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Position

Charles R. Mollo

President, Chief Executive Officer and Chairman of the Board

Joan W. Brubacher

Executive Vice President, Chief Financial Officer and Treasurer

Timothy S. Jeffries

Executive Vice President and Chief Operating Officer

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2003) was $82,705,739. 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.

There were 27,664,795 shares of the registrant’s common stock issued and outstanding as of March 4, 2004.

Portions of the registrant’s definitive Proxy Statement relating to its Annual Meeting of Stockholders to be held on May 26, 2004 are incorporated by reference into Part II and Part III of this Form 10-K.

Certain statements contained in this report constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe,” “expect,” “anticipate” and other similar statements of expectations identify forward-looking statements. Forward-looking statements in this report include expectations regarding our anticipated revenue, gross margin, and related expenses for 2004; the availability of cash and liquidity; expectations of industry trends; beliefs relating to our distribution capabilities and brand identity; expectations regarding new product introductions; the anticipated strength of our patent portfolio; and our expectations regarding the outcome and anticipated impact of various litigation proceedings in which we are involved. These forward-looking statements are based largely on management’s expectations and 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. Factors that could cause or contribute to such differences include those discussed herein under the heading “Risk Factors” and those set forth in other reports that we file with the Securities and Exchange Commission. Additional factors that could cause actual results to differ materially from those expressed in these forward-looking statements include, among others, the following:


	•	the loss of, and failure to replace, any significant customers;

	•	the timing and success of new product introductions;

	•	product developments, introductions and the pricing of competitors;

	•	the timing of substantial customer orders;

	•	the availability of qualified personnel;

	•	the performance of suppliers and subcontractors; and

	•	market demand and industry and general economic or business conditions.

In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will prove to be accurate. We undertake no obligation to publicly update or revise any forward-looking statements, or any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements.

We are a leading provider of innovative products and solutions for the mobile electronics industry. We utilize our proprietary technology to design and develop products that make mobile electronic devices more efficient and cost effective, thus enabling professionals and consumers higher utilization of their mobile devices and the ability to access information more readily.

We have created a broad base of branded and private-label products that focus on providing power, enhancing handheld devices and expanding peripheral computer interface (PCI) capabilities. We primarily sell our products through OEMs such as International Business Machines Corporation (IBM), Dell Inc., Symbol Technologies, Inc., Gateway, Inc. and Apple Computer, Inc.; private-label resellers such as Kensington Technology Group and Targus Group International; distributor Ingram Micro Inc.; retailers such as RadioShack Corporation; resellers such as CDW Corporation and Insight Enterprises, Inc.; and directly to end users through our iGo® brand website, www.igo.com.

Our power products, marketed either under a private-label or our iGo brand, include our range of AC, DC and combination AC/DC universal power adapters. Juice^TM, an iGo branded product, allows users to charge a variety of their electronic devices from AC power sources located in a home, office or hotel room as

well as DC power sources located in automobiles, planes and trains. In addition, our high power Juice products can be used, in combination with our optional peripheral powering system, to simultaneously charge both a portable computer and another peripheral device such as a mobile phone or smart handheld device.

Our other key product categories are handheld solutions, and expansion and docking. Our handheld solutions primarily include charging cradles for handheld devices that allow users to have a direct connection to a network environment. Handheld solutions also include our Quickoffice^TM and other software suites that provide word processing, spreadsheet and presentation program capabilities to the users of smartphones and personal digital assistants, or PDAs, that utilize Palm or Symbian operating systems. In addition, our software allows users to edit and sync Microsoft Office documents. Our expansion and docking products include devices designed to increase the storage capacity and computing capability of portable, desktop or server computers.

We believe our competitive advantages include our extensive intellectual property portfolio, the innovative designs and multi-function capabilities of our products, and our broad OEM, private-label reseller and distribution relationships. For example, our Juice family of power products is gaining wide market acceptance and represented a significant component of our revenue growth in 2003. We intend to continue developing and marketing innovative products and solutions for the mobile electronic device user.

Over the past two decades, technological advancements in the electronics industry have greatly expanded mobile device capabilities. Mobile electronic devices, many of which can be used for both business and personal purposes, include portable computers, mobile phones, smartphones, PDAs, handheld devices, digital cameras, camcorders, portable DVD players, MP3 players, and portable game consoles. The popularity of these devices is benefiting from reductions in size, weight and cost and improvements in functionality, storage capacity and reliability. In addition, advances in wireless connectivity technologies, such as Bluetooth and Wi-Fi, have enabled remote access to data networks and the Internet.

Increased functionality and the ability to access and manage information remotely are driving the proliferation of mobile electronic devices and applications. As the work force becomes more mobile and spends more time away from traditional work settings, users have sought out and become reliant on tools that provide management of critical information and access to wireless voice and data networks. Each of these mobile electronic devices needs to be powered and connected when in the home, the office, or on the road, and can be accessorized, representing an opportunity for one or more of our products.

Market for Our Products. Our products support mobile electronic devices in several market categories.


