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, 2002

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)

17800 N. PERIMETER DRIVE, SUITE 200 85255
SCOTTSDALE, ARIZONA (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(480) 596-0061

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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2). Yes [ ] No [X]
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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 21, 2003 of
$1.35 was $27,507,246. Shares of voting stock held by each officer and director
and by each person who owns 10% or more of the registrant'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 registrant does not have any outstanding
shares of non-voting common equity.

The number of shares outstanding of the registrant's common stock as of
March 21, 2003 was: 20,375,738 shares of common stock.
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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement relating to its
Annual Meeting of Stockholders to be held on May 21, 2003 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-3
(No. 333-102926); and

- other factors to which this report refers.

ITEM 1. BUSINESS

THE COMPANY

Our mission is to provide innovative mobile computing solutions for
notebook computer, PDA (personal digital assistant), Pocket PC, Tablet PC,
smartphone, and other mobile computing device users. We were founded in 1995 and
our early focus was on the development of remote peripheral component interface,
or PCI bus, technology and products based on our proprietary Split Bridge(R)
technology. We have had some success with Split Bridge(R) in the corporate
notebook computer market and will continue to pursue opportunities with both our
Split Bridge(R) technology and products. However, early in 2002 we reached a
decision to create a broader base of innovative mobile computing solutions by
capitalizing on our base of technology, distribution channels and unique
products. As a result, we are currently pursuing our mission through the design,
development and marketing of products and technologies in four major categories:
power products, handheld products, expansion products, and accessory products.

Our power products include a combination AC and DC power adapter that can
be used to simultaneously charge a notebook computer and a cell phone or PDA in
a vehicle, an airplane, a home, or an office; a series of DC to DC or auto/air
power adapters; and batteries for notebook computers. Our handheld products
include Ethernet and modem cradles for both powering handheld devices and
connecting them to the internet; a group of presentation products that allow
users to display presentations from their handheld devices; and software
products to allow the use of presentation, word processing and spreadsheet
programs on handheld devices. Our expansion products include a variety of PCI
expansion devices designed to increase the storage capacity and computing
capability of notebook or desktop computers. Our accessory products include port
replicators based on our Split Bridge(R) technology, monitor stands and a
variety of other accessories for the mobile computing device user.

We have only one operating business segment, the sale of peripheral
computer equipment. During the past three years, our revenues were derived
primarily from a mixture of all four of our product categories, as well as some
revenues from technology transfer fees.

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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 power product technology, expansion technology,
CardBus technology, Split Bridge(R) technology and handheld technology and to
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 previously did not
exist. To effectively leverage our product portfolio, we also intend to actively
pursue corporate and product branding initiatives.

Establish Licensing and Strategic Partnerships. We have licensed and
intend to continue to license our technologies and to enter into strategic
alliances in order to realize the market potential of our intellectual property.

Broaden Distribution Capabilities Worldwide. We currently sell our
products worldwide through distributors, value-added resellers, retailers, the
internet, and private label partners. We believe that broadening the
distribution of our products through strategic alliances with a variety of
companies within the computer and telecommunications industries 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 and telecommunications original equipment manufacturers, or OEMs,
by partnering with OEMs globally. 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 will continue 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 October 2000, we acquired all of the assets of Mesa Ridge Technologies,
Inc. d/b/a MAGMA, a developer and marketer of PCI expansion products for the
computer industry which utilizes traditional PCI bridge technology and MAGMA's
patented expansion technology. The acquisition of MAGMA solidified Mobility's
position as a market leader in the PCI expansion business by providing products,
distribution channels, key customers, and additional resources that can
accelerate Mobility's 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

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

In August 2002, we acquired Cutting Edge Software, Inc., a leading
developer and marketer of software products for hand held computing devices.
Cutting Edge Software currently provides software for integration with certain
Portsmith products and also independently markets its products to a broad range
of customers.

In September 2002, we acquired iGo Corporation (now iGo Direct
Corporation), a leading mobile computer solution provider. We have subsequently
integrated the iGo operations into our infrastructure. This acquisition provides
us with substantial additional North American distribution channels for all our
products, certain additional products, and an extensive customer base.

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 17800 North Perimeter Drive, Suite 200, Scottsdale, Arizona
85255, 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 OUR SOLUTIONS

MARKET OPPORTUNITY

According to IDC, the market for portable computers is expected to grow at
a compounded annual growth rate of about 15% from 29.3 million units in 2002 to
about 52.0 million units in 2006. According to Dataquest, the market for
handheld computing devices is expected to grow at a compounded annual growth
rate of about 25% from 12.1 million units in 2002 to about 29.5 million units by
2006. According to In-stat/MDR, the emerging market for smartphone devices is
expected to reach approximately 15.8 million units in 2006. Each of these
devices, totaling about 97 million units by 2006, represents an opportunity for
one or more of Mobility's products.

POWER PRODUCTS AND ACCESSORIES

A major issue for mobile computing device users 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 use 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 in
carrying multiple power adapters and in having access to an appropriate 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. Mobile users need
access to power anywhere and everywhere -- in their office, in the air and in
their vehicle. Third, the mobile user is inconvenienced because 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
and briefcases. Last, power connectors and device requirements are proprietary.
As a result users must typically purchase their adapters from notebook computer,
mobile

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phone and PDA manufacturers. This phenomenon generally results in high prices
and limits easy access to adapter solutions.

We believe that we are well positioned to provide a variety of power
solutions to mobile computing users. We recently were the first in the industry
to introduce a combination AC and DC power adapter, called Juice(TM), which
allows the simultaneous charging of a portable computer and a secondary
device -- such as a mobile phone or PDA -- in a vehicle, an airplane, a home, or
an office. We also 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 vehicle, a boat, or an airplane, as well as a range of batteries for
portable computers. Our current major customers for these products include the
computer original equipment manufacturers or OEM's, such as Gateway, Apple,
Winbook, Sotec, IBM, Toshiba and others. We are also developing a variety of
complementary power products that we plan to introduce throughout 2003.

For the years ended December 31, 2002, 2001 and 2000, this product category
represented 25.9%, 46.1% and 42.7% of our consolidated revenues, respectively.

HANDHELD PRODUCTS

Today's connectivity devices for handheld PCs, also known as cradles, are
designed to recharge the device's battery and 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 are the difficulties 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. 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 or modem, 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 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 intelligent
cradles that power the device and connect to the internet over an integrated
Ethernet or modem in the cradle; a family of presentation devices, called Pitch,
that allow the user of a PDA or smartphone to display and make presentations on
any monitor or power point projector; and software products that allow users of
Palm operating systems devices -- such as PDA's and smartphones -- to use
presentation, word processing and spreadsheet programs on their handheld device.
These products are marketed to major OEM's such as Symbol and Palm, cellular
phone manufacturers such as Kyocera, 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.

For the year ended December 31, 2002, this product category represented
30.8% of our consolidated revenues. This product category did not exist for
Mobility during the years 2001 and 2000.

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

5

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, we believe that the majority of growth in the
personal computing industry will be driven by the introduction and adoption of
more powerful, portable and flexible notebook computers as primary computing
devices, which will replace desktop machines. Because of their architecture and
small form factor, notebook 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 position as a
market leader 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(R) 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. We provide these products to a range of industries, including
audio/video editing, test and measurement, industrial automation, broadcast,
telephony, and others that 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 for portable computers,
desktop computers and servers, including PCI to PCI expansion, CardBus to PCI
expansion, Switched Fabric Expansion, Split Bridge(R) and other non-enclosed
links and board sets, and Seriel PCI and SBus products.

Our expansion customers include value added reseller and OEM's such as
Agilent, DigiDesign, a division of Avid, Cisco, NBC, AMD, Intel, and many
others. For the years ended December 31, 2002, 2001 and 2000, this product
category represented 22.3%, 27.1% and 27.6% of our consolidated revenues,
respectively.

ACCESSORIES

We also market a number of portable computing accessory products, such as
port replicators that incorporate our Split Bridge(R) technology, monitor
stands, cellular accessories, and portable computer stands. Our most significant
customer in this product category is IBM. For the years ended December 31, 2002,
2001 and 2000, this product category represented 18.0%, 25.4% and 22.2% of our
consolidated revenues, respectively.

TECHNOLOGY TRANSFER FEES

Technology transfer fees consist of revenue derived by us from licensing
and transferring our Split Bridge(R) and handheld docking cradle technology and
architecture. For the years ended December 31, 2002, 2001 and 2000, technology
transfer fees represented 3.0%, 1.4% and 7.5% of our consolidated revenues,
respectively.

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. These relationships include the following:

TECHNOLOGY/RESEARCH AND DEVELOPMENT

Arizona Digital, Inc. is a developer of PCB boards that increase
functionality of passive backplanes. Mobility has exclusively licensed this
technology for use with PCI-based products and has implemented

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this technology to reduce cost, to increase performance and reliability of our
expansion products, and to provide increased PCI slot expansion capabilities.

Hotwire Development, LLC conceptualizes and designs innovative products for
the high-tech industry. It is led by Jeffrey S. Doss, one of our original
founders. Hotwire currently provides us with industrial design services and
works with our in-house design team to generate innovative product concepts.

CONTRACT MANUFACTURERS

Hipro Electronics Co., Ltd. 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 and manufacture a number of unique new power
products for the mobile computing user. We launched the first of these products,
Juice(TM), in January 2003 and expect to introduce a number of additional
products throughout 2003.

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

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

Western Electronics LLC is a contract manufacturer with expertise in
complex THT and SMT PCB assembly, as well as other manufacturing functions.
Western currently manufactures Mobility's intelligent cradles and presentation
devices for handheld computing devices.

FULFILLMENT SERVICES

PFSweb, Inc. is a world-class provider of integrated business
infrastructure solutions and fulfillment services. We have entered into an
agreement with PFSweb to provide hosting and development services for our iGo
Direct website, www.iGo.com. In addition, PFSweb provides warehousing, packaging
and fulfillment services for our products to the bulk of our customers in our
various distribution channels. Our relationship with PFSweb will enable us to
efficiently and economically support the anticipated growth across all our
product categories.

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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 62.4% and 12.3%, respectively, of net product sales for the year ended
December 31, 2002. IBM, who buys brand labeled monitor stands, power products
and portable device bays, accounted for 20.3% of our net product sales for the
year ended December 31, 2002. Symbol, who buys serial and modem cradles for
handheld computing devices, accounted for 19.8% of our net product sales for the
year ended December 31, 2002. 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.

