computing OEMs. Given that Split Bridge(TM) extends the PCI bus of portable
computers, Mobility docking products add new hardware ports and offer users
expansion via industry standard drive bays and PCI slots, whereas docking
products from portable computer OEMs merely replicate the functionality on their
respective portable computer attached. Additionally, by using the industry
standard CardBus interface available on majority of portable computers, Mobility
docking products provide users greater flexibility in their workstation setup
without the restrictions of mating a docking product to a proprietary connector.

Our docking products offer mobile users greater compatibility by using the
industry standard CardBus interface connection to a notebook computer. Given
this type of connectivity, our products are enabled for use with multiple brands
and models, providing broad compatibility greater than traditional mechanical
interfaced docking products offered by portable computing OEMs. Our docking
products also provide a solution for portable computer users lacking an option
from the respective portable computer OEM.

The primary CardBus interfaced docking product we currently offer is the
EasiDock(R) 1000EV. This product enables users to connect most portable
computers to a docking peripheral at a speed of 1.25 + gigabits, which is
approximately 100 times faster than a USB peripheral. The EasiDock(R) 1000EV
offers users key port replicator functionality providing connectivity via mouse,
keyboard, serial, parallel, and USB ports. Additionally, the EasiDock(R) 1000EV
includes 10/100 base T Ethernet networking and external video support for use
with Windows 98SE, Millennium, 2000, and XP operating systems. We currently
market our EasiDock(R) 1000EV to a variety of distributors, including Ingram
Micro Inc., and to value added resellers. We also intend to continue to pursue
Split Bridge(TM) docking solutions with computer OEMs, which products may be
privately labeled at the request of the OEM.

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POWER PRODUCTS AND ACCESSORIES

A major issue for the portable computer user is the requirement to power
their portable computer or handheld device on the road. Many portable devices
offer designs and form factors that support great portability and travel
comfort; however, battery life limits prolonged usage in mobile settings. This
problem is compounded particularly for mobile users that travel frequently via
air or road. Current solutions require the use of multiple, model-specific
charging devices for different models, different computing devices, and
different power sources. For the mobile user with several devices such as
notebook computers, mobile phones and PDAs, there is extreme inconvenience to
carry multiple power adapters and having access to a power source.

Mobile users face several additional issues relating to powering mobile
computing devices. First, mobile devices have limited battery life, which
necessitates the need to frequently connect to a power source to recharge
batteries and negatively impacts productivity. Second, power adapters shipped
with notebook computers only offer power and charging from a wall outlet (AC
source), which limits power source access for mobile users. Truly mobile users
need access to power anywhere and everywhere -- office, air and auto. Third, the
mobile user is inconvenienced given that notebook computers typically provide a
single power adapter. Without a second "travel" adapter mobile users must crawl
under their desks and grab their adapter when they are at home or on the road.
Fourth, there are space constraints for frequent travelers. Mobile users
typically carry a mobile phone and/or a PDA in addition to their notebook
computer. Each device requires a separate power adapter. These adapters consume
valuable space in users' notebook computer bags. Last, power connectors and
device requirements are proprietary. As a result users must typically purchase
their adapters from notebook computer, mobile phone and PDA manufacturers. This
has a tendency to keep price points artificially high and limit easy access to
adapter solutions.

We believe that our company is well positioned to provide a variety of
power solutions to mobile computing users. We currently offer a range of DC to
DC, more commonly known as Auto/Air, power adapters that allow mobile computer
users to power their computing device in a car, a boat, or an airplane. Our
current major customers for these products include the computer original
equipment manufacturers or OEM's, such as Compaq Computer Corporation, Gateway,
Inc., Hewlett-Packard Company, IBM Corporation, Toshiba Corporation and others.
We are also developing a variety of complementary power products that we plan to
introduce in the latter part of 2002.

In addition to power products, we also market a number of accessory
products, such as monitor stands, portable device bays and portable computer
stands. We expect to increase this offering in the future.

HANDHELD PRODUCTS

Today's connectivity devices for handheld PCs, also known as cradles, are
designed to support the handheld PC as a companion product for use with either a
portable or desktop computer. This limited functionality restricts mobile users
who desire to use their handheld PC as their only mobile computing device when
traveling and or communicating to a network. Other challenges facing handheld PC
users is the difficulty of data input and output, the size and quality of the
handheld video display, and connectivity desired to update, share, and present
data.

Handheld device OEMs, of both PDAs and pocket PCs, offer limited
connectivity options that enable handheld PCs to communicate with networks,
computer peripherals, and display devices without the presence of a portable or
desktop computer.

We believe that our connectivity and accessory products effectively fill
gaps in the accessory offering of the leading handheld device OEMs, such as
Palm, Handspring and Compaq, among others. We are uniquely positioned to
leverage technology developed internally that enables us to create a flexible
product offering to satisfy a variety of connectivity needs. Our leading
connectivity products for handheld computers provide ethernet and external video
presentation capabilities that are not offered by the handheld device OEMs. We
have enjoyed success with these types of solutions with customers in vertical
markets that deploy handheld devices as a mobile user's primary computing
device. We believe that the outlook for our products in the

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handheld market is promising, and our technology is well suited to create both
vertical market and mass market solutions that augment handheld computing as a
viable alternative to portable computing.

Our current product offering for handheld computers includes cradles that
power the device and connect to the internet over an integrated Ethernet or
modem in the cradle. These products are marketed to major OEM's such as Symbol
Technologies, Inc. and Palm, Inc. and to the distribution channel, as well as to
customers in vertical markets that deploy handheld devices as a mobile user's
primary computing device. We also have products that provide handheld users
external video presentation capabilities that we plan to begin marketing in
mid-2002.

EXPANSION PRODUCTS

The PCI bus has become the standard I/O bus on every modern personal
computer, and simply put, one of the most successful bus standards ever
developed. Because of this success, the proliferation of PCI cards has been
nothing short of explosive. As a result, the demand for additional PCI slots for
increased functionality has followed the tremendous growth of PCI card usage. In
addition, the demand for increased portability, flexibility, and performance in
computing has followed the trend of smaller form factors and faster processing
speeds.

Despite the demands for additional PCI slots and smaller form factors,
computer manufacturers are not increasing the number of PCI slots on their
desktop computers. Even worse, the majority of growth in the personal computing
industry will be driven by the introduction and adoption of more powerful,
portable and flexible laptop computers as primary computer devices which will
replace desktop machines. Because of their architecture and small form factor,
laptop computers do not have any PCI slots, and thus cannot support the added
functionality of PCI cards. In response, computer users in various industries
have become increasingly frustrated with their computing alternatives.

Our acquisition of MAGMA in October 2000 solidified our market leadership
position in the PCI expansion business by providing intellectual property,
products, distribution channels, key customers, and additional resources that we
believe will leverage our Split Bridge(TM) technology and accelerate our growth
and development in this market segment.

Our family of PCI expansion products provides users of PCI-based systems
the portability, flexibility, and performance needed for high-end computing
applications. Users in industries such as audio/video editing, test and
measurement, industrial automation, and telephony can now have scalable systems
that could not previously be used in mobile settings because of system
limitations. Hence, our products enable mobility for users and provide computing
power and functionality not previously offered.

We offer a variety of PCI slot expansion products, ranging from 1 slot to
13 slot configurations, to provide users the expansion lacking in desktop and
portable computing devices. With the recent completion of our second-generation
Split Bridge(TM) chips, we began integrating our Split Bridge(TM) technology in
the expansion product area. This integration is still underway, and encompasses
the development of new, low cost expansion products, new CardBus expansion
products, and the marketing of Split Bridge(TM) links in a variety of
applications including test, measurement and printing. A Split Bridge(TM) link
includes two Split Bridge(TM) chips, two connectors and a 1.25 gigabit
bi-directional, high-speed cable.

We currently market our expansion products to a broad range of customers,
including value added reseller and OEM's such as DigiDesign, a division of Avid
Technology, Inc., and Media 100 Inc.

STRATEGIC RELATIONSHIPS

We have entered into a number of strategic relationships to develop and
enhance our existing and future technology, product lines and market
opportunities. We own or license all of our Split Bridge(TM) technology,

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our expansion technology, our power product technology, and our card bus and
handheld technology. These relationships include the following:

TECHNOLOGY

Cybex Computer Products Corporation and 2C Computing, Inc. Cybex is a
leader in providing KVM switches in the server market. 2C Computing is
affiliated with Cybex and focuses on developing, manufacturing and selling
digital extension products. In March 2000, we entered into a strategic
partnership agreement with Cybex to pursue the development of new server,
desktop and KVM switch systems, technology and products. As part of this
strategic relationship: (i) we entered into a private label agreement with Cybex
to sell Cybex our universal docking products; (ii) we agreed with Cybex to
cross-license certain of our respective technologies for permitted applications;
and (iii) Cybex purchased $5.0 million of our Series D preferred stock.
Subsequently, the Series D preferred stock was converted to common stock. In
July 2000, we entered into a strategic partner agreement with 2C Computing. As
part of this strategic partner agreement: (i) we agreed with 2C Computing to
cross-license certain of our respective technologies for permitted applications;
(ii) 2C Computing agreed to pay us a technology transfer fee of $2,000,000,
payable over time, and (iii) we purchased a warrant from 2C Computing to acquire
up to 10% of the fully-diluted capital stock of 2C Computing. Subsequently, we
exercised this warrant. A major focus of our strategic partnership with Cybex
and 2C Computing is the potential substantial extension of the distances over
which Split Bridge(TM) technology can be used and the potential use of Split
Bridge(TM) technology over a CAT 5 system. In March 2002, we signed an expanded
license agreement with Cybex which will further facilitate these efforts. In
addition, in March 2002, we sold certain of our assets to Cybex relating to such
expanded licensing arrangement, and granted to Cybex an option to purchase our
equity interest in 2C Computing.

LSI Logic Corporation. LSI is a major supplier of custom, high-performance
semiconductors and is focused on building complete systems on a single chip.
Pursuant to our strategic partnership, LSI completed development of two next
generation chips, at its expense, which will enhance our docking products by
eliminating the need for an external serialization/deserialization, or SerDes,
chip. This development will reduce our costs and provide us expanded
performance. Additionally, in October 2000, we entered into a license agreement
with LSI pursuant to which we licensed to LSI the right to use our Split
Bridge(TM) technology to make and sell Split Bridge(TM) chips, related to
various royalty payments.

Molex Incorporated. Molex is a major developer and manufacturer of
connectors and cable. Together with Molex, we developed our proprietary
connector and 1.25 gigabit bi-directional cable and connector for use with our
Split Bridge(TM) and docking technology. Molex is our sole supplier of certain
system connectors for use with our universal docking products, has invested a
significant amount of capital in this technology and continues to support the
development of our Split Bridge(TM) technology.

Additionally, in December 2000, we entered into a license agreement with
Molex, pursuant to which: (i) Molex was granted the right to make and sell Split
Bridge(TM) and docking solution connectors and cables; and (ii) we were granted
the exclusive right to use certain of Molex's connector technology in Split
Bridge(TM) docking product applications.

Philips Semiconductors, Inc. Philips, formerly VLSI Technology, Inc., is a
leading designer, developer and manufacturer of ASIC chips. Together with
Philips, we developed our proprietary first generation digital ASIC chip, which
incorporates our Split Bridge(TM) technology. Until the next generation chip is
designed into all our products, Philips is our sole supplier of Split Bridge(TM)
technology ASIC chips for certain products.

Arizona Digital, Inc. Arizona Digital is a developer of PCB boards that
increase functionality of passive backplanes. Mobility intends to use this
technology to reduce cost, increase performance and reliability of our expansion
products, and to provide increased PCI slot expansion capabilities.

Hipro. Hipro is a leading designer, developer, and manufacturer of a
variety of AC power products for the computer industry. We have teamed with
Hipro to develop, manufacture and market a number of unique new power products
for the mobile computing user. We expect to launch our first co-developed
product in the second half of 2002.

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National Instruments Corporation. National Instruments is a leading
innovator of computer-based measurement and automation software and hardware. We
entered into a cross-licensing agreement with National Instruments to leverage
our Split Bridge(TM) and CardBus technologies and to strengthen our respective
opportunities in Split Bridge(TM) technology, CardBus and test and measurement
applications.

CONTRACT MANUFACTURERS

Solectron Corporation. Solectron is a leading, high quality contract
manufacturer for the electronics industry. Solectron is currently the sole
manufacturer of our Split Bridge(TM) docking products in its Malaysian facility.