	•	Mobile Phone Market. According to IDC, the worldwide market for mobile phones is expected to grow at a compounded annual growth rate, or CAGR, of about 8.2% from 535.9 million units in 2003 to about 793.9 million units in 2008. The U.S. market is expected to grow at a CAGR of about 3.3% from 74.7 million units in 2003 to about 87.8 million units in 2008.

	•	Smart Handheld Device Market. According to IDC, the worldwide market for smart handheld devices, which includes smartphones, PDAs, and other handheld devices, is expected to grow at a CAGR of about 43.8% from 20.0 million units in 2003 to about 85.5 million units in 2007 and the U.S. market for smart handheld devices is expected to grow at a CAGR of about 38.3% from 6.8 million units in 2003 to about 25.1 million units by 2007.

	•	Portable Computer Market. According to IDC, the worldwide market for portable computers is expected to grow at a CAGR of about 18.5% from 39.7 million units in 2003 to about 78.4 million units in 2007. The U.S. market is expected to grow at a CAGR of about 24.0% from 14.0 million units in 2003 to about 33.1 million units in 2007. We expect these trends to continue.

Industry Challenges. As mobile electronic devices gain widespread acceptance, users will continue to confront limitations on their use, driven by such things as battery life, charging flexibility, compatibility issues, connectivity needs and performance requirements. Furthermore, as users seek to manage multiple devices in their daily routine, the limitations of any one of these functions will tend to be exacerbated.


	•	Power. Mobile electronic device users, by definition, largely require the use of their devices while away from their home or office. Many mobile electronic devices offer designs and form factors that support portability and travel comfort; however, these mobile devices have limited battery life, which necessitates the need to frequently connect to a power source to operate the device or recharge the battery. A number of factors limit the efficient use and charging of these devices:


	—	Most power adapters are compatible with either AC-only power sources located in places such as a home, office or hotel room, or DC-only power sources such as those located in automobiles, planes, and trains;

	—	The majority of power adapters are model-specific requiring a mobile user to carry a dedicated power adapter for each device;

	—	Mobile electronic devices are generally packaged with only one power adapter and many users purchase additional power adapters for convenience and ease of use; and

	—	Mobile electronic device users tend to carry multiple devices and at times only one power source is available, such as an automobile’s cigarette lighter, limiting a user’s ability to recharge multiple devices.


	Mobile electronic device users, who usually have limited available space in their briefcase or luggage, desire solutions that make their mobile experience more convenient. We believe this creates the need for universal power adapters that have the ability to simultaneously charge multiple mobile electronic devices.


	•	Handheld Solutions. Handheld devices continue to face challenges with respect to their ability to interface directly with a network and across various software operating systems. Traditional handheld connectivity devices, known as cradles, offer limited options to communicate with networks, computer peripherals and display devices without the presence of a portable or desktop computer. Additionally, commonly used software applications, such as Microsoft Office, are not available on handheld devices using the Palm or Symbian operating systems. We believe the need exists for solutions to address both the connectivity problems and software compatibility issues associated with handheld devices.

	•	Expansion and Docking. PCI slots are commonly used to expand and extend computing capabilities. Computer manufacturers only provide a limited number of PCI slots in their products, limiting the space available to add additional PCI cards. In addition to expanding PCI slots, portable computer users also often wish to connect to external devices when using their portable computers in a fixed setting. We believe this provides an opportunity for solutions that conveniently and efficiently expand the availability of PCI slots and provide a one-step procedure to connect external devices to portable computers.

We focus on providing a broad range of solutions that satisfy the overall needs of the mobile electronic device user. Our power, handheld and expansion and docking solutions each address particular challenges as follows:

Power. Our innovative power solutions eliminate the need for mobile electronic device users to carry multiple power adapters to operate and charge their devices. Our AC/DC combination power adapters work with any available power source, including the AC wall outlet in a home, office or hotel room, or the DC cigarette lighter plug in an automobile, airplane, or train. Our patented tip technology allows a user to carry a few lightweight tips in combination with a single adapter to charge a variety of devices, including a substantial portion of the portable computers, mobile phones, smartphones, PDAs, and other mobile electronic devices currently in the market. Further, device users can simultaneously charge multiple devices by using a single adapter and the appropriate tips with our optional 12-watt peripheral powering system, or PPS.

Handheld Solutions. Our leading handheld hardware products are cradles for handheld devices that provide connectivity to a network without the need for a computer and are particularly beneficial where

handheld devices are the user’s primary computing device. Uses include inventory management, logistics and pharmaceutical field trials. Our Quickoffice software suite provides users of smartphones and PDAs that utilize Palm or Symbian operating systems with word processing, spreadsheet, and presentation software capability. In addition, the software allows users to edit and sync Microsoft Word, PowerPoint and Excel documents. We believe that our handheld solutions effectively fill gaps in the offering of the leading handheld device OEMs and software vendors.

Expansion and Docking. We offer a variety of PCI slot expansion products for portable computers, desktop computers and servers. In addition, we offer docking stations for portable computers. These solutions allow the users to cost effectively expand the capability of their existing computing devices and connect to external devices thereby increasing portability, flexibility and performance needed for high-end computing applications without requiring duplicative or redundant hardware. We provide these products to a range of industries, including audio/ video editing, test and measurement, industrial automation, broadcast and telephony.