Export sales were approximately 14% of net product sales for the year ended
December 31, 2002. The principal international market we serve is Europe.

As is generally the practice in our industry, 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 are netted against our reported product sales, were
approximately 5% of net product sales for the year ended December 31, 2002.

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 the sale of our standard
products, whether Mobility branded or private labeled, and the sale of custom
products 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. In Europe, we use an internal sales
organization as well as distribute our products through distributors located in
the United Kingdom.

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We implemented a variety of marketing activities in 2002 to aggressively
market our family of products. Such activities included participation in major
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 pursue a
strong public relations program to continually educate the market about us, our
technologies 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

Mobility outsources the manufacture of most of its products. Our auto/air
power adapters are currently manufactured by Group West in Taiwan. Our AC/DC
combination power adapters are manufactured by Hipro in China. Steman currently
manufactures all of our Mobility branded monitor stands and private label
monitor stands for our OEM customers in Taiwan. Our handheld cradles and
presentation products are manufactured primarily by Western Electronics in
Boise, Idaho.

In-house manufacturing activity is currently limited to the manufacture of
our expansion products. The low volumes as well as the engineering support
required to properly manufacture these products is not compatible with an
outsource manufacturing model. We will continue to build these products in-house
for the foreseeable future.

Some products are shipped to us in bulk quantities, and are not packaged
for delivery to our customers. We currently utilize the services of PFSweb to
break down and package these products with the corresponding operations manuals
and other product documentation.

The principal components of our products are purchased from outside
vendors. Several of these vendors are the sole source of supply of the
components that they supply. Philips Semiconductors, Inc. is currently the sole
supplier of our Split Bridge(R) technology ASIC chips. Molex Incorporated is the
sole supplier of certain system connectors for use with our Split Bridge(R)
docking products. SMK Corporation is the sole supplier of the serial interface
connector used in certain of our serial cradles for handheld products. We
purchase from all three of these vendors on a purchase order basis.

COMPETITION

Our power products primarily compete with products offered by specialized
third party mobile computing accessory companies, including Lind, Targus, RRC in
Germany, and others. Although some of these competitors enjoy greater
distribution coverage and resources, 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 products offered by SBS
Communications, a provider of low cost PCI expansion products. We believe that
we are able to differentiate our products from those of SBS with our backplane
technology, our Split Bridge(R) technology, and certain other innovative
features. We also license our bridging technology to SBS for use in several of
their PCI expansion products.

Our handheld products generally compete with products offered by
specialized third party accessory companies, including Margi and Data Viz. We
believe we have unique products and technology not available from our
competitors at this time. We also believe that we have a competitive advantage
through our strategic alliances with certain key industry leaders.

Generally speaking, the market for computer products 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

9

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
twenty-four patents issued worldwide and over fifty patents pending pertaining
to Split Bridge(R) 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.

In addition, we currently have thirty-eight United States trademark
registrations and twelve pending applications for United States trademark
registration. For most of these trademark registrations, we have also pursued or
are pursuing registration in a variety of foreign markets. 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,
except where restricted by law, whereby the employees are prohibited from
working for our competitors for a period of one year after termination of their
employment and from sharing confidential information with them as long as the
information remains confidential. 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;

- 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
available. Our research and development efforts will focus primarily on
enhancing our current technologies and developing new 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 30 people who are
responsible for both hardware and software design, test and quality assurance.
In addition, industrial design services are provided to us as part of our
strategic alliance with Hotwire and several of our contract manufacturers
provide design services under the supervision of our in-house design team.
Amounts spent on research and

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development for the years ended December 31, 2002, 2001 and 2000 were $5.8
million, $5.6 million and $5.9 million, respectively.

EMPLOYEES

As of December 31, 2002, we had 134 full-time employees, 130 of which are
located in the United States and 4 of which are located in Europe, including 30
employed in operations, 31 in engineering, 46 in sales and marketing and 27 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 corporate offices are located in Scottsdale, Arizona. This facility
consists of approximately 20,182 square feet of leased space pursuant to a lease
for which the current term expires on September 30, 2008. Additionally, we lease
offices in San Diego, California, Boise, Idaho, Dallas, Texas, Reno, Nevada and
Orange County, California. Each of these offices supports our selling, research
and development, and general administrative activities. Our San Diego facility
is also utilized for light assembly of computer peripheral products. Our
warehouse and product fulfillment operations are conducted at a third-party
location in Memphis, Tennessee. We believe our facilities are suitable and
adequate for our current business activities for the remainder of the lease
terms.

ITEM 3. LEGAL PROCEEDINGS

Richard C. Liggitt, a former stockholder of Portsmith, filed a claim (Case
No. 02CC03308 filed February 22, 2002 in the Superior Court of the State of
California, County of Orange, Central Judicial District) against Portsmith and
certain of its officers and directors alleging (a) fraud in connection with
merger negotiations that led to the execution of a merger agreement between a
company owned by Mr. Liggitt and Portsmith, (b) wrongful termination of his
employment with Portsmith, and (c) breach of the implied covenant of good faith
and fair dealing under his employment agreement with Portsmith. During November
2002, the parties reached a settlement. Under the terms of the settlement, we
paid $10,000 upon approval of the settlement by the Court. Contemporaneously, we
agreed to pay Mr. Liggitt an aggregate of $990,000 in exchange for cancellation
of all of Mr. Liggitt's rights as a former shareholder of Portsmith under the
merger agreement between Portsmith and us, including, but not limited to, the
53,647 shares of our common stock Mr. Liggitt received in connection with the
merger, the 53,646 shares of our common stock that had been held in escrow that
Mr. Liggitt would have otherwise been entitled to receive and Mr. Liggitt's
share in any potential earn-out payments. The $990,000 will be paid in the form
of a convertible subordinated promissory note bearing interest at four percent
per year, payable in quarterly installments of principal and interest beginning
in January 2003, through December 2005. The outstanding principal of the
promissory note may be converted by Mr. Liggitt at any time into shares of our
common stock, at a conversion price of $3.00 per share. In connection with this
settlement, the potential earn-outs under the merger agreement between Portsmith
and us will be reduced by $480,000, plus a certain additional amount for fees
and expenses and a tax settlement, and Mr. Liggitt's share of the potential
earn-outs will be eliminated.

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, we allege infringement of
U.S. Patent No. 5,347,211 entitled "Selectable Output Power Converter." Our
Amended Complaint also seeks 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 February 4, 2003, we
moved to amend our Complaint again, including adding Targus Group International
as a defendant for infringement of our Patent No. 5,347,211. This Motion was
granted, and our Second Amended Complaint adding Targus Group International was
filed on March 3, 2003. We intend to vigorously pursue our claims in this
litigation.
11

Comarco Wireless Technologies, Inc. v. Xtend Micro Products, Inc. and iGo
Corporation (n/k/a iGo Direct Corporation); No. CIV-02-2201 was filed on June
21, 2002 in the United States District Court for the District of Arizona. This
suit is currently pending in Phoenix. Xtend Micro Products is a subsidiary of
our subsidiary, iGo Direct Corporation. It was initially filed in California but
was transferred to Phoenix based on the motion of iGo Corporation and Xtend
Micro Products, the two defendants. It has been consolidated for purposes of
discovery with the case referenced above brought by us against Comarco, Inc. and
Comarco Wireless Technologies. In this litigation, Comarco claims infringement
of its U.S. Patent Nos. 6,172,884 and 6,091,661. We intend to vigorously pursue
our defenses.

Comarco Wireless Technologies, Inc. v. Mobility Electronics, Inc., Hipro
Electronics Company, Ltd., and iGo Direct Corporation; No. CIV-03-0202; in the
United States District Court for the District of Arizona. Comarco instituted yet
a third lawsuit involving the same patents when it filed its complaint in this
case on January 31, 2003 in the United States District Court for the District of
Arizona. This case, by order of the court, has been consolidated with the case
previously filed by Mobility for purposes of discovery. In this case, Comarco
claims infringement of its U.S. Patent Nos. 6,172,884 and 6,091,661. Comarco has
filed a motion for preliminary injunction which is set for hearing on June 12,
2003. We intend to vigorously defend against the claims in the lawsuit as well
as pursue our own claims that were brought in the previously filed suit.

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 was filed on April 19, 2002. This is a suit for declaratory
judgment arising out of a dispute involving a trademark license agreement with
General Dynamics OTS, Inc., the owner of the trademark "EmPower." General
Dynamics contends that we owe approximately $710,000 in back royalties and
interest based upon its interpretation of the license agreement. Under our
interpretation of the license, the royalties owed are substantially less. We
commenced this litigation in order to have the court construe the disputed terms
of the license agreement and determine the amount we owed. General Dynamics
filed a counterclaim in the litigation seeking damages for breach of the license
agreement and a declaration of its rights under the agreement. The parties
entered into a settlement agreement with respect to the litigation on March 17,
2003 pursuant to which we will obtain a ten year trademark license from General
Dynamics in exchange for $400,000, plus $1,000 in interest charges, payable in
installments as follows: $201,000 on April 1, 2003, $125,000 payable on January
15, 2004 and $25,000 payable on each of January 15, 2005-2007. In connection
with this license, we agreed to pay to General Dynamics an annual maintenance
fee of $25,000 payable on each of January 15, 2009-2013. The license may be
terminated by us at any time, without further obligation, at any time on and
after December 31, 2008.

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

No matter was submitted to a vote of stockholders during the fourth quarter
of 2002.

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

12

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.

As of March 21, 2003, we had 520 stockholders of record.

We have never paid cash dividends on our common stock, and it is the
current intention of management to retain earnings to finance the growth of our
business. We are currently restricted from paying dividends in accordance with
the terms of our bank line of credit. Future payment of cash dividends will
depend upon financial condition, results of operations, cash requirements, tax
treatment, and certain corporate law requirements, loan covenant requirements,
as well as other factors deemed relevant by our Board of Directors.

We incorporate by reference the Equity Compensation Plan Information
contained under the heading "Executive Compensation -- Securities Authorized for
Issuance Under Equity Compensation Plans," from our definitive Proxy Statement
to be delivered to our shareholders in connection with the 2003 Annual Meeting
of Shareholders scheduled for May 21, 2003.

