MOBILITY ELECTRONICS INC - 10-Q Quarterly Report

Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------

FORM 10-Q

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

FOR THE QUARTER ENDED JUNE 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to _________________

Commission file number: 0-30907
-------

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 No.)

7955 EAST REDFIELD ROAD
SCOTTSDALE, ARIZONA 85260
(480) 596-0061
(Address and telephone number of principal executive offices)

Indicate by check mark whether 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 [ ]

At August 9, 2002, there were 16,001,008 shares of the Registrant's
Common Stock outstanding.

MOBILITY ELECTRONICS, INC.
FORM 10-Q

TABLE OF CONTENTS

-2-

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS:

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

See accompanying notes to condensed consolidated financial statements.

-3-

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

-4-

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

-5-

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the
accounts of Mobility Electronics, Inc. ("Mobility" or the "Company") which was
formerly known as Electronics Accessory Specialists International, Inc., and its
wholly-owned subsidiaries, Magma, Inc. and Portsmith, Inc., which includes
Portsmith, Inc. from February 1, 2002 (date of acquisition) to June 30, 2002 and
Mobility 2001 Limited. All significant intercompany balances and transactions
have been eliminated in the accompanying condensed consolidated financial
statements.

The accompanying condensed consolidated financial statements are unaudited
and have been prepared in accordance with accounting principles generally
accepted in the United States of America, pursuant to rules and regulations of
the Securities and Exchange Commission (the "SEC"). In the opinion of
management, the accompanying condensed consolidated financial statements include
normal recurring adjustments that are necessary for a fair presentation of the
results for the interim periods presented. Certain information and footnote
disclosures have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with our audited consolidated financial statements and notes thereto
for the fiscal year ended December 31, 2001 included in our Form 10-K/A, filed
with the SEC. The results of operations for the three and six months ended June
30, 2002 are not necessarily indicative of results to be expected for the full
year or any other period.

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 consolidated financial statements for the three and six months ended
June 30, 2002 include the accounts of Mobility Electronics, Inc. and its
wholly-owned subsidiaries, Magma, Inc. and Portsmith, Inc., which includes
Portsmith, Inc., from February 1, 2002 (date of acquisition) and Mobility 2001
Limited. The consolidated financial statements for the three and six months
ended June 30, 2001 include the accounts of Mobility and its wholly-owned
subsidiaries, Magma, Inc. and Portsmith, 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 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(R) 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 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.

-6-

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(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. 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 finished goods and 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. Inventories include material and overhead costs. Overhead costs are
allocated to inventory based upon a percentage of material costs. 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. 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. Leasehold
improvements are amortized over the shorter of the lease term or estimated
useful lives of the assets.

(h) Patents, Trademarks and Non-compete Agreements

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

(i) Goodwill

In July 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets ("Statement 142"). Statement 142 requires 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. The Company adopted the provisions of Statement 142
effective January 1, 2002. Under Statement 142, the Company is 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. As of June 30, 2002, the Company has no identifiable
intangible assets resulting from a purchase business combination transaction.

In connection with the transitional goodwill impairment evaluation,
Statement 142 requires 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

-7-

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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, 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 statement of
operations.

The Company has completed the first step of the transitional impairment
test during the quarter ended June 30, 2002. Based upon this test, the Company
identified one reporting unit within its one operating business segment. The
Company's goodwill balance is $5,627,000 as of January 1, 2002. Based upon the
results of a valuation, the Company has determined that the carrying value of
this reporting unit exceeds its fair value, and thus, an indication of
impairment exists. The Company intends to complete the second step of the
transitional impairment test and record an impairment charge against its
goodwill by the end of the fiscal year 2002.

The changes in the carrying amount of goodwill follows (amounts in
thousands):

Reported balance at December 31, 2001 $ 5,627
Additional goodwill from acquisition of Portsmith 320
-----------
$ 5,947
===========

The following table presents prior year loss and loss per share as if the
non-amortization provisions of Statement 142 had been applied in the prior
periods (amounts in thousands, except per share data).

(j) 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.

(k) 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.

-8-

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(l) 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.

(m) 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.

(n) Research and Development

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

(o) 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.

(p) Segment Reporting

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

3. ACQUISITIONS

(a) Portsmith, Inc.

On February 1, 2002, the Company acquired Portsmith, Inc. pursuant to the
merger of Portsmith with the Company's subsidiary, Mobility Europe Holdings,
Inc., now Portsmith, Inc. Portsmith provides connectivity solutions for handheld
computing devices. In accordance with the terms of the acquisition agreement,
the Company issued 800,000 shares of common stock, valued at $1.35 per common
share, 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 transaction.
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.

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.
Goodwill of $320,000 was recorded as a result of the transaction.