We intend to capitalize on our current strategic position in the mobile electronic device market by continuing to introduce innovative 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. Elements of our strategy include:

Continue To Develop Innovative Products. We have a history of designing and developing highly differentiated products to serve the needs and enhance the experience of mobile electronic device users. We intend to continue to develop and market a broad range of highly differentiated products, like our family of power adapters, that address additional markets in which we choose to compete. We also intend to protect our intellectual property position in these markets by aggressively filing for additional patents on an ongoing basis.

Expand Our OEM Relationships. We have relationships with original equipment manufacturers, or OEMs such as IBM, Dell, Symbol, Gateway and Apple where we provide branded and private-label products for a broad range of end-market applications. We intend to continue to expand and strengthen our relationships by designing and manufacturing high quality products to meet the exacting specifications required by our OEM customers.

Leverage Our Strategic Relationships. During 2003 and early in 2004, we entered into strategic relationships with RadioShack, Kensington and Targus to private-label our existing products and co-develop next generation products. We expect that these relationships will significantly increase the availability and exposure of our products, particularly among large national and international retailers such as RadioShack, BestBuy, CompUSA, Circuit City, Wal-Mart, Office Depot and Staples.

Capitalize On Our Strong Distribution Channels. We currently sell our products worldwide through leading distributors including Ingram Micro. We intend to leverage these powerful distribution relationships to enable an efficient distribution channel to provide broad availability of our products.

Pursue Strategic Acquisitions. We intend to continue to evaluate opportunities to acquire complementary businesses, technologies and products that address the mobile electronic device market. We also plan to pursue acquisitions that will enable us to more rapidly develop and bring to market advanced technology, to expand distribution capabilities and/or to penetrate other targeted markets or geographic locations.

We provide a broad range of products designed to satisfy the power and connectivity needs experienced by the mobile electronic device user while traveling, at home or in the office. Our products provide customers with solutions specifically in three aspects of mobile computing: versatile power sourcing and charging, increased handheld device functionality and computer expansion and docking. The following is a description of

Power. In early 2003, we introduced a combination AC/DC universal power adapter for portable computers, called Juice, which works with any available power source, including the AC wall outlet in a home, office or hotel room, or the DC cigarette lighter plug in an automobile, airplane or train. In addition, we offer a range of DC-only power adapters, more commonly known as auto/air adapters, and a range of AC-only power adapters. This family of power adapter products utilizes our patented tip technology which allows a single power adapter to plug into a substantial portion of the portable computers, mobile phones, smartphones, PDAs, and other handheld devices currently in the market. When our power adapters are combined with our optional 12 watt peripheral powering system, or PPS, the user can simultaneously charge multiple mobile electronic devices, eliminating the need to carry multiple charging adapters.

In addition, we are developing a family of power adapters specifically for various mobile electronic products with lower power requirements, such as mobile phones, smartphones, PDAs, digital cameras, camcorders, portable DVD players, MP3 players, and portable game consoles, including a DC cigarette lighter adapter, an AC mobile adapter, and a combination AC/DC adapter.

The following table highlights the key features of power products that we currently offer.

The following table highlights the key features of power products that are currently in development.

We also develop a range of custom power products for our OEM and private label partners, including unique products that have been, or are being, developed for OEM’s such as IBM, Dell and private-label partners such as Kensington and Targus. Sales of power products represented approximately 54%, 26% and 46% of our total revenue for the years ended December 31, 2003, 2002 and 2001, respectively.

Handheld Solutions. We offer a family of hardware and software solutions that expand the connectivity, flexibility and functionality of handheld and other electronic devices, including smartphones and PDAs.


	•	Hardware Products. We produce innovative cradles for handheld devices that provide a charging station and direct network connectivity eliminating the need for first connecting to a desktop or portable computer. These cradles enable the use of handheld devices in applications such as inventory management, logistics and pharmaceutical field trials. Our hardware solutions also include our Pitch^TM product, which allows a user to connect a handheld device to various peripheral devices such as keyboards, mice, and video displays. Pitch also allows a user to conduct presentations directly from a smartphone or PDA, allowing professionals who regularly conduct presentations to use a light-weight handheld device instead of their portable computer. Sales of handheld hardware products represented


		approximately 19%, 29% and 0% of our total revenue for the years ended December 31, 2003, 2002 and 2001, respectively.

	•	Software Products. We offer a software suite called Quickoffice that provides word processing, spreadsheet and presentation program capabilities to the users of smartphone or PDA devices. In addition, the software allows users to edit and sync Microsoft Word, PowerPoint and Excel documents on their handheld devices. Quickoffice is compatible with Palm OS and Symbian, a leading operating system for smartphones. Our software is currently offered as a bundle option with smartphones offered by Nokia, Sony Ericsson, Kyocera, palmOne, Inc., and Samsung Electronics; with PDA devices offered by Sony and AlphaSmart, Inc.; and with Intellisync Corporation’s corporate e-mail software. Sales of handheld software products represented less than 10% of our total revenue for each of the years ended December 31, 2003, 2002 and 2001.