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, we determined that the purchasers of securities
described below were sophisticated investors who had the financial ability to
assume the risk of their investment in our 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.

In February 2002, we acquired all of the issued and outstanding stock of
Portsmith, Inc. The compensation we paid to the former Portsmith stockholders
was comprised of 800,000 shares of our common stock, of which 400,000 shares
were placed in escrow for the former 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 during the first year after the
acquisition, through December 31, 2002, which payments may be made in cash
and/or shares of our common stock, subject to certain limitations. In December
2002, the 400,000 escrow shares were issued to the former Portsmith
stockholders. Contemporaneously with the settlement of a lawsuit, we reacquired
107,293 shares of our common stock that had been previously issued to a former
Portsmith stockholder, resulting in a total of 692,707 shares of common stock
issued to former Portsmith stockholders, and we reduced the earn-out payments to
be payable to the former Portsmith stockholders. The settlement and acquisition
of the shares is discussed below.

Richard C. Liggitt, a former stockholder of Portsmith, filed a claim
against Portsmith and certain of its officers and directors alleging (a) fraud
in connection with merger negotiations that led to the execution of a merger
agreement between a company owned by Mr. Liggitt and Portsmith, (b) wrongful
termination of his employment with Portsmith, and (c) breach of the implied
covenant of good faith and fair dealing

13

under his employment agreement with Portsmith. During November 2002, the parties
reached a settlement. Under the terms of the settlement, we paid $10,000 upon
approval of the settlement by the Court. Contemporaneously, we agreed to pay Mr.
Liggitt an aggregate of $990,000 in exchange for cancellation of all of Mr.
Liggitt's rights as a former shareholder of Portsmith under the merger agreement
between the Company and Portsmith, including, but not limited to, the 53,647
shares of our common stock Mr. Liggitt received in connection with the merger,
the 53,646 shares of our common stock that had been held in escrow that Mr.
Liggitt would have otherwise been entitled to receive and Mr. Liggitt's share in
any potential earn-out payments. The $990,000 will be paid in the form of a
convertible subordinated promissory note bearing interest at four percent per
year, payable in quarterly installments of principal and interest beginning in
January 2003, through December 2005. The outstanding principal of the promissory
note may be converted by Mr. Liggitt at any time into shares of our common
stock, at a conversion price of $3.00 per share. In connection with this
settlement, the potential earn-outs under the merger agreement between Portsmith
and us will be reduced by $480,000, plus a certain additional amount for fees
and expenses and a tax settlement, and Mr. Liggitt's share of the potential
earn-outs will be eliminated.

In May 2002, we issued 50,000 shares of our common stock to each of Joan W.
Brubacher, Darryl S. Baker, Ed Romascan and Timothy S. Jeffries, our employees
at the time, at a purchase price of $1.40 per share, for a total issuance of
200,000 shares. Each executive executed and delivered to us 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.

In August 2002, we issued 796,394 shares of our common stock to Jeff Musa
in connection with our acquisition of all of the stock of Cutting Edge Software,
Inc. See "Business" for a description of this acquisition.

In January 2003, we issued and sold 865,051 shares of newly designated
Series E preferred stock, par value $0.01 per share, at a purchase price of
$0.7225 per share, and 729,407 shares of newly designated Series F preferred
stock, par value $0.01 per share, at a purchase price of $0.85 per share. In
connection with this sale, we also issued warrants to purchase an aggregate of
559,084 shares of our common stock. The warrants issued to holders of Series E
Stock permit them to purchase an aggregate of 216,263 shares of common stock, at
an exercise price of $0.867 per share (the "Series E Warrants"), and the
warrants issued to holders of Series F Stock permit them to purchase an
aggregate of 342,821 shares of common stock, at an exercise price of $1.02 per
share (the "Series F Warrants"). The Series E Stock was purchased by a single
non-affiliated investor, while the Series F Stock was purchased by certain of
our officers and directors and their affiliates including Charles Mollo, Jeffrey
Harris, Larry Carr, Joan Brubacher, Timothy Jeffries, Janice Breeze-Mollo, Oxley
LLLP, New Vistas Investment Corporation and New Horizons Enterprises.

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, 2002 are derived from our consolidated
financial statements, which consolidated financial statements have been audited
by KPMG LLP, independent certified public accountants. The consolidated
financial statements as

14

of December 31, 2002 and 2001 and for each of the years in the three-year period
ended December 31, 2002, are derived from our consolidated financial statements,
included elsewhere in this Form 10-K.

15

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

(1) See "Critical Accounting Policies And Estimates -- Goodwill" under Item 7.
for a description of this item.

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

We design, develop and market power, connectivity, and accessory products
and solutions for the mobile computing user. This includes (1) various AC and DC
power adapters and batteries that allow the user to power a notebook computer in
an office, a home, a car, an airplane, or a boat, (2) a variety of cradle and
connectivity products and software for handheld devices, (3) a variety of
accessories for portable computers such as monitor stands, travel adapters, and
the like, and (4) universal docking products and remote peripheral component
interface, or PCI bus, technology and products using our proprietary PCI
expansion and Split Bridge(R) technologies. To date, our revenues have come
predominantly from AC and DC power adapters, accessories, handheld connectivity
products, and expansion products. We expect revenues from those products to
continue and also expect to see increasing revenues primarily from current and
new power and handheld products and solutions as we further expand our markets
and distribution channels for these products.

We sell our products to OEMs, distributors, resellers, retailers, and
end-users. A substantial portion of our net product sales is concentrated among
a number of OEMs, including Symbol, IBM, Gateway, Hewlett-Packard, NEC, and
Toshiba. A portion of our sales to IBM are made through Kingston Technologies,
who acts as our fulfillment hub manager for sales in the United States and
Malaysia. Direct sales to OEMs accounted for approximately 62% of net product
sales for the year ended December 31, 2002 and approximately 72% of net product
sales for the year ended December 31, 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.

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
each of the years ended December 31, 2002 and 2001. The major distributors are
allowed to return up to 20% 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 material portion of our net product sales outside the United
States, principally in Europe. International sales accounted for approximately
14% of our net product sales for the year ended December 31, 2002 and
approximately 30% 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.

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.

16

We have experienced significant operating losses since inception and, as of
December 31, 2002, we have an accumulated deficit of approximately $100.5
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.

Operating expenses for the year ended December 31, 2002 totaled $21.1
million as compared to $23.7 million for the year ended December 31, 2001. We
anticipate that in the future we will make additional investments in our sales
and marketing activities and, as a result, operating expenses will increase. We
intend to make such investments on an ongoing basis, from cash generated from
operations and, if available, from lines of credit and other sources of
financing, 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 our position as a market leader 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.

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 August 2002, we acquired Cutting Edge Software, Inc., a leading
developer and provider of software solutions for handheld computing devices.
Cutting Edge Software currently provides software that allows users of Palm
operating system devices to utilize popular word processing, spreadsheet and
presentation programs. Cutting Edge Software has also developed software that
allows users to remotely access files stored on a desktop computer from a
wireless PDA or smartphone. This acquisition, in conjunction with the Portsmith
acquisition, enhances our product and service offering within the rapidly
growing wireless handheld computing device market.

In September 2002, we acquired iGo Corporation (now iGo Direct
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 broaden
our revenue base and substantially strengthen our distribution capabilities and
brand identity.

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

17

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 affected 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). Gross sales to the distribution channel accounted for approximately 12%
of net product sales for the year ended December 31, 2002 and approximately 14%
for the year ended December 31, 2001.

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".

GOODWILL

In conjunction with the implementation of Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), we
performed a goodwill impairment evaluation as of January 1, 2002 relating to the
goodwill that was recorded at December 31, 2001. Based on the results of that
impairment evaluation, we determined the recorded goodwill at December 31, 2001
of approximately $5.6 million was fully impaired. We recorded the impairment
write-down as a cumulative effect of change in accounting principle in
accordance with the new accounting standard.

18

As a result of our recent acquisitions of Portsmith, Cutting Edge Software
and iGo during 2002, we have recorded additional goodwill of approximately $8.3
million. In accordance with SFAS No. 142, we evaluated the newly acquired
goodwill for impairment and determined that the recorded goodwill was not
impaired as of December 31, 2002.

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. For these reasons, we believe that the
accounting estimate related to goodwill impairment is a "critical accounting
estimate".

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, 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 increased 8.9% to $30.4 million for the year ended December 31,
2002 from $27.9 million for the year ended December 31, 2001. Revenues for 2002
increased over 2001 primarily as a

19

result of our acquisitions of Portsmith, Cutting Edge Software and iGo during
2002. Approximately $9.2 million of the increase was due to sales of handheld
connectivity products through our Portsmith subsidiary, which we acquired in
February 2002. Approximately $0.5 million of the increase was due to sales of
handheld software products through our Cutting Edge Software subsidiary, which
we acquired in August 2002. Approximately $3.8 million of the increase was due
to sales of AC and DC power adapters, batteries, and accessories through our iGo
subsidiary, which we acquired in September 2002. Sales of expansion and docking
products increased by approximately $0.3 million during 2002. These increases
were partially offset by a decrease of approximately $7.3 million in sales of AC
and DC power adapters primarily due to the termination of our distribution
agreement with Targus, Inc. in December 2001. Sales of USB products decreased by
approximately $1.0 million as a result of a planned exit of that product line
during 2002. Sales of monitor stands and other accessories decreased by
approximately $3.0 million during 2002 as a result of recent general economic
conditions that have contributed to a slow down in sales of computers and
computer-related products and accessories. During 2003, we anticipate revenues
will increase primarily as a result of the introduction of new combination AC
and DC power adapter products and increased sales of handheld connectivity and
software products.

Technology transfer fees. Technology transfer fees consist of revenue from
our licensing and transferring our Split Bridge--Registered Trademark--
technology and other technology and architecture, and related training and
implementation support services. Revenue from technology transfer fees is
recognized ratably over the term of the sales agreement. During the year ended
December 31, 2002, we recognized technology transfer fee revenues of $0.9
million or 3.0% of total revenues. Technology transfer fees represented revenue
of $0.4 million, or 1.4% of total revenues, for the year ended December 31,
2001. The increase of approximately $0.5 million is primarily attributable to
the recognition of technology transfer fees associated with sales of handheld
connectivity architecture from our Portsmith subsidiary during 2002.