-9-

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The purchase price of $540,000 plus acquisition costs of $123,000 was
allocated as follows (amounts in thousands):

Purchase price:
Common stock and additional paid-in
capital ....................................... $ 540
Costs of acquisition ............................ 123
------------
$ 663
============
Assets acquired and liabilities assumed:
Current assets .................................. $ 1,711
Equipment ....................................... 31
Other assets .................................... 15
Goodwill ........................................ 320
Current liabilities ............................. (1,414)
------------
$ 663
============

The consolidated financial statements as of June 30, 2002 include the
accounts of Portsmith and results of operations since the date of acquisition.
The following summary, prepared on a pro forma basis, presents the results of
operations as if the acquisition had occurred on January 1, 2001 (unaudited
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 2001 or as a projection of future results.

(b) iGo Corporation

On March 25, 2002 and as amended on July 18, 2002, the Company announced
its execution of a definitive agreement to acquire iGo Corporation for
$3,250,000 in cash and 2,600,000 shares of the Company's common stock.
Additional consideration of $1,000,000 and 500,000 shares of common stock will
be held in escrow until one day following the first anniversary date for the iGo
stockholders the issuance of which is contingent upon certain performance
criteria. 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 the Company's common
stock to be issued in the transaction. The registration statement was declared
effective August 6, 2002.

4. INVENTORIES

Inventories consist of the following (amounts in thousands):

-10-

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. STOCKHOLDERS' EQUITY

(a) Preferred Stock

The 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 public offering of common stock
pursuant to a registration statement filed with the Securities and Exchange
Commission having a per share price equal to or greater than $24.00 per share
and a total gross offering amount of not less than $15,000,000. The rate of
conversion is 1-to-0.7548 as of June 30, 2002.

The Company may not pay any cash dividends on its common stock while any
Series C preferred stock remains outstanding without the consent of the Series C
preferred stockholders. Holders 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 holders of
securities junior to the Series C preferred stock receiving payments.

During the period from December 31, 2001 through June 30, 2002, 58,705
shares of Series C preferred stock were converted into 41,592 shares of common
stock at a rate of 1-to-0.70220 for conversions through February 20, 2002, at a
rate of 1-to-0.74385 for those conversions beginning February 21, 2002 and
through May 6, 2002, and at a rate of 1-to-0.7548 for those conversions
beginning May 7, 2002 and thereafter.

(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 therefor, 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.

6. NET LOSS PER SHARE

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

-11-

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes securities outstanding which were not included in
the calculation of diluted net loss per share since their inclusion would be
antidilutive:

7. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

Two customers accounted for 25% and 18% of total revenue of the Company for
the six months ended June 30, 2002. Two customers accounted for 29% each of
total revenue of the Company for the six months ended June 30, 2001.

Export sales were approximately 20% and 31% of the Company's total revenues
for the six months ended June 30, 2002 and 2001, respectively. The principal
international market served by the Company was Europe.

8. CONTINGENCIES AND LITIGATION

The Company is involved in various claims and legal actions 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 condensed consolidated
financial statements do not include a provision for losses, if any, that might
result from the ultimate disposition of these matters.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Certain statements under the caption "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;

- other factors to which this report refers.

The following discussion and analysis of our financial condition and
results of operations should be read together with our condensed 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(R) technology. We also design, develop and market a
range of other products for portable computers. These products include monitor
stands and in air/in car chargers to power portable computers. In addition, we
offer a variety of PCI slot expansion products for both desktop and portable
computing devices. 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(R)
revenues from both product and technology sales as we further expand our markets
and strategic relationships in this area.

-12-

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(R) technology consists of a Split Bridge(R) 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(R) patents that are issued by the U.S. Patent
and Trademark Office. Our first major application for Split Bridge(R) 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(R) technology so that we are able to
expand our product offerings to include additional applications and markets.

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 and NEC. A substantial portion of our net
product sales are concentrated among a number of OEMs, including Compaq, Dell,
Hewlett-Packard, IBM, NEC, 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 70% of net product sales for the six months ended June 30, 2002
and approximately 87% of net product sales for the six months ended June 30,
2001. 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.

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. Returns, which have been netted in the
product sales presented herein, were approximately 5% of net product sales for
the six months ended June 30, 2002 and 2001, respectively. 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 20% of our net product sales for the six months
ended June 30, 2002. 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.

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 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.

We have experienced significant operating losses since inception and, as of
June 30, 2002, we have an accumulated deficit of approximately $86.9 million.
These accumulated losses have resulted in decreases in cash and cash
equivalents. If we do not achieve continued revenue growth sufficient to absorb
our recent and planned expenditures, we could experience additional losses and
corresponding decreases in cash and cash equivalents in future periods,
including the remainder of 2002.

Operating expenses for the six months ended June 30, 2002 totaled $9.0
million as compared to $12.0 million for the six months ended June 30, 2001.
However, we anticipate that in the future we will make additional investments in
our sales and marketing activities and that as a result, operating expenses will
increase. We intend to make such investments on an ongoing basis, primarily from
cash generated from operations and, if available, from lines of credit, as we
develop and introduce new products and expand into new markets. We expect that
such increases in spending will result in increases in revenues and resulting
gross profits, which should result in turning our net losses into net profits.