Expansion and Docking. 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® and other non-enclosed links and board sets, and Serial PCI and SBus products. These solutions allow the user to cost effectively expand the capability of their computing device, permitting the application of solutions that were not previously possible or that were prohibitively expensive. For example, our expansion products can be used to add necessary storage or PCI capability to an existing server, eliminating the need to purchase additional servers.

Our family of PCI expansion products also 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. Sales of expansion and docking products represented approximately 13%, 22% and 27% of our total revenue for the years ended December 31, 2003, 2002 and 2001, respectively.

Accessories. In addition to our other products, we market a number of mobile device accessories such as port replicators, monitor stands, mobile phone accessories and portable computer stands. Sales of accessories and other products represented approximately 10%, 18% and 25% of our total revenue for the years ended December 31, 2003, 2002 and 2001, respectively.

We market and sell our products on a worldwide basis to OEMs, private-label resellers, distributors, resellers, retailers and direct to end users through our iGo website. Our OEM and private-label reseller sales organization is primarily aligned along our core product lines: power, handheld solutions and expansion and docking. In addition, our distribution channel sales team focuses on selling our iGo branded products throughout North America.

We implement a variety of marketing activities to aggressively market our family of products. Such activities include participation in major trade shows, key OEM and distribution catalogs, distribution promotions, reseller and information technology manager advertising, on-line advertising and banner ads, direct mail and bundle advertisements with OEMs and distribution channel partners. In addition, we pursue a strong public relations program to educate the market regarding our products.

We sell to OEMs, private-label resellers, distributors, resellers, retailers and directly to end users through our iGo website. Our customers include:


(1)	These customers purchase from us through a distributor or private-label reseller.

As a group, the OEMs and private-label resellers, and distributors and retailers listed in the table above accounted for 36% and 29%, respectively, of revenue for the year ended December 31, 2003, compared to 48% and 5% 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.

During 2003 and early in 2004, we entered into strategic relationships with RadioShack, Kensington and Targus to private-label our existing products and co-develop next generation products. We expect that these relationships will increase the availability and exposure of our products, particularly among large national and international electronics and office products retailers.

IBM, which purchases brand labeled power products and monitor stands, accounted for 14% of our revenue for the year ended December 31, 2003 and 20% for the year ended December 31, 2002. Symbol, which purchases serial and modem cradles for handheld devices, accounted for 10% of our revenue for the year ended December 31, 2003 and 20% for the year ended December 31, 2002. RadioShack, a retailer of consumer electronic devices, accounted for 15% of our revenue for the year ended December 31, 2003. Ingram Micro, which is a distributor of mobile electronic devices, accounted for 11% of our revenue for the year ended December 31, 2003. No other customer accounted for greater than 10% of sales for the year ended December 31, 2003. International sales were approximately 14% of revenue for each of the years ended December 31, 2003 and 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 revenue, were approximately 4% of revenue for the year ended December 31, 2003 and 5% for the year ended December 31, 2002.

Our research and development efforts focus primarily on enhancing our current products and developing innovative new products to address a variety of mobile electronic device needs and requirements. We work with customers, prospective customers and outsource partners to identify and implement new solutions intended to meet the current and future needs of the markets we serve.

As of December 31, 2003, our research and development group consisted of 30 people who are responsible for hardware and software design, test and quality assurance. Electrical design services are provided to us by several of our outsource partners under the supervision of our in-house research and development group. Industrial design services are provided to us primarily by Hotwire Development, LLC, who also works with our in-house design team to generate innovative product concepts. Amounts spent on research and development for the years ended December 31, 2003, 2002 and 2001 were $4.8 million, $5.8 million, and $5.6 million, respectively.

In order to manufacture our products cost-effectively, we have implemented a strategy to outsource substantially all of the manufacturing services for our products. Our internal activities are focused on design, low-volume manufacturing and quality testing and our outsourced manufacturing providers are focused on high-volume manufacturing and logistics.

For example, Hipro Electronics Co., Ltd., a leading designer, developer and manufacturer of a variety of power adapter products based in Taiwan, currently manufactures Juice, our combination AC/DC universal power adapter. In contrast, we focus our internal manufacturing activity on our expansion products, which are low-volume products that require custom engineering support.

We purchase the principal components of our products from outside vendors. The terms of supply contracts are negotiated by us or our manufacturing partners with each vendor. We believe that our present vendors have sufficient capacity to meet our supply requirements and that alternative production sources for most components are generally available without interruption. However, several vendors, including those that provide components for certain of our handheld hardware products, are sole sourced.

The majority of our OEM and private-label products are shipped by our outsource manufacturers to our OEM and private-label reseller customers or their fulfillment hubs. We employ the services of an outsource logistics company to efficiently manage the packaging and shipment of our iGo branded products. The logistics company breaks down and packages the iGo branded products for our various distribution channels.

The market for our 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 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. However, we believe that our innovative products, coupled with our strategic relationships with key OEMs, private-label resellers, distributors, resellers and retailers provide us a competitive advantage in the marketplace.