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 6.5% to $24.0 million for the
year ended December 31, 2002 from $25.7 million for the year ended December 31,
2002. The decrease in cost of revenue -- product sales was due primarily to a
$3.8 million charge to cost of revenue -- product sales for excess and obsolete
inventory and abandoned tooling for the year ended December 31, 2001. This
decrease was partially offset by a similar charge for excess and obsolete
inventory of $1.2 million during 2002. Cost of revenue -- product sales as a
percentage of net product sales decreased to 76.7% for the year ended December
31, 2002 from 90.7% for the year ended December 31, 2001. Excluding the charges
for excess and obsolete inventory and abandoned tooling, cost of
revenues -- product sales as a percentage of net product sales was 75.0% and
78.6% for the years ended December 31, 2002 and 2001, respectively. The
reduction in cost of revenues -- product sales as a percentage of net product
sales is primarily attributable to the spreading of fixed overhead expenses over
increases in sales volumes. We anticipate cost of revenue -- product sales as a
percentage of net product sales to continue to decrease as future sales volumes
increase and with the anticipated introduction of new, higher-margin products.

Cost of revenue -- technology transfer. Cost of revenue -- technology
transfer consists of engineering expenses related to the Split Bridge(R)
technology and other technology and architecture. There were no costs of
revenue -- technology transfer for the years ended December 31, 2002 and 2001,
as the technology transfer fees for the periods consisted solely of fees for
existing technology.

Gross profit. Gross profit increased to 23.3% of total revenue for the
year ended December 31, 2002 from 9.3% of total revenue for the year ended
December 31, 2001. The gross profit rate increase is due primarily to the $3.8
million charge to cost of revenue -- product sales for excess and obsolete
inventory and abandoned tooling for the year ended December 31, 2001, offset by
a similar charge of approximately $1.2 million during 2002. Excluding these
charges, gross profit was 27.3% and 22.5% for the years ended December 31, 2002
and 2001, respectively. Gross profit was also positively impacted by the change
in product mix during 2002, including the discontinuance of low margin power
product sales to Targus. We

20

expect gross profit as a percent of sales to increase in future periods due to
projected future revenue increases and as a result of the introduction of new,
higher margin products.

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 12.9% to $7.1 million for the
year ended December 31, 2002 from $8.1 million for the year ended December 31,
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 22.6% for the year ended
December 31, 2002 from 28.7% for the year ended December 31, 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 increased 3.3% to $5.8 million for the year
ended December 31, 2002 from $5.6 million for the year ended December 31, 2001.
Research and development expenses as a percentage of total revenue decreased to
18.5% for the year ended December 31, 2002 from 19.8% for the year ended
December 31, 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. The decrease is partially
offset by charges for acquired in-process research and development of $620,000
and the $400,000 write-off of certain tooling equipment related to the
development of a product that was abandoned during the year ended December 31,
2002. Excluding these charges, research and development expense decreased to
$4.8 million or 15.2% of revenues.

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 of $51,000 and $21,000 for 2002 and 2001 respectively, 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. General and administrative expenses decreased 17.3% to $8.2
million for the year ended December 31, 2002 from $10.0 million for the year
ended December 31, 2001. For the year ended December 31, 2001, general and
administrative expenses included a write-off of a $3.0 million loan to a
strategic partner and also included goodwill amortization of $0.6 million
relating to the acquisition of Magma in October 2000. Excluding the 2001 charge
and goodwill amortization, general and administrative expenses for the year
ended December 31, 2002 increased approximately $1.8 million, primarily due to
severance and termination costs and increases in general and administrative
expenses, including personnel, facilities, travel and telecommunications as a
result of the acquisitions of Portsmith, Cutting Edge Software and iGo.
Excluding the 2001 charge and goodwill amortization, general and administrative
expenses as a percentage of total revenue increased to 26.2% for the year ended
December 31, 2002 from 22.4% for the year ended December 31, 2001. 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. Net interest
income for year ended December 31, 2002 was $0.6 million compared to $1.3
million for the year ended December 31, 2001. The change was primarily due to
the reduction in cash balance from December 31, 2001 to December 31, 2002.

Income taxes. We have incurred losses from inception to date; therefore,
no provision for income taxes was required for the years ended December 31, 2002
or 2001.

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

21

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 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.

Technology transfer fees. Technology transfer fees consist of revenue from
the licensing and transferring by the Company of its Split Bridge(R) 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(R)
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
22

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(R) technology, which was largely developed during 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, 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.

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.

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 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. At December 31, 2002 we had approximately $3.2
million and $5.6 million in cash and cash equivalents and working capital,
respectively. At December 31, 2001 we had approximately $14.8 million and $19.4
million in cash and cash equivalents and working capital, respectively.

Our operating activities used cash of $7.6 million, $12.8 million and $14.2
million for the years ended December 31, 2002, 2001 and 2000, respectively. Net
cash used in operating activities for the year ended December 31, 2002 was
primarily attributed to our net loss and increases in inventories, prepaid
expenses and other current assets. Cash used in operating activities was offset,
in part, by a decrease in accounts receivable of $2.3 million, non-cash expenses
such as depreciation of property and equipment and amortization of intangible
assets of $1.3 million, write-off of impaired goodwill of $5.6 million,
acquisition
23

of in-process research and development, write-down of tooling equipment,
amortization of deferred compensation and provision for obsolete inventory.
During 2002, inventories grew by approximately $1.2 million compared to
inventory levels at December 31, 2001 including the write-down of excess and
obsolete inventory of approximately $1.2 million. Other operating expenses, such
as salaries and wages, marketing and selling, professional services fees,
engineering related expenses, and building and facility costs in excess of
revenues contributed to our net loss for 2002 and resulted in a net use of cash.

Our investing activities used cash of approximately $4.3 million, $2.8
million and $6.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively. For the year ended December 31, 2002, cash used in investing
activities was for the acquisitions of Portsmith, Cutting Edge and iGo, and the
purchase of property and equipment. These uses were partially offset by the sale
of an investment during 2002.

Our net financing activities provided cash of approximately $230,000 for
the year ended December 31, 2002, used cash of approximately $17,000 for the
year ended December 31, 2001 and generated cash of approximately $46.0 million
for the year ended December 31, 2000. Net cash was provided by financing
activities for the year ended December 31, 2002 primarily from repayments of
stock subscription receivables and net proceeds from the sale of common stock.

At December 31, 2002, we had approximately $85.9 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, 2002, we had future commitments relating to various
non-cancelable operating leases totaling approximately $2.7 million, payable
over the next six years, with approximately $560,000 payable in 2003, $607,000
payable in 2004, $402,000 payable in 2005, $410,000 payable in 2006, $418,000
payable in 2007, and $320,000 payable thereafter.

At December 31, 2002, we had debt obligations payable over the next three
years, with approximately $330,000 payable in 2003, $330,000 payable in 2004,
and $330,000 payable in 2005.

At December 31, 2002, we had future commitments relating to payments of
earn-out to former Portsmith stockholders in connection with our February 2002
acquisition of Portsmith. The earnout is made up of two components. The first is
calculated using a formula based on Portsmith's revenue and net income
performance, adjusted for certain items, for the year 2002. The Company has
recorded a long-term liability in the amount of $725,000 as an estimate of this
component of the earnout. The second component of the earnout is based on a
percentage of the fair market value of Portsmith as a stand-alone entity as of
December 31, 2002, as mutually agreed upon by the Company and the former
Portsmith stockholders. In the event that the parties are not able to come to an
agreement, the fair market value will be determined by an Independent Financial
Expert as defined in the agreement. As the amount of this component of the
earnout is not yet determinable or issuable, the Company has recorded no
liability for it. Earn-out payments may be made in cash or shares of stock, at
our discretion, with total shares of stock issued to former Portsmith
stockholders not to exceed 3,023,863 shares. We anticipate the payment of
earn-out will be made entirely in shares of common stock and that no future cash
payments will be required.

INTERNAL SOURCES OF LIQUIDITY

During the year ended December 31, 2002, we began several initiatives to
address our overall business structure, including evaluating our key product
lines, distribution channels, our cost structure, and cash management. In
connection with these initiatives, we completed three acquisitions during 2002
and completed development of a key new combination AC/DC power adapter product.
In the fourth quarter of 2002, we began to see favorable results from these
efforts. We believe the continued benefits of these

24

measures will allow us to generate sufficient operating funds from internal
sources to satisfy our liquidity requirements in 2003.

For 2002, our net loss of $18.9 million, adjusted for
non-working-capital-related expenses of $10.1 million, was approximately $8.8
million. Changes in working capital, net of current assets and liabilities
acquired, resulted in cash flow generation of approximately $1.2 million during
2002. We used net cash from investing and financing activities of approximately
$4.0 million, primarily relating to our acquisitions during 2002, which resulted
in our net cash used of approximately $11.6 million.

For 2003, we anticipate further improvement in our operating performance as
a result of the 2002 initiatives. In the fourth quarter of 2002, our revenues
grew to approximately $10.3 million from $7.4 million in the third quarter of
2002. With the introduction of our new combination AC/DC power adapter product
in the first quarter of 2003, we project steady revenue growth through 2003. We
also project improvement in gross margins as increased sales volumes are spread
over our semi-fixed operating overhead structure and with the introduction of
new, higher margin products. We project operating expenses will decrease from
the fourth quarter 2002 level of approximately $5.7 million into the first
quarter of 2003 as we continue to realize cost savings from our acquisition
integration initiatives. We expect operating expenses to remain consistent
throughout 2003. As a result of planned increases in sales, improvements in
gross margins, and leveraging of our operating expenses structure, we project to
generate cash working profits in 2003. However, we expect to use cash in 2003 to
finance growth in accounts receivable and inventories associated with our
projected revenue growth, capital expenditures and repayments of long-term debt.

EXTERNAL SOURCES OF LIQUIDITY

In October 2002, we entered into a $10,000,000 line of credit with a bank.
The line bears interest at prime plus 1.25% (5.5% at December 31, 2002),
interest only payments due monthly, with final payment of interest and principal
on July 31, 2004. The line of credit is secured by all of our assets. The line
of credit is subject to financial covenants, certain of which we were not in
compliance with as of December 31, 2002. However, on March 26, 2002, the terms
and covenants of the line of credit were modified, and we are currently in
compliance with the modified covenants. We have not drawn against the line of
credit as of March 31, 2003. Under the terms of the line, we can borrow up to
80% of eligible accounts receivable, offset by a $1.25 million stop-loss
provision. At February 28, 2003, our net borrowing base capacity was
approximately $1.9 million. We expect our borrowing base will increase
throughout 2003 as a result of projected growth in accounts receivable
associated with projected sales growth.