Steman International. Steman is a leading manufacturer of high quality
plastic injection molds and plastic components. Steman is currently the sole
manufacturer of our Mobility branded monitor stands and private label monitor
stands for our OEM customers.

Group West International. Group West is a Taiwanese contract manufacture
specializing in the production of power products. Group West currently
manufactures Mobility's branded and OEM auto/air products.

CUSTOMERS

Our customers currently include:

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* These customers purchase from us through distributors

As a group, the OEMs and distributors listed in the chart above accounted
for 72% and 13%, respectively, of net product sales for the year ended December
31, 2001. Targus accounted for 28% of our total net product sales for the year
ended December 31, 2001. In 2001, Targus distributed a range of our power
products, on a private label basis, primarily to major retail outlets and
certain OEM fulfillment outlets worldwide. However, in December 2001 we came to
an agreement with Targus to terminate our relationship. It is our intention
going forward to market our power products under our own brand through the
distribution channels we have developed. IBM, who buys brand labeled monitor
stands, power products, a portable device bay, and USB docking stations,
accounted for 30% of our net product sales for the year ended December 31, 2001.
Our distributors sell a wide range of our products to value-added resellers,
system integrators, cataloguers, major retail outlets and certain OEM
fulfillment outlets worldwide.

SALES, MARKETING AND DISTRIBUTION

We have dedicated, senior level OEM sales people who, along with senior
management, focus on developing and expanding relationships with top tier
computer OEMs on a worldwide basis. We are pursuing

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the sale of our standard products, whether Mobility branded or private labeled,
and the sale of custom products and chips on board with OEMs on a worldwide
basis.

In North America, we use an internal sales organization and sales
representative organizations to penetrate the traditional two-tier distribution
channel. We leverage major catalog houses such as CDW Computer Centers, Inc. and
OEM catalog programs such as Dell, top retailers such as CompUSA and Radio Shack
and a broad range of value-added resellers and dealers such as Insight
Enterprises, Inc. and Comark, Inc. We also work with major corporations and key
accounts as part of our strategic efforts.

We also plan to pursue markets outside North America by establishing
strategic sales representatives and distribution or private label arrangements
in each significant geographic region. We plan to execute bundling programs with
major OEMs, drive manufacturers, selected related vendors and synergistic
suppliers to our market. We have also established an e-commerce capability and
marketing program, which will include, in the future, build-to-order capability.
In Europe, we use an internal sales organization and we distribute our products
through a distributor located in the United Kingdom.

We implemented a variety of marketing activities in 2001 to aggressively
market our family of products. Such activities included participation in major
user groups and trade shows, key OEM and distribution catalogs, distribution
promotions, value-added reseller and information technology manager advertising,
on-line advertising and banner ads, direct mail and telemarketing and bundle
advertisements with OEMs and related product partners. In addition, we
implemented a strong public relations program to continually educate the market
about us, our Split Bridge(TM) technology and our products, with a major
emphasis on timely product and news releases, speaking opportunities and feature
stories. We also utilize our web site as a major marketing and direct sales
mechanism.

MANUFACTURING

The proprietary components of our Split Bridge(TM) technology are
manufactured by our strategic partners. Philips Semiconductors supplies us with
our Split Bridge(TM) technology chips, and Molex supplies us with our high-speed
cable and connectors. In the future LSI will supply us with our next generation
chips. Our power products and monitor stands are supplied by contract
manufacturers in Taiwan. Solectron is our primary contract manufacturing source
for our EasiDock(R) 1000EV product.

Steman currently manufactures all of our Mobility branded monitor stands
and private label monitor stands for our OEM customers. Group West currently
manufactures Mobility's branded and OEM auto/air power adapter products.

In-house manufacturing activity has primarily been reduced to packaging and
fulfillment activity. Some product is shipped to us in bulk quantities, which is
not packaged for delivery to our customers. We package these products in the
appropriate box with the corresponding operations manual and other product
documentation. We currently assemble one mechanical port replicator under a
contract with NEC and a portable device bay under a contract with IBM. The
volume levels on these products are too small to outsource economically. We will
continue to build these products in-house for the foreseeable future.

COMPETITION

Competition for our Split Bridge(TM) technology primarily comes from
traditional communication protocols, such as USB, IEEE 1394, Ethernet and SCSI.
These protocols are generally well established, particularly in certain
applications, and thus will provide competition for our Split Bridge(TM)
technology depending upon the application.

Additionally, our docking products, handheld products and accessory
products compete primarily with the internal design efforts of mobile computing
device OEMs. These OEMs, as well as a number of our potential non-OEM
competitors, have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than we
have. We believe that we have a proprietary position with respect to our Split
Bridge(TM) docking technology, CardBus technology and handheld connectivity

10

technology, which could pose a competitive barrier for companies seeking to
develop similar products or sell competing products in our markets.

Our power products primarily compete with third party mobile computing
accessory companies. Although some of these competitors enjoy greater
distribution coverage, we believe that our power technologies and co-development
relationships will enable us to effectively compete against the products offered
by those competitors. We also believe that our technological leadership will
enable us to secure business from many leading mobile computing device OEMs.

Our expansion products primarily compete with solutions provided by SBS
Communications, a provider of low cost PCI expansion solutions. Our products are
differentiated with cooling performance and chassis durability not offered by
SBS Communications' PCI expansion products. We also license our bridging
technology to SBS Communications for use in several of their PCI expansion
products.

Generally speaking, the market for computer products in general is
intensely competitive, subject to rapid change and sensitive to new product
introductions or enhancements and marketing efforts by industry participants.
The principal competitive factors affecting the markets for our product
offerings include corporate and product reputation, innovation with frequent
product enhancement, breadth of integrated product line, product design,
functionality and features, product quality, performance, ease-of-use, support
and price. Although we believe that our products compete favorably with respect
to such factors, there can be no assurance that we can maintain our competitive
position against current or potential competitors, especially those with greater
financial, marketing, service, support, technical or other competitive
resources.

PROPRIETARY RIGHTS

Our success and ability to compete is dependent in part upon our
proprietary technology. We rely primarily on a combination of patent protection,
copyright and trademark laws, trade secrets, nondisclosure agreements and
technical measures to protect our proprietary rights. We currently have fourteen
patents issued and over forty patents pending pertaining to Split Bridge(TM)
technology, CardBus technology, power technology, expansion technology, and
other technology areas. We currently license different aspects of our
proprietary rights to third parties pursuant to strategic alliances, which often
include cross-licensing arrangements.

We will continue to vigorously pursue patent protection for all our product
categories. We expect to file several new patents relating to handheld
technology in the next year.

In addition, we currently have eleven United States trademark
registrations, three pending applications for United States trademark
registration, eleven foreign trademark registrations, and twelve pending
applications for foreign trademark registration. We have obtained and are
continuing to seek trademark protection abroad in Brazil, Canada, China, the
European Community, France, Germany, Japan, Malaysia, Mexico, Taiwan, and the
United Kingdom. The scope of our trademark protection is comprehensive and
covers all of the company's significant trademarks and service marks.

We typically enter into confidentiality agreements with our employees,
distributors, customers and potential customers, and limit access to, and
distribution of, our product design documentation and other proprietary
information. Moreover, we enter into noncompetition agreements with employees,
whereby the employees are prohibited from working for and sharing confidential
information with our competitors for a period of two years after termination of
their employment. Additionally, we believe that, due to the rapid pace of
innovation within the computer industry, the following factors also represent
protection for our technology:

- technological and creative skill of personnel;

- knowledge and experience of management;

- name recognition;

- maintenance and support of products;

11

- the ability to develop, enhance, market and acquire products and
services; and

- the establishment of strategic relationships in the industry.

RESEARCH AND DEVELOPMENT

Our future success depends on our ability to enhance existing products and
develop new products that incorporate the latest technological developments. Our
research and development efforts will focus primarily on enhancing our current
technologies for use in a variety of innovative mobile computing solutions. We
work with customers and prospects, as well as partners and industry standards
organizations, to identify and implement new solutions that meet the current and
future needs of our customers. Whenever possible, our products are designed to
meet and drive industry standards to ensure interoperability.

Currently, our research and development group consists of 34 people who are
responsible for both hardware and software design, test and quality assurance.
Amounts spent on research and development for the years ended December 31, 2001,
2000 and 1999 were $5.6 million, $5.9 million and $3.4 million, respectively.

EMPLOYEES

As of December 31, 2001, we had 126 full-time employees, 122 of which are
located in the United States and 4 of which are located in Europe, including 35
employed in operations, 34 in engineering, 35 in sales and marketing ad 22 in
administration. We engage temporary employees from time to time to augment our
full time employees, generally in operations. None of our employees are covered
by a collective bargaining agreement. We believe we have good relationships with
our employees.

ITEM 2. PROPERTIES

Our executive offices and operations are located in Scottsdale, Arizona.
This facility consists of approximately 38,712 square feet of leased space
pursuant to a lease for which the current term expires on January 31, 2003.
Additionally, we lease an office in San Diego, California, which houses the
executive and operational activities of our wholly-owned subsidiary, MAGMA, for
which the current term expires on December 31, 2004. We also lease facilities in
Boise, Idaho and Orange County, California, which house the executive and
operational activities of Portsmith. We believe our facilities are suitable and
adequate for our current business activities for the remainder of the lease
terms.

ITEM 3. LEGAL PROCEEDINGS

Mobility Electronics, Inc. v. SBS Technologies, Inc. No. CIV01-0409 PHX JAT
was filed on March 5, 2001 in the United States District Court for the District
of Arizona. In this lawsuit, the Company alleges patent infringement against SBS
Technologies on two patents owned by the Company; U.S. Patent No. 6,070,214
entitled "Serially Linked Bus Bridge for Expanding Access Over a First Bus to a
Second Bus" and U.S. Patent No. 6,088,752 entitled "Method and Apparatus for
Exchanging Information Between Buses and a Portable Computer and Docking Station
Through a Bridge Employing a Serial Link." In its Original Complaint, the
Company alleges that certain products designed, manufactured and/or sold by SBS
infringe these two patents. SBS has filed an answer denying infringement and a
counterclaim seeking a declaratory judgment of non-infringement of patents and a
declaratory judgment of patent invalidity and unenforceability, as well as
tortious interference with prospective contractual relations. The Company in its
answer to SBS's counterclaims has denied any such liability. The parties after
commencing discovery, have reached an agreement in principle to settle the case.
If the settlement is not consummated, the Company intends to vigorously pursue
its claims and defend against the counterclaims.

Mobility Electronics, Inc. v. Comarco, Inc. and Comarco Wireless
Technologies, Inc. was filed on August 10, 2001 in the United States District
Court for the District of Arizona. In this lawsuit, the Company alleges
infringement of U.S. Patent No. 5,347,211 entitled "Selectable Output Power
Converter." The Company has amended its Complaint to further seek declaratory
judgments of non-infringement, patent invalidity and/or patent unenforceability
of three patents allegedly owned by Comarco: U.S. Patent

12

Nos. 6,172,884, 6,091,661 and 5,838,554. The Defendants have filed a motion to
dismiss, to which the Company has responded, and the motion is set for hearing
April 15, 2002. The Company intends to vigorously pursue its claims in this
litigation.

Richard C. Liggitt v. Portsmith, Inc., et al., Case No. 02CC03308 was filed
on February 22, 2002 in the Superior Court of the State of California, County of
Orange, Central Judicial District. In this lawsuit the plaintiff alleges fraud
in connection with merger negotiations that led to the execution of a merger
agreement between a company owned by the plaintiff and Portsmith. The plaintiff
also alleges wrongful termination of his employment with Portsmith and breach of
the implied covenant of good faith and fair dealing under his employment
agreement with Portsmith. Finally, the plaintiff alleges that Portsmith was the
alter ego of certain of Portsmith's former directors. The plaintiff is seeking
general and special damages, punitive damages, attorney's fees and costs. This
lawsuit is in the initial stages and we cannot express an opinion as to the
outcome of this action. Our failure to express an opinion at this stage should
not be construed as an indication that we believe the defendants may ultimately
be liable for any damages. The Company intends to vigorously defend itself
against the claims in this lawsuit.