Our power products primarily compete with products offered by specialized third party mobile computing accessory companies, including American Power Conversion, Belkin, Comarco (who distributes via Belkin), Lind, and RRC Power Solutions. In addition, we compete with the internal design efforts of our OEM and non-OEM customers. Our handheld solutions generally compete with products offered by specialized third party accessory companies, including Data Viz. Our expansion products primarily compete with products offered by SBS Communications.

We primarily rely on a combination of patent protection, copyright and trademark laws, trade secrets, nondisclosure agreements and technical measures to protect our proprietary rights. We file domestic and

In general, our patents cover a variety of aspects of the technology utilized in our power, handheld and expansion and docking product lines. We currently license different aspects of our proprietary rights to third parties pursuant to strategic alliances, which often include cross-licensing arrangements.

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 non-competition 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.

As of December 31, 2003, we had 123 full-time employees, 122 who are located in the United States and 1 who is located in Europe, including 28 employed in operations, 30 in engineering, 37 in sales and marketing and 28 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.

Our website is located at http://www.mobilityelectronics.com. We make available free of charge, on or through our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission (SEC). Information contained on our website is not part of this report or any other report filed with the SEC.

The following table shows the name, age and position of each of our executive officers as of March 4, 2004:

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

Joan W. Brubacher began working for us in 1998 as our Senior Financial Analyst, was appointed Controller in 1999 and promoted to Vice President in 2000. She was appointed to the position of Vice President and Chief Financial Officer in 2001 and Executive Vice President and Chief Financial Officer in 2002. Prior to joining us, Ms. Brubacher served as Chief Financial Officer for Phase Laser Systems, Inc., an electronics development/ manufacturing firm. Previously, she served as Chief Financial Officer and subse-

quently as Chief Operating Officer for Laserex, Inc., a laser pointer manufacturing company. Ms. Brubacher began her career with the international public accounting firm Ernst & Whinney (now Ernst & Young) and holds a bachelor’s degree in Business Administration with concentration in Accounting from Kansas State University.

Timothy S. Jeffries joined us in 2002 as Vice President of Worldwide Sales. Mr. Jeffries was appointed Executive Vice President of Worldwide Sales & Services in August 2002, and was appointed Executive Vice President, Global Sales, Marketing & Services in February 2003. He was appointed Executive Vice President and Chief Operating Officer in May 2003. Prior to joining us, Mr. Jeffries served as Vice President, Client Solutions for Viacore, Inc., from 2000 to 2001. Previously, he served as Vice President, Vendor Sales, and later Vice President, Product Management, for Ingram Micro, Inc., a computer products distribution company, from 1997 to 1999. Mr. Jeffries has also held several sales and marketing leadership roles in the high technology industry with companies such as Intelligent Electronics, Inc. and Novell, Inc. Mr. Jeffries holds a bachelor’s degree in Political Science from Santa Clara University and an MBA from Duke University.

We have experienced significant operating losses since inception and, as of December 31, 2003, have an accumulated deficit of $104.1 million. We intend to make expenditures, specifically in research and development, on an ongoing basis, primarily from cash generated from operations and, if available, from lines of credit, as we develop and introduce new products and expand into new markets. If we do not achieve revenue growth sufficient to absorb our planned expenses, we will experience additional losses in future periods. In addition, there can be no assurance that we will achieve or sustain profitability.

Our future success is dependent on market acceptance of our power products. If acceptance of these products does not continue to grow, we will be unable to increase or sustain our revenue, and our business will be severely harmed. If we do not gain market acceptance of our products and technology, we will be unable to achieve anticipated revenue or maintain revenue.

If we do not achieve widespread market acceptance of our power products and technology, we may not maintain our existing revenue or achieve anticipated revenue. For example, we currently derive a material portion of our revenue from the sale of our recently introduced Juice product. Juice is a power charging product, which is a combination AC/DC power adapter for portable computers, PDAs, and mobile phones. Combination AC/DC power adapters represent a new product category in the mobile electronics industry. We anticipate that a material portion of our revenue in the foreseeable future will be derived from Juice and similar power products in this new market category that we are currently developing or plan to develop. We can give no assurance that this market category will develop sufficiently to cover our expenses and costs or that we will be able to develop similar power products. Moreover, our power products may not achieve widespread market acceptance if:


	•	we fail to complete development of these products in a timely manner;

	•	we fail to achieve the performance criteria required of these products by our customers; or

	•	competitors introduce similar or superior products.

In addition, the retail version of the Juice product includes a universal feature that allows a single version of the product to be used with almost any portable computer. If portable computer manufacturers choose to design and manufacture their products in such a way as to limit the use of universal devices with their computers, it could reduce the applicability of a universal device and limit market acceptance of the product at the retail level.