In January 2003, we raised $1.2 million from an offering of preferred
stock. Specifically, we issued and sold 865,051 shares of newly designated
Series E preferred stock, par value $0.01 per share ("Series E Stock"), at a
purchase price of $0.7225 per share, and 729,407 shares of newly designated
Series F preferred stock, par value $0.01 per share ("Series F Stock"), at a
purchase price of $0.85 per share. In connection with this sale, we also issued
warrants to purchase an aggregate of 559,084 shares of our common stock. The
warrants issued to holders of Series E Stock permit them to purchase an
aggregate of 216,263 shares of common stock, at an exercise price of $0.867 per
share and the warrants issued to holders of Series F Stock permit them to
purchase an aggregate of 342,821 shares of common stock, at an exercise price of
$1.02 per share. The Series E Stock was purchased by a single non-affiliated
investor, while the Series F Stock was purchased by certain of our officers,
directors and affiliates including Charles Mollo, Jeffrey Harris, Larry Carr,
Joan Brubacher, Timothy Jeffries, Janice Breeze-Mollo, Oxley LLLP, New Vistas
Investment Corporation and New Horizons Enterprises.

We believe that our cash and cash equivalents on hand and cash sources,
both internal and external, discussed above will be sufficient to satisfy our
expected cash and working capital requirements for the next twelve months.

25

INFLATION

We do not believe that inflation has a material effect on our operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the FASB issued Statement 143, "Accounting for Asset
Retirement Obligations" ("Statement 143"). Statement 143 requires us to record
the fair value of an asset retirement obligation as a liability in the period in
which we incur a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets and to record a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. We were required to adopt Statement 143 on
January 1, 2003. Statement 143 is not expected to have a material impact on our
results of operations or financial position.

In June 2002, the FASB issued Statement 146, "Accounting for Exit or
Disposal Activities" ("Statement 146"). Statement 146 addresses the recognition,
measurement and reporting of costs associated with exit and disposal activities,
including restructuring activities. Statement 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. Statement 146 is effective for
exit or disposal activities that are initiated after December 31, 2002.
Statement 146 is not expected to have a material impact on our results of
operations or financial position.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation 45"). Interpretation 45
describes the disclosures to be made by a guarantor in interim and annual
financial statements about obligations under certain guarantees the guarantor
has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of Interpretation 45 are applicable on a prospective basis to
guarantees issued or modified after December 15, 2002. The Company has adopted
the disclosure provisions of Interpretation 45, effective December 31, 2002.
While the Company has various indemnity obligations included in contracts
entered into in the normal course of business, these obligations are primarily
in the form of indemnities that could result in immaterial increases of future
costs, but do not represent significant commitments or contingent liabilities of
the indebtedness of others.

In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
provisions of EITF Issue No. 00-21 are not expected to have a material effect on
our consolidated financial statements.

In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment to FASB
Statement 123" (" Statement 148"). Statement 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, Statement 148 amends the
disclosure requirements of Statement 123, "Accounting for Stock-Based
Compensation," to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted the disclosure provisions of Statement 148 effective December 31, 2002.

26

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("Interpretation 46"). Interpretation 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The recognition and
measurement provisions of Interpretation 46 are effective for newly created
variable interest entities formed after January 31, 2003, and for existing
variable interest entities, on the first interim or annual reporting period
beginning after June 15, 2003. The Company will adopt the provisions of
Interpretation 46 for existing variable interest entities on July 1, 2003, which
is not expected to have a material effect on the Company's 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 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, which are subject to minimal credit and market risk. We believe that the
market risks associated with these financial instruments are immaterial.

27

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

28

INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mobility Electronics, Inc.

We have audited the accompanying consolidated balance sheets of Mobility
Electronics, Inc. and subsidiaries as of December 31, 2002 and 2001, 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, 2002. 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 subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, Mobility
Electronics, Inc. and subsidiaries adopted the provisions of Statement of
Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, as
of January 1, 2002.

/s/ KPMG LLP

Phoenix, Arizona
February 28, 2003, except as to Note 10
which is as of March 26, 2003

29

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

30

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

31

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

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

See accompanying notes to consolidated financial statements.
32

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

33

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

See accompanying notes to consolidated financial statements.

34

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 13, 2002, 2001 AND 2000

(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 AC and DC power adapters, portable
computer docking stations, handheld device cradles, handheld software, 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 United States of
America, Canada and Europe.

During the year ended December 31, 2002, the Company began several
initiatives to address their overall business structure, including evaluating
key product lines, distribution channels, cost structure, and cash management.
In connection with these initiatives, the Company completed three acquisitions
during 2002 and completed development of a key new combination AC/DC power
adapter product. In the fourth quarter of 2002, the Company began to see
favorable results from these efforts. In addition, the Company has available
cash sources from financing activities through a $10.0 million line of credit
with a bank (as more fully discussed in Note 10) and a preferred stock offering
of $1.2 million completed in January 2003 (as more fully discussed in Note 21).
The Company believes the continued benefits of these measures will allow them to
generate sufficient operating funds from internal and external sources to
satisfy their liquidity requirements in 2003.

(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, sales returns, 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 and goodwill 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 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. The 2002 consolidated financial statements
include the accounts of Mobility and its wholly owned subsidiaries, Magma, Inc.,
Portsmith, Inc., which includes Portsmith, Inc. from February 1, 2002 (date of
acquisition) and Mobility 2001 Limited, Cutting Edge Software, Inc. from August
20, 2002 (date of acquisition) and iGo Direct Corporation from September 3,

35

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2002 (date of acquisition) collectively to December 31, 2002. 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.

(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 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 on 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. 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

36

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

capital leases and leasehold improvements are amortized over the shorter of the
lease term or estimated useful lives of the assets.

(h) GOODWILL AND INTANGIBLE ASSETS

In June 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. Statement 141 specifies criteria that
intangible assets acquired on a business combination must meet to be recognized
and reported separately from goodwill. 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. Statement 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with "Accounting For The Impairment Or Disposal Of Long Lived Assets"
("Statement 144").

The Company adopted the provisions of Statement 141 as of July 1, 2002, and
Statement 142 as of January 1, 2002. Goodwill and intangible assets determined
to have an indefinite useful life acquired in a purchase business combination
completed after June 30, 2001, are not amortized. Goodwill and indefinite useful
life intangible assets acquired in business combinations completed before July
1, 2002 continued to be amortized through December 31, 2002. Amortization of
such assets ceased on January 1, 2002 upon adoption of Statement 142.

Upon adoption of Statement 142, the Company was required to evaluate its
existing intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria in Statement 141 for recognition separate
from goodwill. The Company was also required to reassess the useful lives and
residual values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. For intangible assets identified as having indefinite useful lives,
the Company was required to test those intangible assets for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Impairment was measured as the excess of carrying value over the fair value of
an intangible asset with an indefinite life. The results of this analysis did
not require the Company to recognize an impairment loss.

Statement 142 defines a reporting unit as an operating segment or one level
below an operating segment (referred to as a component). As the Company has only
one operating business segment (see Note 2(q)), the Company has defined each of
its product lines, routes to market, and geographics as components. Further,
Statement 142 states that two or more components of an operating segment shall
be aggregated and deemed a single reporting unit if the components have similar
economic characteristics. The Company considers each of its components to have
similar economic characteristics, as each component sells computer peripheral
products which are produced using similar methods to OEM and computer product
distribution customers. Accordingly, the Company has determined that its
operating segment is one reporting unit as of January 1, 2002 under Statement
142. At January 1, 2002, the carrying value of the reporting unit goodwill was
$5,627,000. The Company compared the implied fair value of the reporting unit
goodwill with the carrying amount of the reporting unit goodwill, both of which
were measured as of the date of adoption. The implied fair value of goodwill was
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with Statement 141.
The residual fair value after this allocation was the implied fair value of the
reporting unit goodwill. The carrying value of goodwill exceeded the fair value
of the reporting unit and the Company recorded an impairment loss of $5,627,000
during 2002.

37

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Intangible assets include the cost of patents, trademarks and non-compete
agreements, as well as identifiable intangible assets acquired through business
combinations including trade names, customer lists and software technology.
Intangible assets are amortized on a straight-line basis over their estimated
economic lives of two to 10 years.

(i) IMPAIRMENT OF LONG-LIVED ASSETS

In October 2001, the FASB issued Statement 144, which provides a single
accounting model for long-lived assets to be disposed of. Statement 144 also
changes the criteria for classifying an asset as held for sale; and broadens the
scope of businesses to be disposed of that qualify for reporting as discontinued
operations and changes the timing of recognizing losses on such operations. The
Company adopted Statement 144 on January 1, 2002. The adoption of Statement 144
did not affect the Company's financial statements. Prior to the adoption of
Statement 144, the Company accounted for long-lived assets in accordance with
Statement 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."

In accordance with Statement 144, long-lived assets, such as property and
equipment, and purchased intangibles subject to amortization, are reviewed 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 be estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.

Recoverability of long-lived assets is dependent upon, among other things,
the Company's ability to continue to achieve profitability, in order to meet its
obligations when they become due. In the opinion of management, based upon
current information, long-lived assets will be covered over the period of
benefit.

(j) 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.

(k) 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

38

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

(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. 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.

(m) 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 No. 123, Accounting for Stock-Based Compensation (Statement 123).
Statement 123 requires the use of fair value option valuation models that were
not developed for use in valuing employee stock options. Under Statement 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.

Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement 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):

(n) FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments include cash equivalents, accounts
receivable, accounts payable and notes payable. Due to the short-term nature of
cash equivalents, accounts receivable and accounts payable, the fair value of
these instruments approximates their recorded value. In the opinion of
management, based upon current information, the fair value of notes payable
approximates market value. The Company does not have material financial
instruments with off-balance sheet risk, with the exception of operating leases.
See Note 12.

39

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(o) RESEARCH AND DEVELOPMENT

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

(p) 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.