Recent general economic conditions have contributed to a slow down in sales
of computers and computer-related products and accessories. This economic slow
down has had a negative impact on our revenues. If we are not able to grow
revenues in future periods, we are likely to continue to incur net losses and
our cash equivalents are likely to continue to decrease.

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(R) technology and
accelerate our growth and development in this market segment.

-13-

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.

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 and internet
channels, 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. The registration statement
was declared effective on August 6, 2002.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our 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 our contract manufacturer to the customer. Allowances for
sales returns and credits 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(R) 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.

Our recognition of revenues from product sales to distributors and
retailers (the "distribution channel") is impacted by agreements we have giving
certain customers rights to return our product at any time after purchase. We
also have agreements with certain customers that allow them to receive credit
for subsequent price reductions ("price protection"). At the time we recognize
revenue, upon shipment and transfer of ownership, we reduce our measurements of
those sales and the related cost of sales by our estimates of future returns and
price protection. We also reduce our measurements of accounts receivable by the
estimated profit margins associated with returns (i.e., sales price less cost of
sales).

For our products, a historical correlation exists between the amount of
distribution channel inventory and the amount of returns that actually occur.
The greater the distribution channel inventory, the more product returns we
expect. For each of our products, we monitor levels of product sales and
inventory at our distributors' warehouses and at retailers as part of our effort
to reach an appropriate accounting estimate for returns. In estimating returns,
we analyze historical returns, current inventory in the distribution channel,
current economic trends, changes in consumer demand, introduction of new
competing products, and acceptance of our products.

In recent years, as a result of a combination of the factors described
above, we have reduced our gross sales to reflect our estimated amounts of
returns and price protection. It is also possible that returns could increase
rapidly and significantly in the future. Accordingly, estimating product returns
requires significant management judgment. In addition, different return
estimates that we reasonably could have used would have had a material impact on
our reported sales and thus have had a material impact on the presentation of
the results of operations. For those reasons, we believe that the accounting
estimate related to product returns and price protection is a "critical
accounting estimate".

-14-

For the six months ended June 30, 2002, gross sales to the distribution
channel accounted for approximately 9% of net product sales. Accordingly, in
preparing our financial statements as of June 30, 2002, we estimated future
product returns for sales into the distribution channel to be approximately 5%
of gross sales into the distribution channel for the six months ended June 30,
2002, which is consistent with actual historical return rates.

Goodwill

In conjunction with the implementation of the new accounting rules for
goodwill, we have performed a goodwill impairment evaluation. Based on the
preliminary results of the impairment evaluation, we have determined that an
indication of impairment currently exists. According to the new accounting
rules, we will perform a similar evaluation annually, or earlier if indicators
of further potential impairment exists.

The impairment evaluation process is based on both a discounted future
cash flow approach and a market comparable approach. The discounted cash flow
approach uses our estimates of future market growth rates, market share,
revenues and costs, as well as appropriate discount rates. If we fail to
achieve our assumed revenue growth rates or assumed gross margin, we may incur
charges for impairment of goodwill in the future.

RESULTS OF OPERATIONS

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

Comparison of Three Months Ended June 30, 2002 and 2001

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 decreased 4.6% to $6.6 million for the three months ended June 30,
2002 from $6.9 million for the three months ended June 30, 2001. The decrease
was primarily attributable to a reduction in sales of power products to Targus,
as a result of the termination of our relationship with Targus in December 2001.
The decrease was partially offset by sales of handheld products as a result of
our acquisition of Portsmith, Inc. in February 2002.

-15-

Technology transfer fees. Technology transfer fees consist of revenue from
the licensing and transferring by the Company of its Split Bridge(R) and
handheld docking cradle technology and architecture. Revenue from technology
transfer fees is recognized ratably over the term of the sales agreement. During
the three months ended June 30, 2002, the Company recognized a technology
transfer fee of $100,000 or 1.5% of total revenue. Technology transfer fees
represented revenue of $100,000, or 1.4% of total revenues, for the three months
ended June 30, 2001.

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 decreased 28.8% to $5.2 million for the
three months ended June 30, 2002 from $7.2 million for the three months ended
June 30, 2001. The decrease in cost of revenue - product sales was due primarily
to a $2.0 million charge to cost of revenue - product sales for excess and
obsolete inventory for the three months ended June 31, 2001. Cost of revenue -
product sales as a percentage of net product sales decreased to 78.2% for the
three months ended June 30, 2002 from 104.9% for the three months ended June 30,
2001. Excluding the $2.0 million inventory charge, cost of revenues - product
sales as a percentage of net product sales for the three months ended June 30,
2001 was 75.9%.

Cost of revenue - technology transfer. Cost of revenue - technology
transfer consists of engineering expenses related to the Split Bridge(R) and
handheld docking cradle technology. There were no costs of revenue - technology
transfer for the three months ended June 30, 2002 and 2001, as the technology
transfer fees for the periods consisted solely of fees for existing technology.