Our operating results have fluctuated in the past, and may continue to fluctuate in the future. It is likely that in some future quarter or quarters our operating results will be below the expectations of securities analysts and investors. If this happens, the market price for our common stock may decline significantly. The factors that may cause our operating results to fall short of expectations include:


	•	the timing of our new product and technology introductions and product enhancements relative to our competitors or changes in our or our competitors’ pricing policies;

	•	market acceptance of our power, handheld solutions, and expansion and docking products;

	•	the size and timing of customer orders;

	•	delay or failure to fulfill orders for our products on a timely basis;

	•	distribution of or changes in our revenue among OEMs, private-label resellers and distribution partners;

	•	our inability to accurately forecast our contract manufacturing needs;

	•	difficulties with new product production implementation or supply chain;

	•	our suppliers’ ability to perform under their contracts with us;

	•	product defects and other product quality problems which may result from the development of new products;

	•	the degree and rate of growth of the markets in which we compete and the accompanying demand for our products;

	•	our ability to expand our internal and external sales forces and build the required infrastructure to meet anticipated growth; and

	•	seasonality of sales.

Many of these factors are beyond our control. For these reasons, you should not rely on period-to-period comparisons and short-term fluctuations of our financial results to forecast our future long-term performance.

The market for our products is highly competitive and in general is characterized by rapid technological advances, changing customer needs and evolving industry standards. If we fail to continue to introduce new products and product enhancements that achieve broad market acceptance on a timely basis, we will not be able to compete effectively, and we will be unable to increase or maintain our revenue. Our future success will depend in large part upon our ability to:


	•	develop, in a timely manner, new products and services that keep pace with developments in technology and customer requirements;

	•	meet potentially new manufacturing requirements and cover potentially higher manufacturing costs of new products;

	•	deliver new products and services through appropriate distribution channels; and

	•	respond effectively to new product announcements by our competitors by quickly introducing competing products.

We may not be successful in developing and marketing, on a timely and cost-effective basis, either enhancements to existing products or new products that respond to technological advances and satisfy

increasingly sophisticated customer needs. We depend upon Hotwire Development, LLC to assist us in generating innovative product concepts. If we fail to maintain our relationship with Hotwire, we may not be successful in developing innovative product concepts. If we fail to introduce or sell innovative new products, our operating results may suffer. In addition, if new industry standards emerge that we do not anticipate or adapt to, our products could be rendered obsolete and our business could be materially harmed. Alternatively, any delay in the development of technology upon which our products are based could result in our inability to introduce new products as planned. The success and marketability of technology and products developed by others is beyond our control.

We have experienced delays in releasing new products in the past, which resulted in lower quarterly revenue than expected. For example, the introduction in early 2003 of our AC/DC power combination product, Juice, was delayed approximately 13 weeks due to necessary modifications required to meet safety certification and production start up requirements. Further, our efforts to develop new and similar products could be delayed due to unanticipated manufacturing requirements and costs. Delays in product development and introduction could result in:


	•	loss of or delay in revenue and loss of market share;

	•	negative publicity and damage to our reputation and brand;

	•	decline in the average selling price of our products and decline in our overall gross margins; and

	•	adverse reactions in our sales and distribution channels.

Our products may experience a reduction in the average selling prices over their respective sales cycles. Further, as we introduce new or next generation products, sales prices of previous generation products may decline substantially. In order to sell products that have a falling average selling price and maintain margins at the same time, we need to continually reduce product and manufacturing costs. To manage manufacturing costs, we must collaborate with our third-party manufacturers to engineer the most cost-effective design for our products. There can be no assurances we will be successful in our efforts to reduce these costs. In order to do so, we must carefully manage the price paid for components used in our products as well as manage our freight and inventory costs to reduce overall product costs. If we are unable to reduce the cost of older products as newer products are introduced, our average gross margins may decline.

We have historically derived a substantial portion of our revenue from a relatively small number of customers. Our five largest customers comprised 58% of our revenue for the year ended December 31, 2003. These customers typically do not have minimum purchase requirements and can stop purchasing our products at any time or with very short notice. In addition, most customer agreements are short term and non-exclusive and provide for purchases on a purchase order basis. We expect that a small number of customers will continue to represent a substantial percentage of our sales.

For example, RadioShack accounted for 15% of our revenue and IBM accounted for 14% of our revenue for the year ended December 31, 2003. In the event RadioShack, IBM or any of our other major customers reduce, delay or cancel orders with us, and we are not able to sell our products to new customers at comparable levels, our revenue could decline significantly. In addition, any difficulty in collecting amounts due from one or more key customers would negatively impact our result of operations.

We expect that we will continue to be dependent upon a limited number of OEMs for a significant portion of our revenue in future periods. No OEM is presently obligated either to purchase a specified amount of products or to provide us with binding forecasts of product purchases for any period. Our products are typically one of many related products used by portable computer users. Demand for our products is therefore subject to many risks beyond our control, including, among others:


	•	competition faced by our OEM customers in their particular end markets;

	•	market acceptance of our technology and products by our OEM customers;

	•	technical challenges which may or may not be related to the components supplied by us;

	•	the technical, sales and marketing and management capabilities of our OEM customers; and

	•	the financial and other resources of our OEM customers.

The reduction, delay or cancellation of orders from our significant OEM customers, or the discontinuance of the use of our products by our end users may subject us to potential adverse revenue fluctuations.