(q) SEGMENT REPORTING

The Company is engaged in the business of the sale of computer peripheral
products. While the Company's chief operating decision maker (CODM) evaluates
revenues and gross profits based on products lines, routes to market and
geographies (see Note 17), the CODM only evaluates operating results for the
Company taken as a whole. As a result, in accordance with FASB Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information", the
Company has determined it has one operating business segment, the sale of
computer peripheral products.

(r) RECLASSIFICATIONS

Certain amounts included in the 2001 and 2000 consolidated financial
statements have been reclassified to conform to the 2002 financial statement
presentation.

(s) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("Statement 143"). Statement 143 requires us to record
the fair value of an asset retirement obligation as a liability in the period in
which we incur a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets and to record a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. We were required to adopt Statement 143 on
January 1, 2003. Statement 143 is not expected to have a material impact on our
results of operations or financial position.

In June 2002, the FASB issued Statement No. 146, "Accounting for Exit or
Disposal Activities" ("Statement 146"). Statement 146 addresses the recognition,
measurement and reporting of costs associated with exit and disposal activities,
including restructuring activities. Statement 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. Statement 146 is effective for
exit or disposal activities that are initiated after December 31, 2002.
Statement 146 is not expected to have a material impact on our results of
operations or financial position.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation 45"). Interpretation 45
describes the disclosures to be made by a guarantor in interim and annual

40

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial statements about obligations under certain guarantees the guarantor
has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of Interpretation 45 are applicable on a prospective basis to
guarantees issued or modified after December 15, 2002. The Company has adopted
the disclosure provisions of Interpretation 45 effective December 31, 2002 while
the Company has various indemnity obligations included in contracts entered into
in the normal course of business, these obligations are primarily in the form of
indemnities that could result in immaterial increases of future costs, but do
not represent significant commitments or contingent liabilities of the
indebtedness of others.

In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
provisions of EITF Issue No. 00-21 are not expected to have a material effect on
our consolidated financial statements.

In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment to FASB
Statement 123" ("Statement 148"). Statement 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, Statement 148 amends the
disclosure requirements of Statement 123, "Accounting for Stock-Based
Compensation," to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted the disclosure provisions of Statement 148 effective December 31, 2002.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("Interpretation 46"). Interpretation 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The recognition and
measurement provisions of Interpretation 46 are effective for newly created
variable interest entities formed after January 31, 2003, and for existing
variable interest entities, on the first interim or annual reporting period
beginning after June 15, 2003. The Company will adopt the provisions of
Interpretation 46 for existing variable interest entities on July 1, 2003, which
is not expected to have a material effect on the Company's financial statements.

(3) ACQUISITIONS

(a) MAGMA

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 were to be made to the selling stockholders depending upon Magma's
performance over the two years following the date of acquisition, which were
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
Company issued no shares of common stock in 2002 as settlement of the second
earn out payment under the purchase agreement.

41

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Goodwill, net of accumulated
amortization, was $5,627,000 at December 31, 2001. During 2002, in connection
with the adoption of Statement 142, the Company recorded an impairment charge of
$5,627,000 as a cumulative effect of a change in accounting principle.

(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
Mobility 2001 Limited, 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. Mobility Europe Holdings, Inc. is now called Portsmith,
Inc. 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) 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.

(d) PORTSMITH

As of February 1, 2002, the Company acquired Portsmith, Inc. ("Portsmith")
through a merger of Portsmith with the Company's subsidiary, Mobility Europe
Holdings, Inc., now Portsmith, Inc. Portsmith provides connectivity solutions
for handheld computing devices. Under the terms of the merger agreement, the
Company issued 800,000 shares of its common stock, valued at $1.35 per common
share, to the former Portsmith stockholders of which 400,000 shares were held in
escrow. The release of the escrowed shares to the former Portsmith stockholders
was contingent upon certain performance criteria of Portsmith during the first
year after the acquisition, which was achieved. Accordingly, the escrowed shares
were released in December 2002. In addition, earn-out payments may be made to
the former Portsmith stockholders depending upon Portsmith's performance during
the first year after the acquisition, through December 31, 2002. Earn out
payments may be made in cash or shares of stock, at the Company's discretion,
with total shares of common stock issued to former Portsmith stockholders not to
exceed 3,023,863 shares. The earnout is made up of two components. The first is
calculated using a formula based on Portsmith's revenue and net income
performance, adjusted for certain items, for the year 2002. The Company has
recorded a long-term liability in the amount of $725,000 as an estimate of this
component of the earnout. The second component of the earnout is based on a
percentage of the fair market value of Portsmith as a stand-alone entity as of
December 31, 2002, as mutually agreed upon by the Company and the former
Portsmith stockholders. In the event that the parties are not able to come to an
agreement, the fair market value will be determined by an Independent Financial
Expert as defined in the agreement. As the amount of this component of the
earnout is not yet determinable or issuable, the Company has recorded no
liability for it.

42

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Richard C. Liggitt, a former stockholder of Portsmith, filed a claim
against Portsmith and certain of its officers and directors alleging (a) fraud
in connection with merger negotiations that led to the execution of a merger
agreement between a company owned by Mr. Liggitt and Portsmith, (b) wrongful
termination of his employment with Portsmith, and (c) breach of the implied
covenant of good faith and fair dealing under his employment agreement with
Portsmith. During November 2002, the parties reached a settlement. Under the
terms of the settlement, the Company paid $10,000 upon approval of the
settlement by the Court. Contemporaneously, the Company agreed to pay Mr.
Liggitt an aggregate of $990,000 in exchange for cancellation of all of Mr.
Liggitt's rights as a former shareholder of Portsmith under the merger agreement
between the Company and Portsmith, including, but not limited to, the 53,647
shares of the Company's common stock Mr. Liggitt received in connection with the
merger, the 53,646 shares of the Company's common stock that had been held in
escrow that Mr. Liggitt would have otherwise been entitled to receive and Mr.
Liggitt's share in any potential earn-out payments. The $990,000 will be paid in
the form of a convertible subordinated promissory note bearing interest at four
percent per year, payable in quarterly installments of principal and interest
beginning in January 2003, through December 2005. The outstanding principal of
the promissory note may be converted by Mr. Liggitt at any time into shares of
the Company's common stock, at a conversion price of $3.00 per share. In
connection with this settlement, the potential earn-outs under the merger
agreement between the Company and Portsmith will be reduced by $480,000, plus a
certain additional amount for fees and expenses and a tax settlement, and Mr.
Liggitt's share of the potential earn-outs will be eliminated.

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 $1,783,000 was recorded as a result of the transaction.

The purchase price of $1,487,000, plus acquisition costs of $122,000, was
allocated as follows (amounts in thousands):

Purchase price:
Common stock.............................................. $ 762
Estimate of earn out...................................... 725
Costs of acquisition...................................... 122
-------
$ 1,609
=======
Assets acquired and liabilities assumed:
Current assets............................................ $ 2,195
Equipment................................................. 31
Other assets.............................................. 15
Goodwill.................................................. 1,783
Current liabilities....................................... (2,415)
-------
$ 1,609
=======

(e) CUTTING EDGE SOFTWARE

As of August 20, 2002, the Company acquired Cutting Edge Software, Inc.
("Cutting Edge Software") through a merger of Cutting Edge Software with a
subsidiary of the Company, CES Acquisition, Inc., and the subsequent merger of
such subsidiary with another subsidiary of the Company, CES II Acquisition,
Inc., now Cutting Edge Software, Inc. Cutting Edge Software provides software
solutions for handheld computing devices. Under the terms of the merger
agreement, the Company paid cash of $1,547,500 and issued 796,394 shares of its
common stock, valued at $1.8835 per common share,

43

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to the former Cutting Edge Software stockholder. In addition, earn out payments
may be made to such stockholder depending upon Cutting Edge Software's
performance during each of the five years following the acquisition date. The
earn-out payments are to be made 50% in cash and 50% in shares of company stock,
with total shares of common stock issued to the former Cutting Edge Software
stockholder not to exceed 3,263,800 shares.

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 $1,958,000 was recorded as a result of the transaction.

The purchase price of $3,047,500, plus acquisition costs of $221,000, was
allocated as follows (amounts in thousands):

Purchase price:
Cash...................................................... $1,548
Common stock.............................................. 1,500
Costs of acquisition...................................... 221
------
$3,269
======
Assets acquired and liabilities assumed:
Current assets............................................ $ 123
Equipment................................................. 48
Intangible assets......................................... 643
Goodwill.................................................. 1,958
Current liabilities....................................... (123)
In-process research and development....................... 620
------
$3,269
======

The Company recorded $620,000 in expense upon the consummation of the
acquisition relating to in-process research and development acquired from
Cutting Edge Software.

(f) iGO

On September 3, 2002, the Company completed its acquisition of iGo
Corporation ("iGo"), as announced on March 25, 2002 and as amended on July 18,
2002, through the merger of iGo Corporation with the Company's subsidiary, IGOC
Acquisition, Inc., now iGo Direct Corporation. iGo is a direct marketer of
computer peripheral equipment. Under the terms of the merger agreement, the
Company paid cash of $3,250,000 and issued 2,600,000 shares of its common stock,
valued at $1.305 per common share, to the former iGo stockholders. Additional
consideration of $1,000,000 and 500,000 shares of the Company's common stock may
also be paid to the former iGo stockholders on the first anniversary date of the
merger, the payment of which is contingent upon certain performance criteria.

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 $4,524,000 was recorded as a result of the transaction.

44

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The purchase price of $6,643,000, plus acquisition costs of $1,100,000, was
allocated as follows (amounts in thousands):

Purchase price:
Cash...................................................... $ 3,250
Common stock.............................................. 3,393
Costs of acquisition...................................... 1,100
-------
$ 7,743
=======
Assets acquired and liabilities assumed:
Current assets............................................ $ 3,690
Equipment................................................. 893
Intangible assets......................................... 411
Other assets.............................................. 38
Goodwill.................................................. 4,524
Current liabilities....................................... (2,220)
Loan to stockholder....................................... 407
-------
$ 7,743
=======

The consolidated financial statements as of December 31, 2002 include the
accounts of Portsmith, Cutting Edge Software and iGo and results of operations
since the dates of acquisition. The following summary, prepared on a pro forma
basis, presents the results of operations as if the acquisitions 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 acquisitions had been
effective at the beginning of 2001 or as a projection of future results.