We are from time to time involved in various legal proceedings incidental
to the conduct of our business. We believe that the outcome of all such pending
legal proceedings will not in the aggregate have a material adverse effect on
our business, financial condition, results of operations or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT

The names and ages of our executive officers are as follows:

Charles R. Mollo is one of our founders and has been our Chief Executive
Officer and Chairman of our Board of Directors since our formation in May 1995,
and our President since July 1999, having previously served as our President
between March 1997 and June 1998. From September 1992 to May 1995, Mr. Mollo was
the director of the Wireless Telephone Products Division of Andrew Corporation,
a communications equipment services and systems company. From September 1986 to
July 1992, Mr. Mollo was the Vice President of Corporate Development of Alliance
Telecommunications Corporation, a wireless telecommunications company. Between
1980 and 1986, Mr. Mollo was a Vice President of Meadows Resources, Inc., where
he managed a venture capital and investment portfolio of approximately $150
million. In the past, he has served on the boards of a number of companies,
including Alliance Telecommunications Corporation, and he currently serves on
the board of an internet startup company, SuperGroups.com. Mr. Mollo has a
B.S.E.E. from Manhattan College, an M.S.E.E. from Newark College of Engineering,
and an M.B.A. from the University of New Mexico.

Jeffrey S. Doss is one of our founders, served as our President from our
formation until March 1997 and has served as an Executive Vice President since
that time. Mr. Doss has served as a director since May 1995. From May 1994 to
December 1999, Mr. Doss was the owner of Doss Enterprises, which provided
consulting services to various companies in the consumer electronics industry.
From March 1994 through May 1995, Mr. Doss served as a consultant for cellular
accessories for Andrew Corporation, a communications equipment company. From
January 1991 to April 1994, Mr. Doss held various positions, including Vice
President of

13

Operations and President and Chief Executive Officer of Unitech Industries,
Inc., a manufacturer of cellular telephone accessories.

Joan W. Brubacher has served as a Vice President and our Chief Financial
Officer since August 2001, and previously served as our Corporate Controller
from August 1998 until August 2001 and as our Senior Financial Analyst from May
1995 until August 1998. From 1993 to 1998, Ms. Brubacher served as chief
financial officer for Phase Laser Systems, an electronics
development/manufacturing firm. From 1990 to 1993, she served as chief financial
officer and then was appointed to the position of chief operating officer of
Laserex, Inc., a laser pointer manufacturing company. Ms. Brubacher began her
career at the international public accounting firm of Ernst & Whinney (now Ernst
& Young). Ms. Brubacher holds a CPA certificate in the state of Kansas and
received a bachelor's degree in Business Administration with concentration in
Accounting from Kansas State University.

Donald W. Johnson has served as our Executive Vice President and Chief
Operating Officer since January 2001, and previously served as our Executive
Vice President of Worldwide Sales, Marketing and Operations since April 2000.
From 1998 until March 2000, Mr. Johnson served in various capacities for UNISYS
Corporation, most recently as Vice President and General Manager of the
enterprise server business. From 1980 to 1998, Mr. Johnson served in various
capacities for IBM, including Director of Servers and Commercial Systems,
Product Marketing, Brand Management and Product Development in IBM's PC
business, and worldwide sales manager and product manager. Mr. Johnson has a
B.S. Degree in Business Administration from the University of California at
Berkeley.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has been traded on the Nasdaq National Market under the
symbol "MOBE" since June 30, 2000, the date of our initial public offering.
Prior to that time, there was no public market for our common stock. The
following sets forth, for the period indicated, the high and low bid prices for
our common stock as reported by the Nasdaq National Market.

On March 28, 2002, the last reported sale price for our common stock on the
Nasdaq National Market was $1.50 per share. As of December 31, 2001, there were
approximately 440 holders of record of our common stock.

RECENT SALES OF UNREGISTERED SECURITIES.

Each issuance set forth below was made in reliance upon the exemptions from
registration requirements of the Securities Act of 1933, as amended, contained
in Section 4(2) on the basis that such transactions did not involve a public
offering. When appropriate, the Company determined that the purchasers of
securities described below were sophisticated investors who had the financial
ability to assume the risk of their investment in the Company's securities and
acquired such securities for their own account and not with a view to any
distribution thereof to the public. The certificates evidencing the securities
bear legends stating that the securities are not to be offered, sold or
transferred other than pursuant to an effective registration statement under the
Securities Act or an exemption from such registration requirements.

14

Effective as of March 2, 2001, we issued 68,966 shares of common stock to
each of Jeffrey S. Doss, Donald W. Johnson and La Luz Enterprises, L.L.C., an
affiliate of Charles R. Mollo, at a purchase price of $2.90 per share. Each of
the purchasers paid $690 in cash and executed and delivered to us a three-year
promissory note, in the original principal amount of $199,311, and bearing
interest at the rate of 6.33% per annum. Each promissory note is secured by the
shares of common stock so issued, and in addition, the promissory note issued by
La Luz Enterprises, L.L.C. is guaranteed by Mr. Mollo.

In August 2001, we entered into a consulting agreement with Chesapeake
Ventures L.P. Under the terms of the agreement, we retained Chesapeake to assist
us in our marketing and sales efforts. As compensation therefor, we agreed to
pay Chesapeake monthly fees and we issued Chesapeake 60,000 shares of our common
stock at a purchase price of $1.28 per share, for which Chesapeake paid $600 in
cash and executed and delivered to us a three year promissory note in the
original principal amount of $76,200, bearing interest at the rate of 6% per
annum, with principal due on September 11, 2004, and interest payable annually.
The promissory note is secured by the shares of common stock so issued. We have
certain repurchase rights to the shares of common stock issued to Chesapeake in
the event certain events are not satisfied.

In December 2001, we entered into a cross-licensing agreement with National
Instruments Corporation, an innovator of computer-based measurement and
automatic software and hardware. Under the terms of the agreement, both
companies now will license Split Bridge and CardBus technology from each other
to strengthen their respective opportunities in Split Bridge technology, PCI
expansion, portable computer docking, CardBus and test measurement applications.
In connection with the cross-licensing agreement we issued a warrant to National
Instruments to purchase 75,000 shares of our common stock at an exercise price
of $1.38 per share, which expires on December 12, 2004.

In February 2002, we acquired all of the issued and outstanding stock of
Portsmith, Inc., an industry leader in providing connectivity solutions for
handheld computing devices. The compensation we paid to the Portsmith
stockholders was comprised of 800,000 shares of our common stock, of which
400,000 shares were placed in escrow for the Portsmith stockholders pending
measurement of certain performance criteria of Portsmith on the first
anniversary of the date of this transaction, and contingent earn-out payments
are to be made depending on Portsmith's future performance on the first
anniversary of the acquisition, which payments may be made in cash and/or shares
of our common stock, subject to certain limitations. In addition, as part of
this transaction our previous $3 million loan to Portsmith was converted into an
equity contribution in Portsmith.

15

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read together
with our consolidated financial statements and notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other information contained in this Form 10-K. The selected financial data
presented below under the captions "Consolidated Statement of Operations Data"
and "Consolidated Balance Sheet Data" as of and for each of the years in the
five-year period ended December 31, 2001 are derived from the consolidated
financial statements of the Company, which consolidated financial statements
have been audited by KPMG LLP, independent certified public accountants. The
consolidated financial statements as of December 31, 2001 and 2000 and for each
of the years in the three-year period ended December 31, 2001, are derived from
our consolidated financial statements, included elsewhere in this Form 10-K.

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis of our financial condition and
results of operations should be read together with "Selected Consolidated
Financial Data" and our consolidated financial statements and notes thereto
contained in this Report.

OVERVIEW

Mobility Electronics, Inc. designs, develops and markets connectivity
devices and accessories for the computer industry and for a broad range of
related microprocessor applications. Our major focus has been on developing
remote peripheral component interface, or PCI bus, technology and products using
our proprietary Split Bridge(TM) technology. We also design, develop and market
a range of other products for portable computers. To date, our revenues have
come predominantly from monitor stands, in air/in car chargers and expansion
products. We expect revenues from those products to continue and we also expect
to see increasing Split Bridge(TM) revenues from both product and technology
sales as we further expand our markets and strategic relationships in this area.

In 2001, we completed development of our fundamental Split Bridge(TM)
technology and first generation docking products based thereon. As a result, we
have been able to free up resources to capitalize on the emerging opportunities
we have in other areas of our business. Early in 2002, we adopted an evolved
corporate strategy to leverage our strong intellectual property holdings and
unique products to create a broader base of innovative mobile computing
solutions that are natural extensions of our current applications.

Going forward, our efforts will be centered around four core product lines:
portable computer universal docking products based on Split Bridge(TM)
technology; expansion products that increase the functionality and capabilities
of desktop and portable computers; unique products and solutions for powering
and recharging the batteries of portable devices, such as in air/in car
chargers; and innovative products and solutions for handheld computing devices
such as personal digital assistants (PDAs) and pocket PC's.

The PCI bus is the electrical transmission path linking the computer's
central processing unit with its memory and other peripheral devices, such as
modems, disk drives and local area networks, or LANs. Our proprietary Split
Bridge(TM) technology consists of a Split Bridge(TM) link, typically two
customized semiconductors, known as application-specific integrated circuits, or
ASIC chips, two connectors and a high-speed, bi-directional cable. Our
technology for the first time allows the primary PCI bus of any computer to be
extended to a remote location, up to 17 feet, with virtually no software
requirements or performance degradation, thereby enabling architectural designs
of computer systems and applications that previously were not feasible. We
currently have two Split Bridge(TM) patents that are issued by the U.S. Patent
and Trademark Office. Our first major application for Split Bridge(TM)
technology has been the creation of a new universal docking product category
which allows users of portable computers to configure a flexible, high
performance docking solution that meets their individual needs. However, we
intend to pursue the further commercialization of Split Bridge(TM) technology so
that we are able to expand our product offerings to include additional
applications and markets.

In October 2000, we acquired all of the assets of Mesa Ridge Technologies,
Inc. d/b/a MAGMA, a privately held company. MAGMA provides a range of PCI
expansion products for the computer industry which utilize traditional PCI
bridge technology and MAGMA's patented expansion technology. The acquisition of
MAGMA solidified Mobility's market leadership position in the PCI expansion
business by providing products, distribution channels, key customers, and
additional resources that can leverage our Split Bridge(TM) technology and
accelerate our growth and development in this market segment.

In February 2002, we acquired Portsmith, Inc., an industry leader in
providing connectivity solutions for handheld computing devices. This
acquisition provides us with an entrance into the rapidly growing handheld
computing device market and reinforces our focus on delivering powerful mobile
computing solutions. Portsmith currently provides a range of Ethernet, modem,
and other connectivity products for the most popular handheld devices such as
Palm, Handspring Visor, Compaq IPAQ, and other mainstream PDA

17

products, and intends to undertake a number of important product development
programs that expand on these solutions.

We sell our products directly to OEMs and the retail channel, as well as
through distributors. We have also established a few select worldwide private
label accounts, most notably IBM, NEC and Targus. A substantial portion of our
net product sales are concentrated among a number of OEMs, including Compaq,
Dell, Hewlett-Packard, IBM, NEC, Targus and Toshiba. A portion of our sales to
IBM are made through Kingston Technologies, who acts as their fulfillment hub
manager for sales in the United States and Malaysia. Direct sales to OEMs
accounted for approximately 71.9% of net product sales for the year ended
December 31, 2001 and 71.5% of net product sales for the year ended December 31,
2000. Direct sales to OEMs have increased as a percentage of net product sales
as we have successfully promoted our power products and monitor stands in the
OEM market. We expect that we will continue to be dependent upon a number of
OEMs for a significant portion of our net product sales in future periods,
although no OEM is presently obligated to purchase a specified amount of
products. Effective December 2001, we came to an agreement with Targus to
terminate our relationship. In the future, we intend to market our products
previously sold through Targus under our own brand directly through distribution
channels we have established and are continuing to develop.

In March 2002, we announced our execution of a definitive agreement to
acquire iGo Corporation, a leading computer solutions provider. iGo distributes
its products through distributors and directly through its catalog operations
and e-commerce web site, and is a well-recognized brand name in the portable
computer power products and accessories market. We believe the acquisition of
iGo will greatly strengthen our distribution capabilities. The closing of this
transaction is subject to the satisfaction of certain material conditions
precedent, including without limitation, approval by the iGo stockholders and
the declared effectiveness by the Securities and Exchange Commission of a
registration statement which registers the issuance of the shares of our common
stock to be issued to the iGo stockholders in such transaction.