During the second quarter of 2003, we entered into relationships with Kensington and Fellowes to sell our power products on a private-label basis. At the end of the fourth quarter of 2003, however, we terminated our relationship with Fellowes because of its failure to place required minimum orders under our agreement, as well as other reasons. Our relationships with strategic private-label resellers are critical to our success. For example, we had expected significant sales of our power products to Fellowes in the fourth quarter of 2003, and because these sales did not materialize, our revenues during this quarter fell below our expectations. In addition, the failure to meet our revenue expectations will, and has, had a negative impact on the price of our common stock. During the first quarter of 2004, we entered into a relationship with Targus to sell our power products on a private-label basis. If Kensington or Targus fail to execute as we anticipate, our revenues will suffer and we will experience additional losses in future periods.

Under the terms of our agreements with Kensington and Targus, our direct access to international markets or to certain U.S. markets has been limited. These agreements provide that we may not enter into any more than two broad-based distribution agreements, thereby currently prohibiting us from entering into any other broad-based distribution agreements. Accordingly, our success will depend in part upon Kensington and Targus’ ability and willingness to effectively and widely distribute and market our products. For example, because both the Kensington and Targus distribution chains include large retailers such as Circuit City, CompUSA, and Fry’s Electronics, we are precluded from distributing to these retailers directly. If Kensington and Targus do not purchase the volume of products that we anticipate, our results of operations will suffer.

Success of the relationship with private-label resellers, such as Kensington and Targus, will also depend in part upon their success in marketing and selling our products on a private-label basis outside of the United States. The international sales by our private-label resellers are subject to a number of risks that could limit sales of our products. These risks include:


	•	the impact of possible recessionary environments in foreign economies;

	•	political and economic instability;

	•	unexpected changes in regulatory requirements;

	•	export restriction and availability of export licenses; and

	•	tariffs and other trade barriers.

Most of our products are produced under contract manufacturing arrangements with several manufacturers in China, Taiwan and the United States. Our reliance on third party manufacturers exposes us to risks, which are not in our control, and our revenue could be negatively impacted. Any termination of or significant disruption in our relationship with our manufacturers may prevent us from filling customer orders in a timely manner, as we generally do not maintain large inventories of our products, and will negatively impact our revenue.

Our use of contract manufacturers reduces control over product quality and manufacturing yields and costs. We depend upon our contract manufacturers to deliver products that are free from defects, competitive in cost and in compliance with our specifications and delivery schedules. Moreover, although arrangements with such manufacturers may contain provisions for warranty obligations on the part of contract manufacturers, we remain primarily responsible to our customers for warranty obligations. Disruption in supply, a significant increase in the cost of the assembly of our products, failure of a contract manufacturer to remain competitive in price, the failure of a contract manufacturer to comply with any of our procurement needs or the financial failure or bankruptcy of a contract manufacturer could delay or interrupt our ability to manufacture or deliver our products to customers on a timely basis. In addition, a recurrence of the Severe Acute Respiratory Syndrome, or SARS, outbreak in China could result in quarantines or closures of our third party manufacturers or their suppliers.

Hipro Electronics Company, Ltd. is currently the exclusive manufacturer of our Juice products. Our agreement with Hipro does not permit us to second source our Juice product from any other manufacturer. On occasion, however, OEMs require a relationship with a second qualified manufacturer. Accordingly, unless Hipro allows us to secure a second source for such customers or we are not able to find a manufacturer willing to operate in a back-up relationship to Hipro in circumstances where Hipro can not meet our manufacturing needs, our exclusive arrangement may prevent us from working with some OEMs. In addition, Hipro manufactures our products on a purchase order basis and does not dedicate manufacturing capacity to us. Any disruption in our relationship with Hipro and/or the inability of Hipro to meet our manufacturing needs could harm our business. In order to replace Hipro we would have to identify and qualify an alternative supplier. This process could take several months to complete and would significantly impair our ability to fulfill customer orders.

We generally provide our third-party contract manufacturers with a rolling forecast of demand which they use to determine our material and component requirements. Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms and demand and supply for a component at a given time. Some of our components have long lead times. For example, certain electronic components used in our Juice product have lead times that range from six to ten weeks. If our forecasts are less than our actual requirements, our contract manufacturers may be unable to manufacture products in a timely manner. If our forecasts are too high, our contract manufacturers will be unable to use the components they have purchased on our behalf, which may require us to purchase the components from them before they are used in the manufacture of our products.

We rely on a contract fulfillment provider to warehouse our iGo branded finished goods inventory and to ship our iGo branded products to our customers. We do not have a long-term contract with our fulfillment provider. Any termination of or significant disruption in our relationship with our fulfillment provider may prevent customer orders from being fulfilled in a timely manner, as it would require that we relocate our finished goods inventory to another warehouse facility and arrange for shipment of products to our customers.