(4) INVENTORIES

Inventories consist of the following (amounts in thousands):

45

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) PROPERTY AND EQUIPMENT

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

(6) GOODWILL

On January 1, 2002, the Company adopted Statement 142. Under this
accounting standard, goodwill and intangible assets with indefinite lives are no
longer subject to amortization but are tested for impairment at least annually.
Amortization is still required for identifiable intangible assets with finite
lives.

Statement 142 also requires the completion of the transitional impairment
test of the recorded goodwill as of the date this accounting standard is
adopted. The Company completed the first step of the transitional impairment
test during the year ended December 31, 2002, noting an indication of impairment
associated with the recorded goodwill balance of $5,627,000 as of January 1,
2002. As part of the transitional impairment test, the Company identified one
reporting unit within its one operating business segment. The Company then
completed the second step of the transitional impairment test. The Company has
recorded a goodwill impairment loss of $5,627,000 as a result of completing its
transitional impairment test, and has recognized this loss as the effect of a
change in accounting principle as of January 1, 2002 in accordance with
Statement 142. This impairment loss was determined based on a comparison of the
fair value of the Company with its carrying amount, including goodwill that
resulted from prior business acquisitions. The results of the comparison and
loss measurement indicated that goodwill existing at the date of adoption of
this accounting standard was fully impaired. In connection with its adoption of
Statement 142, the Company reassessed previously recognized intangible assets
and determined their classification and useful lives were appropriate.

As a result of the acquisitions of Portsmith, Cutting Edge Software and
iGo, the Company has recorded goodwill of $8,265,000 during 2002. In accordance
with Statement 142, the Company evaluated this goodwill for impairment as of
December 31, 2002 and determined its recorded goodwill is not impaired as of
December 31, 2002.

46

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Goodwill consists of the following (amounts in thousands):

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

Reported balance at December 31, 2001....................... $ 5,627
Acquisition of Portsmith.................................... 1,783
Acquisition of Cutting Edge Software........................ 1,958
Acquisition of iGo.......................................... 4,524
Impairment loss recognized as a result of transitional
goodwill impairment test.................................. (5,627)
-------
$ 8,265
=======

The following table presents prior years' net loss attributable to common
stockholders and net loss per share as if the non-amortization provisions of
Statement 142 had been applied in the prior years (amounts in thousands, except
per share data).

(7) INTANGIBLE ASSETS

Intangible assets consist of the following at December 31, 2002 and 2001
(amounts in thousands):

47

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Aggregate amortization expense for identifiable intangible assets totaled
$607,000 and $167,000 for the years ended December 31, 2002 and 2001,
respectively. Estimated amortization expense for each of the five succeeding
years ended December 31 is as follows (amounts in thousands):

2003........................................................ $733
2004........................................................ 335
2005........................................................ 232
2006........................................................ 216
2007........................................................ 165

(8) OTHER ASSETS

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

(9) 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 was 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 was to be adjusted if the company issued 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.

In July 2002, the Company liquidated its investment in such preferred
stock, resulting in net cash proceeds of $1,870,000. The Company recorded a loss
on the sale of investment of $94,000 in connection with this transaction.

(10) LINE OF CREDIT

In October 2002, the Company entered into a $10,000,000 line of credit with
a bank. The line bears interest at prime plus 1.25% (5.5% at December 31, 2002),
interest only payments are due monthly, with final payment of interest and
principal due on July 31, 2004. The line of credit is secured by all assets of
the Company. The Company has not drawn against the line of credit as of December
31, 2002. The line of credit is subject to financial covenants. The Company was
not in compliance with certain covenants as of December 31, 2002. On March 26,
2003, the Company obtained a waiver from the bank for covenant defaults for the
period from September 30, 2002 through February 28, 2003. In addition, the bank
modified the financial net worth covenant under the line to $8.9 million as of
March 2003, $8.2 million from April through June 2003, $8.6 million from July
through September 2003 and $9.3 million thereafter. The Company is currently in
compliance with the covenants as modified.

48

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) LONG-TERM DEBT

Long-term debt consists of the following (amounts in thousands):

In connection with the settlement of a lawsuit, the Company entered into a
$990,000 convertible subordinated promissory note bearing interest at four
percent per year, payable in quarterly installments of principal of $82,500
beginning in January 2003, through December 2005. The outstanding principal of
the promissory note may be converted at any time into shares of the Company's
common stock, at a conversion price of $3.00 per share. See Note 3.

In connection with its acquisition of Portsmith, the Company has recorded a
long-term liability in the amount of $725,000 as an estimate of a component of
earn-out, as this component was determinable and issuable as of December 31,
2002. Earn-out payments may be made in cash or shares of stock, at the Company's
discretion, with total shares of common stock issued to former Portsmith
stockholders not to exceed 3,023,863 shares. If the earn-out is paid in shares
of common stock, the number of shares to be issued is based on the earn-out in
dollars, divided by the market price of the Company's common stock as of the
date that the earn-out is finally determined. See Note 3.

(12) 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 $855,000, $1,000,000 and $675,000 during the years ended 2002, 2001, and
2000, respectively.

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

2003........................................................ $ 560
2004........................................................ 607
2005........................................................ 402
2006........................................................ 410
2007........................................................ 418
Thereafter.................................................. 320
------
$2,717
======

(13) INCOME TAXES

The Company has generated net operating losses for both financial and
income tax reporting purposes since inception. At December 31, 2002 and 2001,
the Company had net operating loss carryforwards for federal income tax purposes
of approximately $85,900,000 and $68,120,000, respectively, and approximately
$3,626,000 and $2,580,000 for foreign income tax purposes, respectively, which,
subject to annual

49

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

limitations, are available to offset future taxable income, if any, through 2022
and net operating loss carryforwards for state income tax purposes of
approximately $85,900,000 and $68,120,000, which are available to offset future
taxable income through 2007.

The temporary differences that give rise to deferred tax assets and
liabilities at December 31, 2002 and 2001 are as follows (amounts in thousands):

The valuation allowance for deferred tax assets as of December 31, 2002 and
2001 was $38,632,000 and $30,974,000, respectively. The net change in the total
valuation allowance for the years ended December 31, 2002 and 2001 was an
increase of $7,658,000 and $7,693,000, 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 by the Company, it is possible the use 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.

50

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) 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.

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
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 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.

51

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 2002, 132,446 shares of Series C preferred stock sold under private
placements were converted into 103,070 shares of common stock at an average
conversion rate of 1-to-0.77820, 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.

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

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.

During 2002, the Company entered into promissory notes in the principal sum
of $280,000 with four executives of the Company to finance their purchase of
200,000 shares of common stock at a composite purchase price of $1.40 for one
share of common stock.

52

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 2002, in connection with its acquisition of iGo, the Company
acquired a promissory note in the principal sum of $230,000 with a former iGo
shareholder, which is secured by 115,865 shares of common stock.

(15) 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
$114,000, $36,000 and zero during 2002, 2001 and 2000, respectively.

(b) STOCK OPTIONS 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 2002, 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 3,000,000.
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. During 2002, in connection with its acquisition of Cutting Edge Software,
the Company's Board of Directors authorized the issuance of options to purchase
150,000 shares of common stock to certain Cutting Edge Software employees. 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 420,403 shares available for grant under the Plan
as of December 31, 2002.

The per share weighted average fair value of stock options granted under
the Plan for the years ended December 31, 2002, 2001 and 2000, was $1.41, $2.77
and $2.80, respectively, based on the date of grant using the Black-Scholes
method with the following weighted average assumptions:

53

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, 2000, 2001 and 2002:

The following table summarizes information about the stock options
outstanding at December 31, 2002:

In January 2000, the Company issued warrants to purchase 48,706 shares of
common stock at $0.02 per share in conjunction with the completion of a 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 $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.

54

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

During 2002, 176,707 warrants were exercised to acquire 176,707 shares of
common stock at $0.02 per share for total net proceeds of $4,000.

During 2002, 130,973 warrants expired. At December 31, 2002, 218,986
unexercised warrants remained outstanding at exercise prices ranging from $0.69
to $5.75 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. In 2002, 78,928 shares were issued under the
Purchase Plan for net proceeds of $83,000. At December 31, 2002, 1,895,277
shares were available for issuance under the Purchase Plan.

(16) NET LOSS PER SHARE

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

55

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(17) CONCENTRATION OF CREDIT RISK, SIGNIFICANT CUSTOMERS AND BUSINESS SEGMENTS

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

Two customers each accounted for 20% of net sales for the year ended
December 31, 2002. Two customers accounted for 34% and 33% of net sales for the
year ended December 31, 2001. Two customers accounted for 32% and 18% of net
sales for the year ended December 31, 2000.

Three customers' net accounts receivable balances accounted for 32%, 19%
and 11% of net accounts receivable at December 31, 2002. Two customers' net
accounts receivable balances accounted for 28% and 16% of net accounts
receivable at December 31, 2001.

Export sales were approximately 14%, 31% and 32% of the Company's net sales
for the years ended December 31, 2002, 2001 and 2000, respectively. The
principal international market served by the Company was Europe.

The Company has only one operating business segment, the sale of peripheral
computer equipment. The following tables summarize the Company's revenues by
product line, as well as its revenues and net long-lived assets by geography.

56

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(18) 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.

(19) 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
$10,000, $20,000 and $39,000 for the years ended December 31, 2002, 2001 and
2000, respectively.

During 2000, the Company recognized $2,000,000 of revenue from an entity in
which it had a preferred stock ownership. During 2002, the Company sold its
investment in preferred stock to an unrelated third party.

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.

During 2002, the Company sold 200,000 shares of common stock to four
executives at a purchase price of $1.40 per share. Each investor executed and
delivered to the Company a three-year Promissory Note, in the original principal
amount of $70,000 each (or $280,000 in total) and bearing interest at a rate of
6% per annum. Each Promissory Note is secured by the shares of common stock
issued. The notes are reflected as contra equity on the statement of
stockholders' equity.