A portion of our sales to distributors and resellers is generally under
terms that provide for certain stock balancing return privileges and price
protection. Accordingly, we make a provision for estimated sales returns and
other allowances related to those sales using historical experience. Returns,
which have been netted in the product sales presented herein, were approximately
5.5% of net product sales for the year ended December 31, 2001 and 5.8% of net
product sales for the year ended December 31, 2000. The major distributors are
allowed to return up to 15% of their prior quarter's purchases under the stock
balancing programs, provided that they place a new order for equal or greater
dollar value of the stock balancing return.

We derive a significant portion of our net product sales outside the United
States, principally in France, Germany and the United Kingdom, to OEMs,
retailers and a limited number of independent distributors. International sales
accounted for approximately 31% of our net product sales for the year ended
December 31, 2001. We expect product sales outside the United States to continue
to account for a large portion of our future net product sales. International
sales are generally denominated in the currency of our foreign customers. A
decrease in the value of foreign currencies relative to the U.S. dollar could
result in a significant decrease in U.S. dollar sales received by us for our
international sales. That risk may be increased as a result of the introduction
in January 1999 of the new "Euro" currency in European countries that are part
of the European Monetary Union, or EMU. During 2002, all EMU countries are
expected to completely replace their national currencies with the Euro. However,
we cannot determine the impact this may have on our business because a
significant amount of uncertainty exists as to the effect the Euro will have on
the marketplace and because all of the final rules and regulations have not yet
been defined and finalized by the European Commission regarding the Euro
currency. We intend to develop and implement a plan to mitigate this risk once
the final rules and regulations are established. We have not engaged in hedging
transactions with respect to our net foreign currency exposure. To the extent
that we implement hedging activities in the future with respect to foreign
currency transactions, there can be no assurance that we will be successful in
such hedging activities.

Various factors have in the past affected and may continue in the future to
affect our gross profits, including but not limited to, our product mix, lower
volume production and higher fixed costs for newly

18

introduced product platforms and technologies, market acceptance of newly
introduced products and the position of our products in their respective
lifecycles. The initial stages of our product introductions are generally
characterized by lower volume production, which is accompanied by higher costs,
especially for specific products, which are initially purchased in small volumes
during the development lifecycle.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of its financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make a number of estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to bad debts, inventories, warranty
obligations, and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

REVENUE RECOGNITION

Revenue from product sales is recognized upon shipment and transfer of
ownership from us or contract manufacturer to the customer. Allowances for sales
returns and credits based on historical experience are provided for in the same
period the related sales are recorded. Should the actual return or sales credit
rates differ from our estimates, revisions to the estimated allowance for sales
returns and credits may be required.

Revenue from technology transfer fees, consisting of the licensing and
transferring of Split Bridge(TM) and other technology and architecture, and
related training and implementation support services, is recognized over the
term of the respective sales or license agreement. Certain license agreements
contain no stated termination date, whereby we recognize the revenue over the
estimated life of the license. Should the actual life differ from the estimates,
revisions to the estimated life may be required.

ACCOUNTS RECEIVABLE

We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. The allowance is
assessed on a regular basis by management and is based upon management's
periodic review of the collectibility of the receivables with respect to
historic experience. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is primarily
determined using the first-in first-out method. We monitor usage reports to
determine if the carrying value of any items should be adjusted due to lack of
demand for the items. We adjust down the inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.

WARRANTY COSTS

We provide limited warranties on certain of its products for periods
generally not to exceed three years. We accrue for the estimated cost of
warranties at the time revenue is recognized. The accrual is based on the

19

Company's actual claims experience. Should actual warranty claim rates, or
service delivery costs differ from our estimates, revisions to the estimated
warranty liability would be required.

DEFERRED INCOME TAXES

To date, our deferred tax assets have been offset by a valuation allowance.
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event we were to
determine that it would be able to realize its deferred tax assets in the future
in excess of the net recorded amount, an adjustment to the valuation allowance
and deferred tax benefit would increase income in the period such determination
was made.

RESULTS OF OPERATIONS

The following table sets forth certain consolidated financial data for the
periods indicated expressed as a percentage of total revenue for the periods
indicated:

YEARS ENDED DECEMBER 31, 2001 AND 2000

Net product sales. Net product sales consist of sales of product, net of
returns and allowances. We recognize sales at the time goods are shipped and the
ownership of the goods is transferred to the customer. Allowances for returns
and credits are made in the same period the related sales are recorded. Net
product sales increased 7.8% to $27.9 million for the year ended December 31,
2001 from $25.9 million for the year ended December 31, 2000. Approximately $3.3
million of the increase was due to sales of PCI expansion

20

products through our MAGMA subsidiary, which we acquired in October 2000.
Approximately $1.9 million of the increase was due to an increase in sales of
our power adapter and monitor stand product lines. These increases were
partially offset by a decrease of approximately $3.0 million in sales of our
universal serial bus (USB) docking products in 2001. We anticipate completely
exiting the USB product line during 2002. Due to the termination of our
distribution agreement with Targus, Inc. in December 2001, we anticipate a
reduction in sales of our power products in the first half of 2002. However, we
anticipate that the reduction will be offset by increases in sales of our other
products.

Technology transfer fees. Technology transfer fees consist of revenue from
the licensing and transferring by the Company of its Split Bridge(TM) technology
and architecture. Revenue from technology transfer fees is recognized ratably
over the term of the sales agreement. During the year ended December 31, 2001,
we recognized a technology transfer fee of $400,000 or 1.4% of total revenues.
Technology transfer fees represented revenue of $2.1 million, or 7.5% of total
revenues, for the year ended December 31, 2000.

Cost of revenue -- product sales. Cost of revenue -- product sales
consists primarily of costs associated with components, outsourced manufacturing
and in-house labor associated with assembly, testing, packaging, shipping and
quality assurance, and depreciation of equipment and indirect manufacturing
costs. Cost of revenue -- product sales increased 28.4% to $25.7 million for the
year ended December 31, 2001 from $20.0 million for the year ended December 31,
2000. The increase in cost of revenue -- product sales was due in part to the
7.8% volume increase in net product sales. The balance of the increase was due
to a $3.8 million charge to cost of revenue -- product sales for excess and
obsolete inventory and abandoned tooling. Cost of revenue -- product sales as a
percentage of net product sales increased to 92.0% for the year ended December
31, 2001 from 77.3% for the year ended December 31, 2000. Excluding the $3.8
million charge recorded in 2001, cost of revenue -- product sales as a
percentage of net product sales for the year ended December 31, 2001 increased
to 78.6% from 72.2%, excluding a $1.3 million charge to write off obsolete
inventory, for the year ended December 31, 2000.

Cost of revenue -- technology transfer. Cost of revenue -- technology
transfer consists of engineering expenses related to the Split Bridge(TM)
technology. There were no costs of revenue -- technology transfer for the year
ended December 31, 2001, as the technology transfer fees for the period
consisted solely of fees for existing technology. Cost of revenue -- technology
transfer was $200,000 for the year ended December 31, 2000.

Gross profit. Gross profit decreased to 9.3% of total revenue for the year
ended December 31, 2001 from 27.8% of total revenue for the year ended December
31, 2000. The gross profit rate decline was the result of the $3.8 million
charge to cost of revenue -- product sales for excess and obsolete inventory and
abandoned tooling, and the decrease in technology transfer fee revenues.
Excluding the $3.8 million charge, gross profit decreased to 22.5% of total
revenues for the year ended December 31, 2001 from 32.5% of total revenue for
the year ended December 31, 2000 excluding a $1.3 million charge to write off
obsolete inventory.

Sales and marketing. Sales and marketing expenses generally consist of
salaries, commissions and other personnel related costs of our sales, marketing
and support personnel, advertising, public relations, promotions, printed media
and travel. Sales and marketing expenses decreased 2.3% to $8.1 million for the
year ended December 31, 2001 from $8.3 million for the year ended December 31,
2000. The decrease is primarily the result of a reduction in marketing programs
resulting from our decision to focus our marketing efforts on what we have
deemed to be the most productive sales channels. As a percentage of total
revenue, sales and marketing expenses decreased to 28.7% for the year ended
December 31, 2001 from 29.7% for the year ended December 31, 2000.

Research and development. Research and development expenses consist
primarily of salaries and personnel-related costs, facilities, outside
consulting, lab costs and travel related costs of our product development group.
Research and development expenses decreased 4.8% to $5.6 million for the year
ended December 31, 2001 from $5.9 million for the year ended December 31, 2000.
Research and development expenses as a percentage of total revenue decreased to
19.8% for the year ended December 31, 2001 from 21.0% for the year ended
December 31, 2000. The decrease is due to the reductions in engineering costs,
primarily personnel, in 2001 relating to Split Bridge(TM) technology, which was
largely developed during 2000
21

and the early part of 2001. We expect to see further decreases in research and
development expenses as a result of the completion of the fundamental
development of our Split Bridge(TM) technology.

General and administrative. General and administrative expenses consist
primarily of salaries and other personnel-related expenses of our finance, human
resources, information systems, corporate development and other administrative
personnel, as well as professional fees, depreciation and amortization and
related expenses. General and administrative expenses also include non-cash
compensation, which is the result of the issuance of common stock, warrants and
stock options at a price deemed to be less than market value to employees and
outside consultants for services rendered, and goodwill amortization which
relates to the acquisition of Magma in October, 2000. General and administrative
expenses increased 47.0% to $10.0 million for the year ended December 31, 2001
from $6.8 million for the year ended December 30, 2000. The increase is due
primarily to the write-off of a $3.0 million loan to a strategic partner,
Portsmith, Inc., that we believed had become uncollectible. Excluding the
write-off, general and administrative expenses as a percentage of total revenue
increased to 24.6% for the year ended December 31, 2001 from 24.2% for the year
ended December 31, 2000. As we begin to recognize increased revenues from the
sales of our products, we anticipate that general and administrative expenses,
as a percentage of revenue, will decrease.

Interest, net. Interest, net consists primarily of interest earned on our
cash balances and short-term investments, net of interest expense. For the year
ended December 31, 2000, net interest expense consists of interest on our bank
revolving lines of credit and promissory notes as well as our subordinated debt
and convertible debentures, partially offset by interest earned on our cash
balances and short-term investments. Net interest income for year ended December
31, 2001 was $1.3 million compared to $0.6 million for the year ended December
31, 2000. The change was primarily due to the payoff of debt with our IPO
proceeds during 2000 and interest earned on our IPO proceeds during 2000 and
2001.

Non-cash deferred loan costs. Non-cash deferred loan costs decreased to
zero for the year ended December 31, 2001 from $2.5 million for the year ended
December 31, 2000. The decrease was the result of the balance of deferred loan
costs that were expensed in 2000 when the associated debt was repaid with a
portion of our IPO proceeds.

Income taxes. We have incurred losses from inception to date; therefore,
no provision for income taxes was required for the years ended December 31, 2001
or 2000.

YEARS ENDED DECEMBER 31, 2000 AND 1999

Net product sales. Net product sales increased 85.7% to $25.9 million for
the year ended December 31, 2000 from $14.0 million for the year ended December
31, 1999. The increase was primarily due to increased sales of power products
and monitor stands to OEM customers. Sales of power products and monitor stands
grew 91.7% to $16.8 million for the year ended December 31, 2000 from $8.8
million for the year ended December 31, 1999. In addition, sales of our
universal docking products, which includes products built on USB and Split
Bridge(TM) technology platforms, totaled $5.4 million in 2000 following
introduction to the market in December 1999. Other contributors were sales of
Magma's expansion products, which totaled $2.3 million. These increases were
offset in part by a $3.6 million reduction in sales of mechanical docks during
the year 2000.

Technology transfer fees. Technology transfer fees represented revenue of
$2.1 million for the year ended December 31, 2000. The technology transfer fees
consist of revenue from the licensing and transferring by the Company of its
Split Bridge(TM) technology and related training and implementation support
services. The fees are amortized over the life of the agreements. This
represents a new revenue stream created by the commercialization of our Split
Bridge(TM) technology.

Cost of revenue-product sales. Cost of revenue-product sales for the year
ended December 31, 2000 increased 70.3% to $20.0 million from $11.8 million for
the year ended December 31, 1999. The increase was due to the increase in net
product sales.

Gross profit. Gross profit increased to 27.8% of total revenue for the
year ended December 31, 2000 from 15.8% of total revenue for the year ended
December 31, 1999. The increase was due primarily to our
22

decision to outsource the manufacture of our products. In addition to the cost
savings obtained from outsourcing, the universal docking products, which include
products based upon both USB and Split Bridge(TM) technologies have higher gross
profit rates.