Gross profit. Gross profit increased to 23.0% of total revenue for the
three months ended June 30, 2002 from (3.4%) of total revenue for the three
months ended June 30, 2001. The gross profit rate increase is due primarily to
the $2.0 million charge to cost of revenue - product sales for excess and
obsolete inventory for the three months ended June 30, 2001. Excluding this
charge, gross profit was 25.2% for the three months ended June 30, 2001.

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 31.7% to $1.7 million for the
three months ended June 30, 2002 from $2.5 million for the three months ended
June 30, 2001. 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 25.2% for the three months
ended June 30, 2002 from 35.2% for the three months ended June 30, 2001.

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 34.1% to $1.1 million for the three
months ended June 30, 2002 from $1.7 for the three months ended June 30, 2001.
Research and development expenses as a percentage of total revenue decreased to
16.7% for the three months ended June 30, 2002 from 24.3% for the three months
ended June 30, 2001. The decrease is due to reductions in engineering expenses
and staff as a result of the decrease in development efforts related to Split
Bridge(R) technology, the development of which was largely completed in the
early part of 2001.

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. For the three months ended June 30,
2001, general and administrative expenses also included goodwill amortization of
$155,000 relating to the acquisition of Magma in October, 2000. General and
administrative expenses decreased 12.7% to $1.8 million for the three months
ended June 30, 2002 from $2.1 million for the three months ended June 30, 2001.
The decrease is due primarily to cost reduction efforts of management and the
reduction in amortization expense as a result of the application of FAS 142.
General and administrative expenses as a percentage of total revenue decreased
to 26.9% for the three months ended June 30, 2002 from 29.4% for the three
months ended June 30, 2001.

Interest, net. Interest, net consists primarily of interest earned on our
cash balances and short-term investments, net of interest expense. Net interest
income for three months ended June 30, 2002 was $147,000 compared to $340,000
for the three months ended June 30, 2001. The change was primarily due to the
reduction in cash balance from June 30, 2001 to June 30, 2002.

Income taxes. We have incurred losses from inception to date; therefore, no
provision for income taxes was required for the three months ended June 30, 2002
and 2001.

-16-

Comparison of Six Months Ended June 30, 2002 and 2001

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 decreased 5.7% to $13.2 million for the six months ended June 30,
2002 from $14.0 million for the six months ended June 30, 2001. The decrease was
primarily attributable to a reduction in sales of power products to Targus, as a
result of the termination of our relationship with Targus in December 2001. The
decrease was partially offset by sales of handheld products as a result of our
acquisition of Portsmith, Inc. in February 2002.

Technology transfer fees. Technology transfer fees consist of revenue from
the licensing and transferring by the Company of its Split Bridge(R) and
handheld docking cradle technology and architecture. Revenue from technology
transfer fees is recognized ratably over the term of the sales agreement. During
the six months ended June 30, 2002, the Company recognized a technology transfer
fee of $416,000 or 3.1% of total revenue. Technology transfer fees represented
revenue of $200,000, or 1.4% of total revenues, for the six months ended June
30, 2001.

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 decreased 20.2% to $10.2 million for the
six months ended June 30, 2002 from $12.8 million for the six months ended June
30, 2001. The decrease in cost of revenue - product sales was due primarily to a
$2.0 million charge to cost of revenue - product sales for excess and obsolete
inventory for the six months ended June 30, 2001. Cost of revenue - product
sales as a percentage of net product sales decreased to 77.5% for the six months
ended June 30, 2002 from 91.7% for the six months ended June 30, 2001. Excluding
the $2.0 million charge, cost of revenues - product sales as a percentage of net
product sales for the six months ended June 30, 2001 was 77.4%.

Cost of revenue - technology transfer. Cost of revenue - technology
transfer consists of engineering expenses related to the Split Bridge(R) and
handheld docking cradle technology. There were no costs of revenue - technology
transfer for the six months ended June 30, 2002 and 2001, as the technology
transfer fees for the periods consisted solely of fees for existing technology.

Gross profit. Gross profit increased to 24.8% of total revenue for the six
months ended June 30, 2002 from 9.6% of total revenue for the six months ended
June 30, 2001. The gross profit rate increase is due primarily to the $2.0
million charge to cost of revenue - product sales for excess and obsolete
inventory for the six months ended June 30, 2001. Excluding this charge, gross
profit was 23.7% for the six months ended June 30, 2001.

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 33.0% to $3.1 million for the
six months ended June 30, 2002 from $4.7 million for the six months ended June
30, 2001. 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 23.1% for the six months
ended June 30, 2002 from 33.1% for the six months ended June 30, 2001.

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 24.7% to $2.4 million for the six
months ended June 30, 2002 from $3.2 for the six months ended June 30, 2001.
Research and development expenses as a percentage of total revenue decreased to
17.7% for the six months ended June 30, 2002 from 22.6% for the six months ended
June 30, 2001. The decrease is due to reductions in engineering expenses and
staff as a result of the development of Split Bridge(R) technology, which was
largely developed in 2000 and the early part of 2001.