57

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(20) SUPPLEMENTAL FINANCIAL INFORMATION

A summary of additions and deductions related to the allowances for
accounts receivable for the years ended December 31, 2002, 2001 and 2000 follows
(amounts in thousands):

(21) SUBSEQUENT EVENTS

On or about January 14, 2003, the Company issued and sold 865,051 shares of
newly designated Series E preferred stock, par value $0.01 per share ("Series E
Stock"), at a purchase price of $0.7225 per share, and 729,407 shares of newly
designated Series F preferred stock, par value $0.01 per share ("Series F
Stock"), at a purchase price of $0.85 per share. In connection with this sale,
the Company also issued warrants to purchase an aggregate of 559,084 shares of
common stock, par value $0.01 per share, of the Company. The warrants issued to
holders of Series E Stock permit them to purchase an aggregate of 216,263 shares
of common stock, at an exercise price of $0.867 per share (the "Series E
Warrants"), and the warrants issued to holders of Series F Stock permit them to
purchase an aggregate of 342,821 shares of common stock, at an exercise price of
$1.02 per share (the "Series F Warrants"). The Series E Stock was purchased by a
single non-affiliated investor, while the Series F Stock was purchased by
certain officers and directors of the Company and their affiliates.

On January 15, 2003, Jeffrey S. Doss resigned his positions as a director
and executive vice president of the Company, effective as of January 31, 2003.
During 1999 and 2001, Mr. Doss issued two personal promissory notes payable to
Mobility, which evidenced personal borrowings from Mobility to finance purchases
of the Company's stock. The first note was in the original principal amount of
$300,000, accrued interest at a rate of 6% per annum and was due and payable on
November 30, 2002 (the "First Note"). The second note was in the original
principal amount of $199,000, accrued interest at a rate of 6.33% and was due
and payable on March 2, 2004 (this note together with the First Note, the
"Promissory Notes"). The collateral for the Promissory Notes was the stock
purchased by Mr. Doss. On December 31, 2002, the Company delivered to Mr. Doss a
demand notice to immediately pay the outstanding principal balance of and
accrued but unpaid interest on the First Note. Mr. Doss was unable to pay the
First Note as demanded. Because he could not pay and Section 402 of the
Sarbanes-Oxley Act of 2002 prohibits the extension of credit to directors and
executive officers after July 30, 2002, Mr. Doss resigned all positions with the
Company. Additionally, on January 31, 2003, the Company extended the exercise
periods of four options granted to Mr. Doss until January 31, 2006 and converted
the options to non-qualified options. In exchange for the extension of the
exercise periods of these options, Hotwire (as discussed below) on behalf of
itself and its subsidiaries, affiliates, officers, employees, agents and
successors, including

58

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Mr. Doss, agreed to a non-solicitation, non-compete and non-disparagement
agreement with the Company for the term of the agreement and for a period of two
years after the termination of the agreement.

On February 1, 2003, the Company and Mr. Doss entered into an Amended and
Restated Promissory Note, which consolidated all principal and accrued but
unpaid interest on the Promissory Notes into a principal balance of $581,000,
extended the payment terms and lowered the interest rate, and also consolidated
and amended and restated the related pledge and security agreements. The Amended
and Restated Promissory Note is due and payable on December 31, 2005 and accrues
interest at a rate of 2.00% per annum on $499,000 with the remaining $82,000 not
accruing interest. The collateral under the Amended and Restated Pledge and
Security agreement is 50,000 shares of the Company's Series C preferred stock,
plus 118,966 shares of the Company's common stock. Additionally, effective
February 1, 2003, the Company entered into an independent contractor agreement
with Hotwire Development, LLC, an Arizona limited liability company controlled
by Mr. Doss ("Hotwire") for the initial term of which is one year. For the term
of the agreement with Hotwire, Hotwire will undertake certain engineering,
development, marketing and product development projects for the Company as
requested from time to time during such term through the use of certain
qualified employees, including Mr. Doss. In this capacity, Hotwire is solely an
independent contractor. Mr. Doss is not an officer, director or employee of the
Company.

(22) QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of the quarterly data for the years ended December 31, 2002 and
2001 follows (amounts in thousands, except per share amounts):

59

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 2003 Annual Meeting of Shareholders
under the captions "Proposal No. 1 Election of Director", "Executives and
Executive Compensation", "Section 16(a) Beneficial Ownership Reporting
Compliance", and "Principal Stockholders" and is incorporated by reference
herein.

ITEM 11. EXECUTIVE COMPENSATION

The response to this Item will be contained in the Proxy Statement for the
2003 Annual Meeting of Shareholders under the captions "Director Compensation
Committee Report", "Executive Compensation" and is incorporated by reference
herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The response to this Item will be contained in the Proxy Statement for the
2003 Annual Meeting of Shareholders under the caption "Principal Stockholders"
and is incorporated by reference herein.

ITEM 13. CERTAIN TRANSACTIONS

The response to this Item will be contained in the Proxy Statement for the
2003 Annual Meeting of Shareholders under the caption "Certain Relationships and
Related Transactions" and is incorporated by reference herein.

ITEM 14. CONTROLS AND PROCEDURES

As required by Rule 13a-14 under the Exchange Act, within 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and our Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our controls and
procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly effect
internal controls subsequent to the date the Company carried out this
evaluation.

Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer as appropriate, to allow timely decisions regarding
disclosures.

The Company has confidence in its internal controls and procedures and has
expanded its efforts to develop and improve its controls. Nevertheless, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure procedures and controls, or our
internal controls, will necessarily prevent all error or intentional fraud. An
internal control system, no matter how well-conceived and operated, can provide
only reasonable, but not absolute, assurance that the

60

objectives of such internal controls are met. Further, the design of an internal
control system must reflect the fact that we are subject to resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all internal control systems, no
evaluation of controls can provide absolute assurance that all internal control
issues or instances of fraud, if any, within the Company can be detected.

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, our Chief
Executive Officer and Chief Financial Officer have provided certain
certifications to the Securities and Exchange Commission.

ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The response to this item will be contained in the Proxy Statement for the
2003 Annual Meeting of Shareholders under the caption "Independent Public
Accountants" and is incorporated by reference herein.

61

PART IV

ITEM 16. 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

65

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

* Filed herewith

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

*** Schedules and similar attachments have been omitted from these agreements.
The registrant will furnish supplementally a copy of any omitted schedule or
attachment to the Commission upon request.

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

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

(3) Previously filed as an exhibit to Amendment No. 2 to Registration Statement
No. 333-30264 on Form S-1 dated May 4, 2000.

(4) Previously filed as an exhibit to Amendment No. 3 to Registration Statement
No. 333-30264 on Form S-1 dated May 18, 2000.

(5) Previously filed as an exhibit to Form 10-Q for the quarter ended March 31,
2001 dated May 14, 2001.

(6) Previously filed as an exhibit to Amendment No. 1 to Registration Statement
No. 333-99845 on Form S-3 dated November 21, 2002.

(7) Previously filed as an exhibit to Form 10-Q for the quarter ended June 30,
2002 dated August 14, 2002.

(8) Previously filed as an exhibit to Form 10-Q for the quarter ended September
30, 2001 dated November 14, 2001.

(9) Previously filed as an exhibit to Amendment No. 1 to Registration Statement
No. 333-88078 on Form S-4 dated August 5, 2002.

(10) Previously filed as an exhibit to Form 10-K for the period ending December
31, 2000 dated April 2, 2001.

(11) Previously filed as an exhibit to Registration Statement No. 333-99845 on
Form S-3 dated September 19, 2002.

(12) Previously filed as an exhibit to Form 10-K for the period ending December
31, 2002 dated April 1, 2002.

(13) Previously filed as an exhibit to Current Report on Form 8-K dated October
17, 2000.

(14) Previously filed as an exhibit to Registration Statement No. 333-88078
filed on Form S-4 dated May 13, 2002.

(15) Previously filed as an exhibit to Form 10-Q for the quarter ended September
30, 2002 dated November 19, 2002.

(16) Previously filed as an exhibit to Current Report on Form 8-K dated January
14, 2003.

(17) Previously filed as an exhibit to Current Report on Form 8-K dated February
7, 2003.

66

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 on March 31, 2003.

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.

67

CERTIFICATIONS

I, Charles R. Mollo, certify that:

1. I have reviewed this annual report on Form 10-K of Mobility Electronics,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ CHARLES R. MOLLO
--------------------------------------
Charles R. Mollo
President and Chief Executive Officer

March 31, 2003

68

I, Joan W. Brubacher, certify that:

1. I have reviewed this annual report on Form 10-K of Mobility Electronics,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ JOAN W. BRUBACHER
--------------------------------------
Joan W. Brubacher
Executive Vice President and Chief
Financial Officer

March 31, 2003

69

INDEX TO EXHIBITS

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

* Filed herewith

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

*** Schedules and similar attachments have been omitted from these agreements.
The registrant will furnish supplementally a copy of any omitted schedule or
attachment to the Commission upon request.

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

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

(3) Previously filed as an exhibit to Amendment No. 2 to Registration Statement
No. 333-30264 on Form S-1 dated May 4, 2000.

(4) Previously filed as an exhibit to Amendment No. 3 to Registration Statement
No. 333-30264 on Form S-1 dated May 18, 2000.

(5) Previously filed as an exhibit to Form 10-Q for the quarter ended March 31,
2001 dated May 14, 2001.

(6) Previously filed as an exhibit to Amendment No. 1 to Registration Statement
No. 333-99845 on Form S-3 dated November 21, 2002.

(7) Previously filed as an exhibit to Form 10-Q for the quarter ended June 30,
2002 dated August 14, 2002.

(8) Previously filed as an exhibit to Form 10-Q for the quarter ended September
30, 2001 dated November 14, 2001.

(9) Previously filed as an exhibit to Amendment No. 1 to Registration Statement
No. 333-88078 on Form S-4 dated August 5, 2002.

(10) Previously filed as an exhibit to Form 10-K for the period ending December
31, 2000 dated April 2, 2001.

(11) Previously filed as an exhibit to Registration Statement No. 333-99845 on
Form S-3 dated September 19, 2002.

(12) Previously filed as an exhibit to Form 10-K for the period ending December
31, 2002 dated April 1, 2002.

(13) Previously filed as an exhibit to Current Report on Form 8-K dated October
17, 2000.

(14) Previously filed as an exhibit to Registration Statement No. 333-88078
filed on Form S-4 dated May 13, 2002.

(15) Previously filed as an exhibit to Form 10-Q for the quarter ended September
30, 2002 dated November 19, 2002.

(16) Previously filed as an exhibit to Current Report on Form 8-K dated January
14, 2003.

(17) Previously filed as an exhibit to Current Report on Form 8-K dated February
7, 2003.