Sales and marketing. Sales and marketing expenses increased 59.8% to $8.3
million for the year ended December 31, 2000 from $5.2 million for the year
ended December 31, 1999. The increase was due to the expansion of our internal
infrastructure and increased marketing efforts to promote our new Split
Bridge(TM) based products. We added regional sales managers, a telemarketing
group, a customer service group and funded approximately $450,000 in increased
sales efforts by our European representative resulting in a $1.9 million
increase in selling expenses. Our marketing expenses also increased $1.2
million, primarily as a result of an increase in spending on trade shows of
approximately $272,000 and increased advertising of approximately $342,000.

Research and development. Research and development expenses increased
74.2% to $5.9 million for the year ended December 31, 2000 from $3.4 million for
the year ended December 31, 1999. Salaries, related expenses and employee
recruiting increased approximately $786,000 due to increases in general
engineering staffing and the addition of an internal ASIC development team to
pursue the next generation of Split Bridge(TM) technology. Prototype expenses
also increased approximately $457,000 as a result of ongoing new product
development. In addition, we wrote off $540,000 of tooling expense and $400,000
in pre-production inventory costs related to an uncompleted product that was
abandoned.

General and administrative. General and administrative costs increased
85.6% to $6.8 million for the year ended December 31, 2000 from $3.6 million for
the year ended December 31, 1999. Approximately $1.5 million of the increase was
attributed to staffing and infrastructure additions to support the higher sales
volume and anticipated launch of the universal connectivity products. Consulting
and legal fees, investor relation expenses and various other filing fees
increased $397,000 as a result of entering the public equity market. Non-cash
expenditures included in general and administrative expenses included $155,000
of goodwill amortization expense resulting from the acquisition of Magma in
October 2000 and an increase in non-cash compensation to $1.5 million for the
year ended December 31, 2000 from $561,000 for the year ended December 31, 1999.
This increase was due primarily to the write-off of the remaining value of
options issued to consultants that vested fully with the completion of our IPO
in June 2000, as well as to the fact that we recorded a full year's amortization
on employee options, many of which were issued late in 1999.

Interest, net. Interest, net increased to $570,000 interest income, net
for the year ended December 31, 2000 from $1.5 million interest expense, net for
the year ended December 31, 1999. The decrease in interest expense and
corresponding increase in interest income was the result of paying off all our
debt with a portion of our IPO proceeds and investing the remaining proceeds in
interest-bearing accounts.

Non-cash deferred loan costs. Non-cash deferred loan costs decreased 47.8%
to $2.5 million for the year ended December 31, 2000 from $4.8 million for the
year ended December 31, 1999. The decrease was the result of 1999 costs being
largely due to the issuance of convertible bridge loan debt that included
warrants which resulted in non-cash deferred loan expense of $4.8 million. No
such debt was issued in 2000, although the balance of deferred loan costs were
all expensed in 2000 when the associated debt was repaid with a portion of our
IPO proceeds.

Income taxes. We have incurred losses from inception to date; therefore,
no provision for income taxes was required for the years ended December 31, 2000
or 1999.

LIQUIDITY AND CAPITAL RESOURCES

On June 30, 2000, our registration statement on Form S-1 registering our
initial public offering, or IPO, of 4,000,000 shares of common stock became
effective. At the offering price of $12.00 per share, we received proceeds of
approximately $43.1 million, net of underwriting discounts, commissions and
other expenses, from the IPO. As part of the IPO, we granted the underwriters a
30-day option to purchase up to 600,000 additional shares of common stock to
cover over-allotments, if any. On July 28, 2000, the underwriters exercised
their

23

30-day option in full and purchased 600,000 additional shares of common stock,
resulting in additional IPO proceeds of approximately $6.7 million, net of
underwriting discounts, commissions and other expenses.

Since inception, we have funded our operations primarily through debt and
equity financing, as the cash consumed by our operating activities has exceeded
cash generated by revenues. Our operating activities used cash of $12.8 million,
$14.2 million and $11.5 million for the years ended December 31, 2001, 2000 and
1999, respectively. Net cash used in operating activities for the year ended
December 31, 2001 was primarily attributed to our net loss and increases in
inventories, prepaid expenses and other assets and reductions in accounts
payable and accrued expenses. Cash used in operating activities was offset, in
part, by a decrease in accounts receivable, non-cash expenses such as
depreciation of property and equipment, write-off of a note receivable, which
has become uncollectible, amortization of deferred compensation and intangibles,
and provision for obsolete inventory.

Our investing activities used cash of $2.8 million, $6.2 million and $0.7
million for the years ended December 31, 2001, 2000 and 1999, respectively. For
the year ended December 31, 2001, cash used in investing activities was for the
purchase of property and equipment, cash paid for a note receivable which was
written off in its entirety during the year ended December 31, 2001, and cash
paid to exercise a stock purchase warrant.

Our net financing activities used cash of $17,000 for the year ended
December 31, 2001 and generated cash of $46.0 million and $14.6 million for the
years ended December 31, 2000 and 1999, respectively. Net cash used in financing
activities for the year ended December 31, 2001 was primarily used to pay down
capital lease obligations.

Our cash and cash equivalents decreased to $14.8 million at December 31,
2001 compared to $30.4 million at December 31, 2000. Our net working capital at
those same dates was $19.4 million and $37.0 million, respectively. At December
31, 2001 our available sources of liquidity were our cash and cash equivalents.

Our future capital requirements include funding operations, financing the
growth of working capital items such as accounts receivable and inventories, and
the purchase of equipment and fixtures to accomplish future growth. We believe
that our cash and cash equivalents on hand will be sufficient to satisfy our
expected cash and working capital requirements for the next twelve months.

At December 31, 2001, we had approximately $65.0 million of federal,
foreign and state net operating loss carryforwards which expire at various
dates. We anticipate that the sale of common stock in the IPO coupled with prior
sales of common stock will cause an annual limitation on the use of our net
operating loss carryforwards pursuant to the change in ownership provisions of
Section 382 of the Internal Revenue Code of 1986, as amended. This limitation is
expected to have a material effect on the timing of our ability to use the net
operating loss carryforward in the future. Additionally, our ability to use the
net operating loss carryforward is dependent upon our level of future
profitability, which cannot be determined.

At December 31, 2001, we had future commitments relating to various
non-cancelable operating leases totaling $1.0 million dollars, payable over the
next three years, with $0.6 million payable in 2003, $0.2 million payable in
2004, and $0.2 million payable in 2005.

INFLATION

We do not believe that inflation has a material effect on the Company's
operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued Statement No. 141, Business Combinations
("Statement 141"), and Statement No. 142, Goodwill and Other Intangible Assets
("Statement 142"). Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and

24

reported apart from goodwill, noting that any purchase price allocable to an
assembled workforce may not be accounted for separately. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

We are required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001,
which it expects to account for using the pooling-of-interests method, and
Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.

Statement 141 will require upon adoption of Statement 142, that we evaluate
our existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, we will be required to reassess
the useful lives and residual values of all intangible assets acquired in
purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, we will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.

In connection with the transitional goodwill impairment evaluation,
Statement 142 will require us to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this we must identify our reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
of adoption. We will then have up to six months from the date of adoption to
determine the fair value of each reporting unit and compare it to the reporting
unit's carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired and we must perform the second step of the transitional impairment
test. In the second step, we must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of it assets (recognized and unrecognized) and liabilities in a
manner similar to a purchase price allocation in accordance with Statement 141,
to its carrying amount, both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as possible, but
no later than the end of the year of adoption. Any transitional impairment loss
will be recognized as the cumulative effect of a change in accounting principle
in our statement of operations.

Finally, any unamortized negative goodwill existing at the date Statement
142 is adopted must be written off as the cumulative effect of a change in
accounting principle.

As of the date of adoption, we have unamortized goodwill in the amount of
$5.6 million, which will be subject to the transition provisions of Statements
141 and 142. At that same date, we will have no unamortized identifiable
intangible assets and no unamortized negative goodwill. Amortization expense
related to goodwill was $621,000 and $155,000 for the years ended December 31,
2001 and 2000, respectively. Because of the extensive effort needed to comply
with adopting Statements 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on our financial statements at
the date of this report, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a change in
accounting principle.

25

In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations ("Statement 143"). Statement 143 requires that the fair
value of a liability for an asset retirement obligation be recorded in the
period in which it is incurred. We are required to adopt the provisions of
Statement 143 as of January 1, 2003. The adoption of Statement 143 is not
expected to have a material effect on our consolidated financial statements.

In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("Statement 144"). Statement 144
supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. Statement 144 also
supercedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. We are required to adopt the provisions of
Statement 144 as of January 1, 2002. The adoption of Statement 144 is not
expected to have a material effect on our consolidated financial statements.

FORWARD-LOOKING STATEMENTS

The above discussions contain forward-looking statements based on current
expectations, and we assume no obligation to update these statements. Because
actual results may differ materially from expectations, we caution readers not
to place undue reliance on these statements. These statements are based on our
estimates, projections, beliefs, and assumptions, and are not guarantees of
future performance. A number of factors could cause future results to differ
materially from historical results, or from results or outcomes currently
expected or sought by us. These factors include: reduced demand for our
products; the loss of one or more of our significant customers; an inability to
increase our market share; difficulties in maintaining our technology and
supplier alliances; and a continued downturn in general economic conditions.

These factors and the other matters discussed above under the heading
"Disclosure Concerning Forward-Looking Statements" in Part I of this Report may
cause future results to differ materially from historical results, or from
results or outcomes we currently expect or seek.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks in the ordinary course or our
business. These risks result primarily from changes in foreign currency exchange
rates and interest rates. In addition, our international operations are subject
to risks related to differing economic conditions, changes in political climate,
differing tax structures and other regulations and restrictions.

To date we have not utilized derivative financial instruments or derivative
commodity instruments. We do not expect to employ these or other strategies to
hedge market risk in the foreseeable future. We invest our cash in money market
funds, which are subject to minimal credit and market risk. We believe that the
market risks associated with these financial instruments are immaterial.

26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

27

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Mobility Electronics, Inc.:

We have audited the accompanying consolidated balance sheets of Mobility
Electronics, Inc. and subsidiary as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for each of the years in the
three-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mobility
Electronics, Inc. and subsidiary as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.

/s/ KPMG LLP

Phoenix, Arizona
March 1, 2002, except for the second
paragraph of Note 18, which is as of March 25, 2002

28

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

29

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

30

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)

See accompanying notes to consolidated financial statements.
31

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

32

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 13, 2001, 2000 AND 1999

(1) NATURE OF BUSINESS

Mobility Electronics, Inc. and subsidiaries (collectively, "Mobility" or
"the Company") formerly known as Electronics Accessory Specialists
International, Inc. was formed on May 4, 1995. Mobility was originally formed as
a limited liability corporation; however, in August 1996 the Company became a C
Corporation incorporated in the State of Delaware.

Mobility manufactures and/or distributes in-car and in/out DC power
adapters, portable computer docking stations, port replicators, monitor stands
and other portable computing products and solutions. Mobility also designs,
develops and markets connectivity and remote PCI bus technology and products for
the computer industry and a broad range of related embedded processor
applications. Mobility distributes products in the U.S., Canada and Europe.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make a number of estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to bad debts, inventories, warranty
obligations, and contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

The Company believes its critical accounting policies, consisting of
revenue recognition, accounts receivable, inventories, warranty costs, and
deferred income taxes affect its more significant judgments and estimates used
in the preparation of its consolidated financial statements. These policies are
discussed below.

(b) PRINCIPLES OF CONSOLIDATION

The 1999 consolidated financial statements include the accounts of Mobility
and its wholly owned subsidiary, Mobility Electronics L.L.C. including its three
operating subsidiaries, up to October 1999, being the date of the sale of this
subsidiary. The 2000 consolidated financial statements include the accounts of
Mobility and its wholly owned subsidiary, Magma, Inc., from October 2, 2000
(date of acquisition) to December 31, 2000. The 2001 consolidated financial
statements include the accounts of Mobility and its wholly-owned subsidiaries,
Magma, Inc. and Mobility Europe Holdings, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.

(c) REVENUE RECOGNITION

Revenue from product sales is recognized upon shipment and transfer of
ownership from the Company or contract manufacturer to the customer. Allowances
for sales returns and credits, based on historical experience, are provided for
in the same period the related sales are recorded. Should the actual return or
sales credit rates differ from the Company's estimates, revisions to the
estimated allowance for sales returns and credits may be required.