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. For the six months ended June 30,
2001, general and administrative expenses also included goodwill amortization of
$310,000 relating to the acquisition of Magma in October, 2000. General and
administrative expenses decreased 15.3% to $3.4 million for the six months ended
June 30, 2002 from $4.1 million for the six months ended June 30, 2001. The
decrease is due primarily to cost reduction efforts of management and the
reduction in amortization expense as a result of the application of FAS 142.
General and administrative expenses as a percentage of total revenue decreased
to 25.3% for the six months ended June 30, 2002 from 28.7% for the six months
ended June 30, 2001.

Interest, net. Interest, net consists primarily of interest earned on our
cash balances and short-term investments, net of interest expense. Net interest
income for six months ended June 30, 2002 was $401,000 compared to $811,000 for
the six

-17-

months ended June 30, 2001. The change was primarily due to the reduction in
cash balance from June 30, 2001 to June 30, 2002.

Income taxes. We have incurred losses from inception to date; therefore, no
provision for income taxes was required for the six months ended June 30, 2002
and 2001.

LIQUIDITY AND CAPITAL RESOURCES

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 $2.4 million
and $9.3 million for the six months ended June 30, 2002 and 2001, respectively.
Net cash used in operating activities for the six months ended June 30, 2002 was
primarily attributed to our net loss and increases in prepaid expenses and
reductions in accounts payable and accrued expenses. Cash used in operating
activities was offset, in part, by decreases in accounts receivable and
inventories, non-cash expenses such as depreciation of property and equipment,
amortization of deferred compensation and intangibles, loss on the sale of
assets, and provision for obsolete inventory.

Our investing activities provided cash of $51,000 for the six months ended
June 30, 2002 and used cash of $2.5 million for the six months ended June 30,
2001. Cash provided by investing activities resulted primarily from cash
acquired from Portsmith, offset by purchases of property and equipment. For the
six months ended June 30, 2001, cash used in investing activities was for the
purchase of property and equipment, advances under a note receivable and the
exercise of stock purchase warrant.

Our net financing activities generated cash of $57,000 for the six months
ended June 30, 2002 and used cash of $20,000 for the six months ended June 30,
2001.

Our cash and cash equivalents decreased to $12.5 million at June 30, 2002
compared to $14.8 million at December 31, 2001. Our net working capital at those
same dates was $14.7 million and $19.4 million, respectively. At June 30, 2002
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 June 30, 2002, we had approximately $68.7 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 June 30, 2002, we had future commitments relating to various
non-cancelable operating leases totaling approximately $3.1 million, payable
over the next six years, with approximately $400,000 payable in 2002, $550,000
payable in 2003, $650,000 payable in 2004, $400,000 payable is 2005, $400,000
payable in 2006, $400,000 payable in 2007, and $300,000 payable in 2008.

Recently Issued Accounting Standards:

In April 2002, the FASB issued Statement of Financial Accounting Standard
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS No. 145), which addresses
financial accounting and reporting for reporting gains and losses from
extinguishment of debt, accounting for intangible assets of motor carriers and
accounting for leases. SFAS No. 145 requires that gains and losses from the
early extinguishment of debt should not be classified as extraordinary, as
previously required. SFAS No. 145 also rescinds Statement 44, which was issued
to establish accounting requirements for the effects of transition to the
provisions of the Motor Carrier Act of 1980 (Public Law 96-296, 96th Congress,
July 1, 1980). Those transitions are completed; therefore, Statement 44 is no
longer necessary. SFAS No. 145 also amends Statement 13 to require
sale-leaseback accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also makes
various technical corrections to existing pronouncements. Those corrections are
not substantive in nature. The provisions of this statement relating to
Statement 4 are applicable in fiscal years beginning after May 15, 2002. The
provisions of this Statement related to Statement 13 are effective for
transactions occurring after May 15, 2002. All other provisions of this
Statement are effective for financial statements issued on or after May 15,
2002. The adoption of SFAS NO. 145 is not expected to have a material impact on
our consolidated financial statements.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Exit or Disposal Activities (SFAS NO. 146). SFAS No. 146
addresses the recognition, measurement and reporting of costs associated with
exit and disposal activities, including restructuring activities. SFAS No. 146
also addresses recognition of certain costs related to terminating a contract
that is not a capital lease, costs to consolidate facilities or relocate
employees and termination of benefits provided to employees that are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred compensation
contract. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company is in the process of evaluating
the adoption of SFAS No. 146 and its impact on the financial position or results
of operations of the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks in the ordinary course of 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 and other short term, highly liquid investments, which are subject to
minimal credit and market risk. We believe that the market risks associated with
these financial instruments are immaterial.

-18-

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS:

Mobility Electronics, Inc. v. Comarco, Inc. and Comarco Wireless
Technologies, Inc. No. CIV01-1489 PHX MHM was filed on August 10, 2001 in the
United States District Court for the District of Arizona. In this lawsuit, we
allege infringement of U.S. Patent No. 5,347,211 entitled "Selectable Output
Power Converter." We have amended our 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 Nos. 6,172,884,
6,091,661 and 5,838,554. The defendants filed a Motion to Dismiss, which was
denied by the Court on July 26, 2002. We intend to continue to vigorously pursue
our 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, which we
acquired in February 2002. 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, attorneys' fees and costs. We have filed an answer denying all material
allegations and have asserted a counterclaim for fraud and breach of contract.
This lawsuit is in the initial stages and our legal counsel cannot express an
opinion as to the outcome of this action. 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. We intend to vigorously defend itself
against the claims in this lawsuit.

Mobility Electronics, Inc. v. General Dynamics OTS, Inc., pending in The
United States District Court for the District of Arizona, Docket No. Civ '02
0736 PHX JAT. This is a suit for declaratory judgment brought by Mobility
arising out of a dispute involving a trademark license agreement with General
Dynamics OTS, Inc., the owner of the trademark "EmPower." General Dynamics has
contended that it is owed approximately $710,000 in back royalties and interest
based upon its interpretation of the license agreement. Under Mobility's
interpretation of the license, the royalties owed are substantially less.
Mobility commenced this litigation on April 19, 2002, in order to have the Court
construe the disputed terms of the license agreement and determine the amount
owed by Mobility. General Dynamics has not yet answered or otherwise responded
to the suit. 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 Mobility may
ultimately be liable for any or all of the damages sought by General Dynamics.
We intend to vigorously pursue the claims made in this lawsuit.

We are from time to time involved in various legal proceedings other than
those set forth above 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

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.

Effective as of May 7, 2002, the Company issued 50,000 shares of common
stock to each of Joan W. Brubacher, Darryl S. Baker, Ed Romascan and Tim S.
Jeffries at a purchase price of $1.40 per share, for a total issuance of 200,000
shares. Each executive executed and delivered to the Company a three-year
promissory note, in the original principal amount of $70,000, and bearing
interest at the rate of 6% per annum. These promissory notes are secured by the
shares of common stock so issued.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

The annual meeting was held on May 22, 2002, at which meeting
stockholders were asked to consider and vote upon the election of three
directors whose terms of office expired in 2002 and the approval of an amendment
to the Amended and Restated 1996 Long Term Incentive Plan to increase the shares
authorized under the plan from 2,500,000 to 3,000,000 shares.

-19-

Additionally, the stockholders voted to approve an Amendment to the
plan with 11,797,120 shares voting for, 497,222 shares voting against, 48,038
shares abstaining and 0 broker non-votes.

ITEM 5. OTHER INFORMATION:

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:

(a) Exhibits:

Exhibit
Number Description

3.1 -- Certificate of Incorporation of the Company.(1)

3.2 -- Articles of Amendment to the Certificate of Incorporation of
the Company dated as of June 17, 1997.(3)

3.3 -- Articles of Amendment to the Certificate of Incorporation of
the Company dated as of September 10 1997.(1)

3.4 -- Articles of Amendment to the Certificate of Incorporation of
the Company dated as of July 20, 1998.(1)

3.5 -- Articles of Amendment to the Certificate of Incorporation of
the Company dated as of February 3, 2000.(1)

3.6 -- Certificate of Designations, Preferences, Rights and
Limitations of Series C Preferred Stock.(1)

3.7 -- Amended Bylaws of the Company.(1)

3.8 -- Certificate of the Designations, Preferences, Rights and
Limitations of Series D Preferred Stock.(2)

3.9 -- Articles of Amendment to the Certificate of Incorporation of
the Company dated as of 2000.(3)

4.1 -- Specimen of Common Stock Certificate.(4)

4.2 -- Form of 12% Convertible Debenture of the Company.(1)

4.3 -- Registration Rights Agreement by and between the Company and
Miram International, Inc. dated July 29, 1997. (1)

4.4 -- Placements for the Purchase of Up To 900 Units, Each
Consisting of 1,000 shares of the Company's Common stock.(1)

4.5 -- Form of Unit Purchase Agreement used in 1997 Private
Placements for the Purchase of Up To 875 Units, Each
Consisting of 2,000 shares of the Company's Common stock and
warrants to purchase 500 shares of the Company's Common
Stock. (1)

4.6 -- Form of 13% Bridge Promissory Note and Warrant Purchase
Agreement used in March 1999 Private Placement. (1)

4.7 -- Form of 13% Bridge Promissory Note and Warrant Purchase
Agreement used in March 1999 Private Placement.(1)

4.8 -- Form of 13% Bridge Promissory Note and Warrant Purchase
Agreement used in July 1999 Private Placement.(1)

4.9 -- Form of 13% Bridge Note issued in July 1999 Private
Placement.(1)

4.10 -- 13% Bridge Note Conversion Notice expired March 31, 1999.(1)

4.11 -- Form of Series C Preferred Stock Purchase Agreement used in
1998 and 1999 Private Placements.(1)

4.12 -- Form of Series C Preferred Stock and Warrant Purchase
Agreements used in 1999 and 2000 Private Placements.(1)