Revenue from technology transfer fees, consisting of the licensing and
transferring of Split Bridge(TM) and other technology and architecture, and
related training and implementation support services, is recognized over the
term of the respective sales or license agreement. Certain license agreements
contain no stated

33

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

termination date, whereby the Company recognizes the revenue over the estimated
life of the license. Should the actual life differ from the estimates, revisions
to the estimated life may be required.

(d) CASH AND CASH EQUIVALENTS

All short-term investments purchased with an original maturity of three
months or less are considered to be cash equivalents. Cash and cash equivalents
include cash on hand and amounts on deposit with financial institutions.

(e) ACCOUNTS RECEIVABLE

The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company's customers to make required
payments. The allowance is assessed on a regular basis by management and is
based upon management's periodic review of the collectibility of the receivables
with respect to historical experience. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.

(f) INVENTORIES

Inventories consist of component parts purchased partially and fully
assembled for computer accessory items. The Company has all normal risks and
rewards of its inventory held by contract manufacturers. Inventories are stated
at the lower of cost (first-in, first-out method) or market. Finished goods and
work-in-process inventories include material, labor and overhead costs. Overhead
costs are allocated to inventory manufactured in-house based upon direct labor.
The Company monitors usage reports to determine if the carrying value of any
items should be adjusted due to lack of demand for the items. The Company
adjusts down the inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.

(g) PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Equipment held under capital
leases is stated at the present value of future minimum lease payments.
Depreciation on furniture, fixtures and equipment is provided using the
straight-line method over the estimated useful lives of the assets ranging from
two to seven years. Tooling is capitalized at cost and is depreciated over a
two-year period. Equipment held under capital leases and leasehold improvements
are amortized over the shorter of the lease term or estimated useful lives of
the assets.

(h) DEFERRED LOAN COSTS

Deferred loan costs, consisting primarily of the value of warrants issued
in conjunction with certain debt financings, are included in other assets and
amortized over the term of the related debt.

(i) PATENTS, TRADEMARKS AND NON-COMPETE AGREEMENT

The cost of patents, trademarks and a non-compete agreement are included in
other assets and amortized on a straight-line basis over their estimated
economic lives of two to five years.

(j) GOODWILL

Goodwill represents the excess of purchase price over fair value of net
assets acquired and is amortized on a straight-line basis over the estimated
economic life of ten years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of goodwill balance
over its remaining life can
34

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

be recovered through undiscounted future operating cash flows of the acquired
operation. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.

(k) IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

(l) WARRANTY COSTS

The Company provides limited warranties on certain of its products for
periods generally not exceeding three years. The Company accrues for the
estimated cost of warranties at the time revenue is recognized. The accrual is
based on the Company's actual claim experience. Should actual warranty claim
rates, or service delivery costs differ from our estimates, revisions to the
estimated warranty liability would be required. The Company's warranty accrual
was $178,000 and $291,000 as of December 31, 2001 and 2000, respectively.

(m) INCOME TAXES

The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

The Company records a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company was to determine that it would be able to realize its deferred tax
assets in the future in excess of the net recorded amount, an adjustment to the
valuation allowance and deferred tax benefit would increase income in the period
such determination was made.

(n) NET LOSS PER COMMON SHARE

Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
if securities or contracts to issue common stock were exercised or converted to
common stock or resulted in the issuance of common stock that then shared in the
earnings or loss of the Company. The assumed exercise of outstanding stock
options and warrants have been excluded from the calculations of diluted net
loss per share as their effect is antidilutive.

(o) EMPLOYEE STOCK OPTIONS

The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options and to adopt the
"disclosure only" alternative treatment under Statement of Financial Accounting
Standards

35

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123
requires the use of fair value option valuation models that were not developed
for use in valuing employee stock options. Under SFAS No. 123, deferred
compensation is recorded for the excess of the fair value of the stock on the
date of the option grant, over the exercise price of the option. The deferred
compensation is amortized over the vesting period of the option.

(p) FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of accounts receivable, accounts payable, and accrued
expenses approximates the carrying value due to the short-term nature of these
instruments.

(q) RESEARCH AND DEVELOPMENT

The cost of research and development is charged to expense as incurred.

(r) FOREIGN CURRENCY TRANSLATION

The financial statements of the Company's foreign subsidiary are measured
using the local currency as the functional currency. Assets and liabilities of
this subsidiary are translated at exchange rates as of the balance sheet date.
Revenues and expenses are translated at average rates of exchange in effect
during the year. The resulting cumulative translation adjustments have been
recorded as comprehensive income (loss), a separate component of stockholders'
equity. Foreign currency transaction gains and losses are included in
consolidated net loss for the years ended December 31, 2001, 2000 and 1999.
These foreign currency transaction gains and losses were not considered material
and, thus, are not separately disclosed on the face of the accompanying
consolidated statements of operations.

(s) SEGMENT REPORTING

The Company has only one operating business segment, the sale of peripheral
computer equipment.

(t) RECLASSIFICATIONS

Certain amounts included in the 2000 and 1999 consolidated financial
statements have been reclassified to conform to the 2001 financial statement
presentation.

(u) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued Statement No. 141, Business Combinations
("Statement 141"), and Statement No. 142, Goodwill and Other Intangible Assets
("Statement 142"). Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. Statement 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.

The Company adopted the provisions of Statement 141 on July 1, 2001, and
Statement 142 is effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized,

36

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

but will continue to be evaluated for impairment in accordance with the
appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.

Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.

In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
operations.

Finally, any unamortized negative goodwill existing at the date Statement
142 is adopted must be written off as the cumulative effect of a change in
accounting principle.

As of the date of adoption, the Company has unamortized goodwill in the
amount of $5.6 million, which will be subject to the transition provisions of
Statements 141 and 142. At that same date, the Company will have no unamortized
identifiable intangible assets and no unamortized negative goodwill.
Amortization expense related to goodwill was $621,000 and $155,000 for the years
ended December 31, 2001 and 2000, respectively. Because of the extensive effort
needed to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.

In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations ("Statement 143"). Statement 143 requires that the fair
value of a liability for an asset retirement obligation be recorded in the
period in which it is incurred. The Company is required to adopt the provisions
of Statement 143 as of January 1, 2003. The adoption of Statement 143 is not
expected to have a material effect on our consolidated financial statements.

In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("Statement 144"). Statement 144
supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. Statement 144 also

37

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

supercedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. The Company is required to adopt the provisions
of Statement 144 as of January 1, 2002. The adoption of Statement 144 is not
expected to have a material effect on our consolidated financial statements.

(3) ACQUISITIONS AND SALE

(a) CNF MOBILE SOLUTIONS

On May 18, 2001 the Company acquired certain assets, including a product
line, inventory related to that product line, and patent rights, of CNF Mobile
Solutions, a manufacturer of computer peripheral products, for $685,000 cash.
$585,000 of the total purchase price has been capitalized as inventory and
intangibles and the remaining $100,000 has been recorded as a component of
operating expenses. The acquisition has been accounted for as a purchase and,
accordingly, the purchase price has been allocated to the assets acquired based
upon the estimated fair values at the date of acquisition. No goodwill resulted
from the purchase.

(b) MOBILITY EUROPE HOLDINGS, INC.

On January 1, 2001, the Company purchased essentially all of the assets of
its European distributor for $282,000 cash and assumed its leases, employee
contracts and other business contracts in order to better facilitate the sale of
the Company's products in Europe. The European operations have been organized as
a subsidiary of Mobility Europe Holdings, Inc., which was formed in January 2001
under the laws of the state of Delaware and is owned entirely by the Company.
The acquisition has been accounted for as a purchase and, accordingly, the
purchase price has been allocated to the assets acquired based upon the
estimated fair values at the date of acquisition. No goodwill resulted from the
purchase.

(c) MESA RIDGE TECHNOLOGIES

On October 2, 2000, the Company acquired all of the outstanding stock of
Mesa Ridge Technologies, Inc., doing business as MAGMA, a California corporation
("Magma"). Magma manufactures and markets connectivity products (serial products
and PCI slot expansion systems) to the music, video and satellite communications
industries. The purchase price consisted of $2,000,000 in cash and 562,098
shares of Common Stock, valued at $4,720,000. In addition, contingent earn out
payments are to be made to the selling stockholders depending upon Magma's
performance over the two years following the date of acquisition, which are
measured and payable on each anniversary date of the acquisition. During 2001,
the Company issued 110,855 shares of common stock (valued at $131,000) as
settlement of the first earn out payment under this purchase agreement.

The acquisition has been accounted for as a purchase and, accordingly, the
purchase price has been allocated to the assets acquired and the liabilities
assumed based upon the estimated fair values at the date of acquisition. The
acquisition resulted in goodwill of $6,211,000 which is being amortized on a
straight-line basis over ten years.

38

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The purchase price of $6,719,000 plus acquisition costs of $197,000 was
allocated as follows (amounts in thousands):

Purchase price:
Cash consideration........................................ $ 2,000
Common stock and additional paid-in capital............... 4,720
Costs of acquisition...................................... 197
-------
$ 6,917
=======
Assets acquired and liabilities assumed:
Current assets............................................ $ 2,216
Equipment................................................. 26
Other assets.............................................. 13
Goodwill.................................................. 6,211
Current liabilities....................................... (1,549)
-------
$ 6,917
=======

The consolidated financial statements as of December 31, 2000 includes the
accounts of Magma and results of operations since the date of acquisition. The
following summary, prepared on a pro forma basis present the results of
operations as if the acquisition had occurred on January 1, 1999 (amounts in
thousands, except per share data).

The pro forma results are not necessarily indicative of what the actual
consolidated results of operations might have been if the acquisition had been
effective at the beginning of 1999 or as a projection of future results.

(d) MIRAM

On July 29, 1997, the Company acquired certain assets and assumed certain
liabilities approximating $565,000 of Miram International, Inc. (Miram), a
manufacturer of docking stations, in exchange for 55,000 shares of common stock
valued at $425,000, with further consideration payable in future periods,
contingent upon product sales revenue during these periods. The transaction was
accounted for in accordance with the purchase method of accounting. During May
1999, the Company issued an additional 38,500 shares of common stock valued at
$308,000 to settle and eliminate any contingent future consideration. This
amount has been recorded as a component of general and administrative expense
for 1999 and no additional payments to the seller will be required.

39

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(e) SALE OF MOBILITY ELECTRONICS LLC

On October 1, 1999, the Company sold its European subsidiary (Mobility
Electronics LLC, which maintained offices in the United Kingdom and France, and
offices and a warehouse/distribution center in Germany through its three
operating subsidiaries, Mobility Electronics (U.K.), Mobility Electronics GMBH
and Mobility SARL). The stated value of net assets of approximately $134,000 was
sold for nominal consideration resulting in a loss on sale of the subsidiary of
approximately $134,000, which is recorded as a component of other loss for 1999.

(4) INVENTORIES

Inventories consist of the following (amounts in thousands):

(5) PROPERTY AND EQUIPMENT

Property and equipment consists of the following (amounts in thousands):

Capital lease assets consist of computers and furniture and fixtures.
Capital lease assets were fully amortized during 2001.

40

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) OTHER ASSETS

Other assets consist of the following (amounts in thousands):

(7) NOTE RECEIVABLE

In August 2000, the Company entered into a Strategic Partner Agreement and
Purchase and Development Agreement with a Portsmith, Inc. ("Portsmith") to
develop, license and sell certain products. In conjunction with these
agreements, the Company signed a subordinated promissory note ("Subordinated
Note") to loan up to $3,000,000 to Portsmith. Interest on the Subordinated Note,
which accrues at a rate of 8% per annum, is payable on each anniversary date of
the note, with principal, together with all accrued but unpaid interest, due and
payable on August 29, 2003. The principal balance of the Subordinated Note is
convertible at any time into post-conversion equity interest in Portsmith.
During 2000, the Company advanced $2,200,000 to Portsmith under the Subordinated
Note, all of which was outstanding at December 31, 2000 and reflected as a
component of other assets. During 2001, the Company advanced the remaining
$800,000. In September 2001, the Company determined the Subordinated Note to be
uncollectible and wrote-off the $3,000,000 balance.

In February 2002, the Company acquired Portsmith pursuant to the merger of
Portsmith with the Company's subsidiary, Mobility Europe Holdings, Inc. See note
18.