4.13 -- Series C Preferred Stock Purchase Agreement executed May 3,
1999, between the Company, Philips Semiconductors VLSI, Inc.
(f/k/a VSLI Technology, Inc.) and Seligman Communications
and Information Fund, Inc.(1)

4.14 -- Amended and Restated Stock Purchase Warrant issued by the
Company to Finova Capital Corporation (f/k/a Sirrom Capital
Corporation) dated as of March 25, 1998.(1)

4.15 -- Stock Purchase Warrant issued by the Company to Finova
Capital Corporation (f/k/a Sirrom Capital Corporation) dated
as of March 25, 1998.(1)

-20-

4.16 -- Series C Preferred Stock and Warrant Purchase Agreement
dated October 29, 1999, between the Company and Seligman
Communications and Information Fund, Inc.(1)

4.17 -- Contribution and Indemnification Agreement by and among
Janice L. Breeze, Jeffrey S. Doss, Charles R. Mollo, Cameron
Wilson, the Company and certain Stockholders of the Company
dated April 20, 1998.(1)

4.18 -- Form of Warrant to Purchase common stock of the Company
issued to certain holders in Connection with that certain
Contribution and Indemnification Agreement by and among
Janice L. Breeze, Jeffrey S. Doss, Charles S. Mollo, Cameron
Wilson, the Company and certain Stockholders of the Company
dated April 20, 1998.(1)

4.19 -- Form of Warrant to Purchase common stock of the Company
issued to certain holders in Connection with that certain
Contribution and Indemnification Agreement by and among
Janice L. Breeze, Jeffrey S. Doss, Charles S. Mollo, Cameron
Wilson, the Company and certain Stockholders of the Company
dated November 2, 1999.(2)

4.20 -- Form of Warrant to Purchase Common Stock of the Company
issued in the 1997 Private Placement. (2)

4.21 -- Form of 13% Bridge Note issued in March 1999 Private
Placement.(2)

4.23 -- Investor Rights Agreement dated October 29, 1999 by and
between the Company and Seligman Communications and
Information Fund, Inc. entered into in connection with The
Series C Preferred Stock and Warrant Purchase Agreement
Series C Preferred Stock and Warrant Purchase Agreement
dated October 29, 1999.(2)

4.24 -- Form of Warrant to Purchase Shares of Common Stock issued in
connection with the Loan Extension Agreement dated February
29, 2000.(2)

4.25 -- Investors' Rights Agreement executed May 3, 1999 between the
Company, Philips Semiconductors VLSI, Inc. f/k/a VLSI
Technology, Inc.) and Seligman Communications and
Information Fund, Inc.(3)

4.26 -- Registration Rights granted by the Company to Cybex Computer
Products Corporation in connection with the Strategic
Partner Agreement dated March 6, 2000.(3)

4.27 -- 13% Bridge Note Conversion Notice used in July 1999 Private
Placement.(5)

10.1 -- Settlement Agreement dated July 18, 2002, by and among Xtend
Micro Products, Inc., iGo Corporation, XMicro Holding
Company, Inc., Mark Rapparport, Mobility Electronics, Inc.,
and each of Institutional Venture Partners VII, L.P., Ken
Hawk, individually and as Trustee of the Kenneth W. Hawk
Grantor Retained Annuity Trust, Peter Gotcher, IVM
Investment Fund VIII, LLC, Robert Darrell Boyle Trustee UTA
dated August 26, 1994, Lauren Reeves Boyle Trustee UTA dated
August 26, 1994, IVM Investment Fund VIII-A, LLC, IVP
Founders Fund, L.P., Ross Bott, Ph.D., David Olson, Scott
Shackelton, Reid W. Dennis and IVP Founders Fund I, L.P.(7)

10.2 -- Depository Agreement made as of July 18, 2002, by and among
U.S. Stock Transfer Corporation, iGo Corporation, Mark
Rapparport, an individual, and XMicro Holding Company,
Inc.(7)

10.3 -- Lock-up and Voting Agreement, dated July 18, 2002 by and
between Mobility Electronics, Inc., iGo Corporation, XMicro
Holding Company, Inc., and Mark Rapparport.(7)

10.4 -- Form of Promissory Note in the principal amount of $70,000
dated May 7, 2002 by and between the Company and each of
Joan W. Brubacher, Darryl S. Baker, Ed Romascan and Tim S.
Jeffries.(**)(*)

10.5 -- Form of Pledge and Security Agreement, dated as of May 7,
2002 by and between the Company and each of Joan W.
Brubacher, Darryl S. Baker, Ed Romascan and Tim S.
Jeffries.(**)(*)

10.6 -- Option Agreement to Purchase Stock, dated as of March 1,
2002 by and between Mobility Electronics, Inc., and Cybex
Computer Products Corporation d/b/a Avocent-Huntsville(*)

10.7 -- Amendment to Option Agreement to Purchase Stock entered into
as of July 18, 2002 by and between Mobility Electronics,
Inc., and Cybex Computer Products Corporation d/b/a/
Avocent-Huntsville(*)

24.1 -- None

99.1 -- Certification of Charles R. Mollo pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 *

99.2 -- Certification of Joan W. Brubacher pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 *

- ----------
* Filed herewith

** Each of these agreements is identical in all material respects except for the
purchasers.

(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.

-21-

(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 Amendment No. 4 to Registration Statement
No. 333-30264 dated May 26, 2000.

(6) Previously filed as an exhibit to Current Report on Form 8-K No. 000-30907
filed on October 17, 2000.

(7) Previously filed as an exhibit to Amendment No. 1 to Registration Statement
No. 333-88078 filed on August 5, 2002.

(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter ended June 30, 2002.

-22-

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

SIGNATURE

Pursuant to the requirements 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.

Dated: August 14, 2002 By: /S/ JOAN W. BRUBACHER
--------------------------------------
Joan W. Brubacher
Vice President and Chief Financial Officer
and Authorized Officer of Registrant
(Principal Financial and Accounting Officer)

-23-

MOBILITY ELECTRONICS, INC.

INDEX TO EXHIBITS

-24-

4.21 -- Form of 13% Bridge Note issued in March 1999 Private
Placement.(2)

4.23 -- Investor Rights Agreement dated October 29, 1999 by and
between the Company and Seligman Communications and
Information Fund, Inc. entered into in connection with The
Series C Preferred Stock and Warrant Purchase Agreement
Series C Preferred Stock and Warrant Purchase Agreement
dated October 29, 1999.(2)

4.24 -- Form of Warrant to Purchase Shares of Common Stock issued in
connection with the Loan Extension Agreement dated February
29, 2000.(2)

4.25 -- Investors' Rights Agreement executed May 3, 1999 between the
Company, Philips Semiconductors VLSI, Inc. f/k/a VLSI
Technology, Inc.) and Seligman Communications and
Information Fund, Inc.(3)

4.26 -- Registration Rights granted by the Company to Cybex Computer
Products Corporation in connection with the Strategic
Partner Agreement dated March 6, 2000.(3)

4.27 -- 13% Bridge Note Conversion Notice used in July 1999 Private
Placement.(5)

10.1 -- Settlement Agreement dated July 18, 2002, by and among Xtend
Micro Products, Inc., iGo Corporation, XMicro Holding
Company, Inc., Mark Rapparport, Mobility Electronics, Inc.,
and each of Institutional Venture Partners VII, L.P., Ken
Hawk, individually and as Trustee of the Kenneth W. Hawk
Grantor Retained Annuity Trust, Peter Gotcher, IVM
Investment Fund VIII, LLC, Robert Darrell Boyle Trustee UTA
dated August 26, 1994, Lauren Reeves Boyle Trustee UTA dated
August 26, 1994, IVM Investment Fund VIII-A, LLC, IVP
Founders Fund, L.P., Ross Bott, Ph.D., David Olson, Scott
Shackelton, Reid W. Dennis and IVP Founders Fund I, L.P.(7)

10.2 -- Depository Agreement made as of July 18, 2002, by and among
U.S. Stock Transfer Corporation, iGo Corporation, Mark
Rapparport, an individual, and XMicro Holding Company,
Inc.(7)

10.3 -- Lock-up and Voting Agreement, dated July 18, 2002 by and
between Mobility Electronics, Inc., iGo Corporation, XMicro
Holding Company, Inc., and Mark Rapparport.(7)

10.4 -- Form of Promissory Note in the principal amount of $70,000
dated May 7, 2002 by and between the Company and each of
Joan W. Brubacher, Darryl S. Baker, Ed Romascan and Tim S.
Jeffries.(**)(*)

10.5 -- Form of Pledge and Security Agreement, dated as of May 7,
2002 by and between the Company and each of Joan W.
Brubacher, Darryl S. Baker, Ed Romascan and Tim S.
Jeffries.(**)(*)

10.6 -- Option Agreement to Purchase Stock, dated as of March 1,
2002 by and between Mobility Electronics, Inc., and Cybex
Computer Products Corporation d/b/a Avocent-Huntsville(*)

10.7 -- Amendment to Option Agreement to Purchase Stock entered into
as of July 18, 2002 by and between Mobility Electronics,
Inc., and Cybex Computer Products Corporation d/b/a/
Avocent-Huntsville(*)

24.1 -- None

99.1 -- Certification of Charles R. Mollo pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 *

99.2 -- Certification of Joan W. Brubacher pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 *

- ----------
* Filed herewith

** Each of these agreements is identical in all material respects except for the
purchasers.

(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 Amendment No. 4 to Registration Statement
No. 333-30264 dated May 26, 2000.

(6) Previously filed as an exhibit to Current Report on Form 8-K No. 000-30907
filed on October 17, 2000.

(7) Previously filed as an exhibit to Amendment No. 1 to Registration Statement
No. 333-88078 filed on August 5, 2002.

All other schedules and exhibits are omitted because they are not
applicable or because the required information is contained in the Financial
Statements or Notes thereto.

-25-