(8) INVESTMENT IN PREFERRED STOCK

In September 2000, the Company paid $1,200,000 to purchase a warrant to
purchase Series A preferred stock of a company. The warrant is initially
exercisable to purchase shares of Series A preferred stock equal to 10% of the
fully diluted capital stock at an aggregate exercise price of $764,000. However,
the exercise price and number of shares to be acquired upon the exercise of the
warrant is adjusted if the company issues any capital stock or stock equivalent
other than with respect to the exercise of the warrant at a price of less than
$2,750 per share. During 2001, the Company paid $764,000 to exercise the warrant
and the investment in Series A preferred stock is stated at a cost of $1,964,000
as a component of other assets at December 31, 2001.

(9) OPERATING LEASE COMMITMENTS

The Company has entered into various non-cancelable operating lease
agreements for its office facilities, automobile, and office equipment. Existing
facility leases require monthly rents plus payment of property taxes, normal
maintenance and insurance on facilities. Rental expense for the operating leases
was $1,000,000, $675,000 and $478,000 during the years ended 2001, 2000, and
1999, respectively.

41

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the minimum future lease payments for the years ending after
December 31 follows (amounts in thousands):

2002........................................................ $ 622
2003........................................................ 215
2004........................................................ 183
------
$1,020
======

(10) INCOME TAXES

The Company has generated net operating losses for both financial and
income tax reporting purposes since inception. At December 31, 2001 and 2000,
the Company had net operating loss carryforwards for federal income tax purposes
of approximately $62,060,000 and $47,480,000, respectively, and approximately
$2,580,000 and $0 for foreign income tax purposes, respectively, which, subject
to annual limitations, are available to offset future taxable income, if any,
through 2021 and net operating loss carryforwards for state income tax purposes
of approximately $62,060,000 and $47,480,000, which are available to offset
future taxable income through 2006.

The temporary differences that give rise to deferred tax assets and
liabilities at December 31, 2001 and 2000 are as follows (amounts in thousands):

The valuation allowance for deferred tax assets as of December 31, 2001 and
2000 was $30,974,000 and $23,281,000, respectively. The net change in the total
valuation allowance for the years ended December 31, 2001 and 2000 was an
increase of $7,693,000 and $6,249,000, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
generation of future taxable income during the periods in which those temporary
differences become deductible. In addition, due to the frequency of equity
transactions within the Company, it is possible the use

42

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the net operating loss carryforward may be limited in accordance with Section
382 of the Internal Revenue Code. A determination as to this limitation will be
made at a future date as the net operating losses are utilized. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will not realize
the benefits of these deductible differences.

(11) STOCKHOLDERS' EQUITY

In January 2000, the Board of Directors authorized the Company's
certificate of incorporation to increase the number of authorized shares of
common stock to 100,000,000 and increased the authorized shares of preferred
stock to 15,000,000 shares. Additionally, in March 2000, the Company's Board of
Directors authorized and the Company's stockholders approved a 1-for-2 reverse
stock split and a post-split adjustment of the number of authorized shares of
common stock to 90,000,000 shares. All share information included in the
accompanying consolidated financial statements has been retroactively adjusted
to reflect these amendments.

(a) CONVERTIBLE PREFERRED STOCK

Series C preferred stock is convertible into shares of common stock. The
initial conversion rate was one for one, but was subject to change if certain
events occur. Generally, the conversion rate will be adjusted if the Company
issues any non-cash dividends on outstanding securities, splits its securities
or otherwise effects a change to the number of its outstanding securities. The
conversion rate will also be adjusted if the Company issues additional
securities at a price that is less than the price that the Series C preferred
stockholders paid for their shares. Such adjustments will be made according to
certain formulas that are designed to prevent dilution of the Series C preferred
stock. The Series C preferred stock can be converted at any time at the option
of the holder, and will convert automatically, immediately prior to the
consummation of a firm commitment underwritten public offering of common stock
pursuant to a registration statement filed with the SEC having a per share price
equal to or greater than $24.00 per share and a total gross offering amount of
not less than $15.0 million.

The Company may not pay any cash dividends on its common stock while any
Series C preferred stock remain outstanding without the consent of the Series C
preferred stockholders. Holders of shares of Series C preferred stock are
entitled to vote on all matters submitted for a vote of the holders of common
stock. Holders will be entitled to one vote for each share of common stock into
which one share of Series C preferred stock could then be converted. In the
event of liquidation or dissolution, the holders of Series C preferred stock
will be entitled to receive the amount they paid for their stock, plus accrued
and unpaid dividends out of the Company's assets legally available for such
payments prior to the time other holders of securities junior to the Series C
preferred stock will be entitled to any payments.

During 1998, the Company issued 558,400 shares of Series C preferred stock
for $3,354,000, net of legal and issuance costs of $415,000 through a Private
Placement. During 1999, the remaining 176,900 shares relating to this Private
Placement were issued for $1,058,000, net of issuance costs of $136,000. An
additional 91,909 shares were issued as a result of repricing the Private
Placement from $6.75 per share to $6.00 per share and 5,804 shares were issued
as payment for broker commissions.

During 1999, the Company issued 1,182,744 shares of Series C preferred
stock at $6.00 per share for $7,027,000 million, net of legal and Private
Placement fees of $70,000, in conjunction with a Private Placement. During
January 2000, the Company completed the Private Placement and issued an
additional 48,706 shares of Series C preferred stock for $269,000, net of legal
and issuance costs of $23,000. In conjunction with this Private Placement, the
Company issued a warrant for each share of Series C preferred

43

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock to purchase one share of common stock. In addition, the Company issued
warrants to purchase 72,584 shares of common stock as settlement of certain
private placement fees. The total warrants issued of 1,292,594 and 11,440 are
exercisable at $0.02 and $9.60, respectively, per common stock share and expire
December 2004.

In April 1999, the Company entered into an agreement with Seligman
Communications and Information Fund, Inc. (Seligman) under which the Company
issued 166,666 shares of Series C preferred stock at $6.00 per share in exchange
for a $1,000,000 investment in the Company for a total of $1,000,000. During
September 2000, these shares were converted into 114,991 shares of common stock
at a conversion rate of 1-to-0.68995.

In April 1999, the Company entered into an agreement with VLSI Technology,
Inc. (VLSI) under which the Company issued 166,666 shares of Series C preferred
stock at $6.00 per share in exchange for the settlement of liabilities of
$406,000 with the Company and a prepayment for inventory purchases of $593,000,
net of issuance costs of $68,000.

At the date of issuance of the Series C shares, a non-cash beneficial
conversion adjustment of $49,000 and $1,450,000, which represents a 17% discount
to the fair value of the common stock at the date of issuance, has been recorded
in the 2000 and 1999 consolidated financial statements as an increase and
decrease to additional paid-in capital, respectively.

On March 6, 2000, the Company signed a Strategic Partner Agreement with
Cybex Computer Products Corporation (Cybex). The Company and Cybex have agreed
to license certain technology to each other and the Company has agreed to sell
certain of its products to Cybex on a private label basis. In conjunction with
this agreement, the Company sold Cybex 500,000 shares of $0.01 par value Series
D preferred stock for $4,727,000, net of issuance of costs of $273,000. The
Series D preferred stockholders have voting rights consistent with common
stockholders and have liquidation preference over common stockholders but
subordinate to Series C preferred stockholders. The Series D preferred stock is
convertible into shares of common stock. On June 30, 2000, the Series D
preferred stock were converted to 438,595 shares of common stock at a conversion
rate of 1-to-0.87719 ($10.00 divided by 95% of the $12.00 initial public
offering price per share of common stock).

During 2000, 1,017,434 shares of Series C preferred stock sold under these
Private Placements were converted into 701,926 shares of common stock at a
conversion rate of 1-to-0.68995, Series C preferred stock to common stock.

During 2001, 581,049 shares of Series C preferred stock sold under these
Private Placements were converted into 400,264 shares of common stock at an
average conversion rate of 1-to-0.68886, Series C preferred stock to common
stock.

(b) COMMON STOCK

Holders of shares of common stock are entitled to one vote per share on all
matters submitted to a vote of the Company's stockholders. There is no right to
cumulative voting for the election of directors. Holders of shares of common
stock are entitled to receive dividends, if and when declared by the board of
directors out of funds legally available therefore, after payment of dividends
required to be paid on any outstanding shares of preferred stock. Upon
liquidation, holders of shares of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to the liquidation
preferences of any outstanding shares of preferred stock. Holders of shares of
common stock have no conversion, redemption or preemptive rights.

During 1999, the Company issued 4,875 shares of common stock valued at
$51,000 for services performed by a third-party consultant, which was recorded
as compensation expense in 1999.

44

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 1999, the Company issued 394,063 shares of common stock for
$3,037,000, net of issuance costs of $116,000 under a private placement.

On June 30, 2000, the Company's registration statement on Form S-1
registering its initial public offering ("IPO") of 4,000,000 shares of common
stock became effective. At the offering price of $12.00 per share, the Company
received proceeds of $44,600,000 from the IPO, net of underwriting discounts and
commissions of $3,400,000. Other offering expenses totaled $1,500,000. Net cash
proceeds to the Company after the payment of total offering expenses of
$4,900,000 was $43,100,000. As part of the IPO, the Company granted the
underwriters a 30-day option from the effective date of the IPO to purchase up
to 600,000 additional shares of common stock to cover over-allotments, if any.
On July 28, 2000, the underwriters exercised their 30-day option in full and
purchased 600,000 additional shares of common stock, resulting in additional IPO
proceeds received by the Company of $6,700,000, net of underwriting discounts
and commissions of $504,000. Including the underwriters' over-allotment option,
the net cash proceeds received by the Company after deducting the total offering
expenses of $5,400,000 was $49,800,000.

(c) STOCK SUBSCRIPTION AND DEFERRED COMPENSATION

During 1999, 75,000 incentive stock options to purchase common stock at a
weighted average exercise price of $2.68 were issued to an officer. The Company
recorded $400,000 of deferred compensation, which represents the intrinsic value
of these stock options, related to the issuance of the options, which are
charged to compensation expense over the vesting period through March 2002. The
unamortized portion, which is recorded as a deduction from stockholders' equity,
is $17,000 and $83,000 at December 31, 2001 and 2000, respectively.

During 1999, 441,250 incentive stock options to purchase common stock at a
weighted average exercise price of $4.00 were issued to employees. The Company
recorded $2,375,000 of deferred compensation expense, which represents the
intrinsic value of these stock options, related to the issuance of the options,
which are charged to compensation expense over the vesting period through
periods ranging from December 2000 to December 2004. The unamortized portion,
which is recorded as a deduction from stockholders' equity, is $492,000 and
$1,338,000 at December 31, 2001 and 2000, respectively.

In December 1999, the Company entered into a promissory note in the
principal sum of $300,000 with an executive of the Company to finance his
purchase of 50,000 shares of Series C preferred stock at a composite purchase
price of $6.00 for one share of preferred stock and one warrant for the purchase
of 50,000 shares of common stock at an exercise price of $0.02.

In June 2000, the Company sold 100,000 shares of common stock at a price of
$12.00 per share to a company in exchange for $1,000 in cash and $1,199,000
promissory note which bears interest at 6% per annum and is secured by these
shares of common stock. Accrued but unpaid interest under the promissory note is
due and payable on each anniversary date of the promissory note beginning June
30, 2001, with all unpaid principal and interest due and payable in full on June
30, 2003. As of December 31, 2000, the $1,199,000 outstanding principal balance
is reflected as a component of deferred compensation and stock subscriptions.
During 2001, the promissory note was canceled and the 100,000 shares of common
stock were returned to the Company.

During 2001, the Company entered into a promissory note in the principal
sum of $76,200 with a consultant to finance his purchase of 60,000 shares of
common stock at a purchase price of $1.28 per share. The Company recorded
compensation expense of $21,000 during 2001 as a result of this transaction.

During 2001, the Company entered into promissory notes in the principal sum
of $598,000 with two executives of the Company and one related party to finance
their purchase of 206,898 shares of common stock at a composite purchase price
of $2.90 for one share of common stock.

45

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) EMPLOYEE BENEFIT PLANS

(a) RETIREMENT PLAN

The Company has a defined contribution 401(k) plan for all employees. Under
the 401(k) plan, employees are permitted to make contributions to the plan in
accordance with IRS regulations. The Company may make discretionary
contributions as approved by the Board of Directors. The Company contributed
$36,000 during 2001. There were no Company contributions made during 2000 and
1999.

(b) INCENTIVE STOCK OPTION PLAN AND WARRANTS

In 1995, the Board granted stock options to employees to purchase 132,198
shares of common stock. Later in 1996, the Company adopted an Incentive Stock
Option Plan (the Plan) pursuant to the Internal Revenue Code. During 2001, the
Plan was amended to increase the aggregate number of shares of common stock for
which options may be granted or for which stock grants may be made to 2,500,000.
Options become exercisable over varying periods up to five years and expire at
the earlier of termination of employment or up to seven years after the date of
grant. The options under both the Plan and Board approved were granted at the
fair market value of the Company's stock at the date of grant as determined by
the Company's Board of Directors. There were 1,141,028 shares available for
grant under the Plan as of December 31, 2001.

The per share weighted average fair value of stock options granted under
the Plan for the years ended December 31, 2001, 2000 and 1999, was $2.77, $2.80
and $5.22, respectively, based on the date of grant using the Black-Scholes
method for 2001 and 2000, and the minimum value method for 1999 with the
following weighted average assumptions:

46

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information regarding stock option activity
for the years ended December 31, 1999, 2000 and 2001:

The following table summarizes information about the stock options
outstanding at December 31, 2001:

Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss and
net loss per share would have been increased to the pro forma amount indicated
below (amounts in thousands, except per share):

Pro forma net loss reflects only options granted since 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net loss amount presented above because
compensation cost is reflected over the options' vesting period of four to five
years.

47

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In January 1999, the Company issued 32,500 warrants to purchase common
stock in connection with the Private Placement of Series C Preferred Stock. The
warrants are exercisable at $12.00 per share and expire January 2004.

In March 1999, 525,000 warrants were issued to purchase common stock for an
exercise price of $0.02. The warrants, valued at $4,200,000, were recorded as
deferred loan costs in other assets and charged to interest expense over the
term of the related debt.

In May 1999, the Company granted consultants 35,000 stock options for
services performed. The options are exercisable at $8.00 per share and expire in
May 2003. The Company recorded $37,000 of deferred compensation in other assets
related to the issuance of the options. The value of these options was amortized
to compensation expense resulting in non-cash compensation of $28,000 and $9,000
during 2000 and 1999, respectively.

In May 1999, in conjunction with the issuance of Bridge Notes in a Private
Placement, 65,000 warrants were issued to purchase common stock for an exercise
price of $0.02. The warrants, valued at $520,000, were included as deferred loan
costs in other assets. The value of the warrants was charged to interest expense
over the term of the related debt.

In June through August 1999, the Company issued warrants to purchase
384,200 shares of common stock at an exercise price of $0.02 per share in
conjunction with the sale of common stock under a Private Placement. In
addition, the Company issued warrants to purchase 53,000 shares of common stock
at an exercise price of $0.02 per share that expire after five years as payment
of broker fees associated with the sale of common stock under the Private
Placement.

In December 1999, the Company granted a consultant 35,000 stock options for
services performed. The options are exercisable at $4.00 per share and expire in
December 2003. The Company recorded $368,000 of deferred compensation in other
assets related to the issuance of the options. The value of these options was
amortized to compensation expense resulting in non-cash compensation of $365,000
and $3,000 during 2000 and 1999, respectively.

In December 1999, the Company issued 1,255,327 warrants to purchase common
stock in connection with the Private Placement of Series C preferred stock.
1,243,888 and 11,439 warrants are exercisable at $0.02 and $9.60, respectively,
and expire October 1, 2002.

In November 1999, the Company issued 56,250 warrants to purchase common
stock in connection with the extension of its $4,500,000 line of credit. The
warrants were issued to certain stockholders as part of their personal
guarantees and indemnification arrangements for this line of credit. The
warrants, valued at $450,000, are exercisable at $4.00, expire November 1, 2004,
were recorded as deferred loan costs in other assets and were charged to
interest expense over the term of the line of credit.

In December 1999, the Company granted a consultant 50,000 warrants to
purchase common stock for services performed in connection with the purchase of
Series C preferred stock. The warrants are exercisable at $0.02 and expire
December 2004.

During 1999, 655,843 and 25,250 warrants were exercised at $0.02 and $7.00
per share, respectively, for a total of $190,000.

In January 2000, the Company issued warrants to purchase 48,706 shares of
common stock exercisable $0.02 per common stock share in conjunction with the
completion of Private Placement of Series C preferred stock.

During 2000, the Company issued warrants to purchase 138,502 and 30,444
shares of common stock in connection with the extension of certain Bridge
Promissory Notes and Promissory Notes, respectively. These warrants (valued at
$213,000 and $365,000, respectively, for a total of $578,000) are exercisable at
$11.40 and

48

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$0.02 per share, respectively. The value of these warrants were recorded as
deferred loan costs in other assets and charged to interest expense over the
term of the related debt.

During 2000, 1,711,180 warrants were exercised to acquire 1,710,083 shares
of common stock at a weighted average exercise price of $0.07 per share for
total net proceeds of $121,000.

During 2001, the Company issued warrants to purchase 75,000 shares of
common stock in connection with a technology license agreement. These warrants,
valued at $71,000, using the Black-Scholes pricing model, are exercisable at
$1.38 per share. The value of these warrants has been recorded as a component of
other assets to be amortized to compensation expense over the term of the
related license agreement.

During 2001, 76,500 warrants were exercised to acquire 76,500 shares of
common stock at $0.02 per share for total net proceeds of $2,000.

During 2001, 564,944 warrants expired. At December 31, 2001, 526,666
unexercised warrants remained outstanding at exercise prices ranging from $0.01
to $7.00 per share.

(c) EMPLOYEE STOCK PURCHASE PLAN

The Company established an Employee Stock Purchase Plan (the "Purchase
Plan") in October 2001, under which 2,000,000 shares of Common Stock have been
reserved for issuance. Eligible employees may purchase a limited number of
shares of the Company's Common Stock at 85% of the market value at certain
plan-defined dates. In 2001, 25,795 shares were issued under the Purchase Plan
for net proceeds of $18,000. At December 31, 2001, 1,974,205 shares were
available for issuance under the purchase plan.

(13) NET LOSS PER SHARE

The computation of basic and diluted net loss per share follows (in
thousands, except per share amounts):

(14) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash with high credit quality financial
institutions and generally limits the amount of credit exposure to the amount of
FDIC coverage. However, periodically during the year, the Company maintains cash
in financial institutions in excess of the FDIC insurance coverage limit of
$100,000. The Company performs ongoing credit evaluations of its customers'
financial condition but does not typically require collateral to support
customer receivables. The

49

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.

Two customers accounted for 34% and 33% of net sales for the year ended
December 31, 2001 and 32% and 18% of net sales for the year ended December 31,
2000. One customer accounted for 26% of net sales for the year ended December
31, 1999.

Export sales were approximately 31%, 32% and 18% of the Company's net sales
for the years ended December 31, 2001, 2000 and 1999, respectively. The
principal international market served by the Company was Europe.

(15) CONTINGENCIES

The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based on consultation
with legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity. Accordingly, the accompanying consolidated financial
statements do not include a provision for losses, if any, that might result from
the ultimate disposition of these matters.

(16) RELATED PARTY TRANSACTIONS

The Company has an agreement with a related entity under which this entity
provides management services. The Company paid the consultant approximately
$20,000, $39,000 and $42,000 for the years ended December 31, 2001, 2000 and
1999, respectively.

During 2000, the Company recognized $2,000,000 of revenue from an entity in
which it has a preferred stock ownership.

During 2001, the Company sold 206,898 shares of common stock to two
officers of the Company and an affiliate of an officer at a purchase price of
$2.90 per share. Each investor paid $690 in cash (or $2,070 in total) and
executed and delivered to the Company a three-year Promissory Note, in the
original principal amount of $199,311 each (or $597,933 in total), and bearing
interest at a rate of 6.33% per annum. Each Promissory Note is secured by the
shares of common stock so issued. The notes are reflected as contra equity on
the statement of stockholders' equity.

50

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(17) SUPPLEMENTAL FINANCIAL INFORMATION

A summary of additions and deductions related to the allowances for
accounts receivable for the years ended December 31, 2001, 2000 and 1999 follows
(amounts in thousands):

(18) SUBSEQUENT EVENTS

In February 2002, the Company acquired Portsmith, Inc. pursuant to the
merger of Portsmith with the Company's subsidiary, Mobility Europe Holdings,
Inc. In accordance with terms of the acquisition agreement, the Company issued
800,000 shares of common stock to the Portsmith stockholders of which 400,000
shares are held in escrow for the Portsmith stockholders, the issuance of which
is contingent upon certain performance criteria of Portsmith on the first
anniversary of the acquisition. In addition, contingent earn out payments are to
be made to the Portsmith stockholders depending upon Portsmith's future
performance on the one year anniversary of the acquisition date. In addition, as
part of this transaction, the Company's $3,000,000 loan to Portsmith (see Note
7), plus accrued interest, was converted into an equity contribution in
Portsmith.

On March 25, 2002, the Company announced its execution of a definitive
agreement to acquire iGo Corporation. The transaction is subject to certain
material conditions precedent, including without limitation, approval by the
stockholders of iGo and the declared effectiveness by the Securities and
Exchange Commission of a registration statement, which registers the issuance of
shares of the Company's common stock to be issued in the transaction.

51

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(19) QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of the quarterly data for the years ended December 31, 2001 and
2000 follows (amounts in thousands, except per share amounts):

52

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The response to this Item regarding our directors and compliance with
Section 16(a) of the Exchange Act by our officers and directors will be
contained in the Proxy Statement for the 2002 Annual Meeting of Shareholders
under the captions "Election of Directors" and Section 16(a) "Beneficial
Ownership Reporting Compliance" and is incorporated by reference herein. The
response to this Item regarding our executive officers is contained in the
Supplemental Item -- "Executive Officers of the Registrant" found in Part I of
this report.

ITEM 11. EXECUTIVE COMPENSATION

The response to this Item will be contained in the Proxy Statement for the
2002 Annual Meeting of Shareholders under the captions "How are directors
compensated?" and "Executive Compensation" and is incorporated by reference
herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this Item will be contained in the Proxy Statement for the
2002 Annual Meeting of Shareholders under the caption "Security Ownership of
Certain Beneficial Owners and Management" and is incorporated by reference
herein.

ITEM 13. CERTAIN TRANSACTIONS

The response to this Item will be contained in the Proxy Statement for the
2002 Annual Meeting of Shareholders under the caption "Certain Relationships and
Related Transactions" and is incorporated by reference herein.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)(2) Financial Statements

See the Index to Consolidated Financial Statements and Financial
Statement Schedule in Part II, Item 8.

(b) Forms 8-K

No form 8-K's were filed during the last quarter of the period covered
by this Report.

(c) Exhibits

- ---------------

* Filed herewith

(1) Previously filed as an exhibit to Registration Statement No. 333-30264 dated
February 11, 2000.

(2) Previously filed as an exhibit to Amendment No. 1 to Registration Statement
No. 333-30264 dated March 28, 2000.

(3) Previously filed as an exhibit to Amendment No. 2 to Registration Statement
No. 333-30264 dated May 4, 2000.

(4) Previously filed as an exhibit to Amendment No. 3 to Registration Statement
No. 333-30264 dated May 18, 2000.

(5) Previously filed as an exhibit to Form 10-Q for the quarter ended March 31,
2001.

55

SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

MOBILITY ELECTRONICS, INC.

By: /s/ CHARLES R. MOLLO
------------------------------------
Charles R. Mollo
President, Chief Executive Officer and
Chairman of the Board (Principal
Executive Officer)

Pursuant to the requirements of the Securities Act of 1934 this Report has
been signed by the following persons in the capacities and on the dates
indicated.

56

INDEX TO EXHIBITS

- ---------------

* Filed herewith

(1) Previously filed as an exhibit to Registration Statement No. 333-30264 dated
February 11, 2000.

58

(2) Previously filed as an exhibit to Amendment No. 1 to Registration Statement
No. 333-30264 dated March 28, 2000.

(3) Previously filed as an exhibit to Amendment No. 2 to Registration Statement
No. 333-30264 dated May 4, 2000.

(4) Previously filed as an exhibit to Amendment No. 3 to Registration Statement
No. 333-30264 dated May 18, 2000.

(5) Previously filed as an exhibit to Form 10-Q for the quarter ended March 31,
2001.

59