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. Examples of sole source critical components include two different programmable microprocessors used in various models of our handheld hardware

We depend upon our suppliers to deliver components that are free from defects, competitive in functionality and cost and in compliance with our specifications and delivery schedules. Disruption in supply, a significant increase in the cost of one or more components, failure of a supplier to remain competitive in functionality or price, the failure of a supplier to comply with any of our procurement needs or the financial failure or bankruptcy of a supplier could delay or interrupt our ability to manufacture or deliver our products to customers on a timely basis.

Any termination of or significant disruption in our relationship with our suppliers may prevent us from filling customer orders in a timely manner as we generally do not maintain large inventories of components or products. In the event that a termination or disruption were to occur, we would have to find and qualify an alternative source. The time it would take to complete this process would vary based upon the size of the supplier base and the complexity of the component or product. Delays could range from as little as a few days to six months, and, in some cases, a suitable alternative may not be available at all.

Our success and ability to compete are dependent upon our internally developed technology and know-how. 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. While we have certain patents and patents pending, there can be no assurance that patents pending or future patent applications will be issued or that, if issued, those patents will not be challenged, invalidated or circumvented or that rights granted thereunder will provide meaningful protection or other commercial advantage to us. Moreover, there can be no assurance that any patent rights will be upheld in the future or that we will be able to preserve any of our other intellectual property rights.

We typically enter into confidentiality, noncompete or invention assignment agreements with our key employees, distributors, customers and potential customers, and limit access to, and distribution of, our product design documentation and other proprietary information. There can be no assurance that our confidentiality agreements, confidentiality procedures, noncompetition agreements or other factors will be adequate to deter misappropriation or independent third-party development of our technology or to prevent an unauthorized third party from obtaining or using information that we regard as proprietary. Litigation has been, and will in the future be, necessary to defend our intellectual property rights, which has in the past and could in the future result in substantial cost to, and divisions of efforts by, us.

The laws of some foreign countries do not protect or enforce proprietary rights to the same extent as do the laws of the United States. In addition, under current law, certain patent applications filed with the United States Patent and Trademark Office before November 29, 2000 may be maintained in secrecy until a patent is issued. Patent applications filed with the United States Patent and Trademark Office on or after November 29, 2000, as well as patent applications filed in foreign countries, may be published some time after filing but prior to issuance. The right to a patent in the United States is attributable to the first to invent, not the first to file a patent application. We cannot be sure that our products or technologies do not infringe patents that may be granted in the future pursuant to pending patent applications or that our products do not infringe any patents or proprietary rights of third parties. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, we could be prevented from selling our products or could be required to obtain licenses from the owners of such patents or be required to redesign our products to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be on terms acceptable to us or that we would be successful in any attempts to redesign our products or processes to avoid infringement. Our failure to obtain these licenses or to redesign our products would have a material adverse effect on our business.

There can be no assurance that our competitors will not independently develop technology similar to existing proprietary rights of others. We expect that our products will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. There can be no assurance that third parties will not assert infringement claims against us in the future or, if infringement claims are asserted, that such claims will be resolved in our favor. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms favorable to us, if at all. In addition, litigation may be necessary in the future to protect our trade secrets or other intellectual property rights, or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources. For example, we recently settled a lawsuit with Comarco, Inc. in which each party made patent infringement claims against the other. We incurred significant costs in the lawsuit and devoted substantial time and efforts of certain employees and members of management to this lawsuit.

We have acquired, and may pursue opportunities to acquire businesses, products or technologies that complement or expand our current capabilities. Acquisitions could require significant capital infusions and could involve many risks including, but not limited to, the following:


	•	difficulties in assimilating and integrating the operations, products and workforce of the acquired companies;

	•	acquisitions may negatively impact our results of operations because they may require large one-time charges or could result in increased debt or contingent liabilities, adverse tax consequences, substantial depreciation or deferred compensation charges, or the amortization or write down of amounts related to deferred compensation, goodwill and other intangible assets;

	•	acquisitions may be dilutive to our existing stockholders;

	•	acquisitions may disrupt our ongoing business and distract our management; and

	•	key personnel of the acquired company may decide not to work for us.

We may not be able to identify or consummate any future acquisitions on acceptable terms, or at all. If we do pursue any acquisitions, it is possible that we may not realize the anticipated benefits from such acquisitions.

Our success depends on our ability to manage growth effectively. If we do not effectively manage this growth, we may not be able to operate efficiently or maintain the quality of our products. Either outcome could materially and adversely affect our operating results. As we continue to develop new products and bring them to market, we will be required to manage multiple projects, including the design and development of products and their transition to high volume manufacturing. This will place a significant strain on our operational, financial and managerial resources and personnel, our management information systems, and our operational and financial controls. To effectively manage our growth we must:


	•	increase research and development resources;

	•	install and implement adequate controls and management information systems in an effective, efficient and timely manner;

	•	increase the managerial skills of our supervisors;


	•	maintain and strengthen our relationships with our contract manufacturers and fulfillment provider; and

	•	more effectively manage our supply chain.

In the past, some of our customers have returned products to us because the product did not meet their expectations, specifications and requirements. These returns were 4% of revenue for the year ended December 31, 2003 and 5% of revenue for the year ended December 31, 2002. It is likely that we will experience some level of returns in the future and, as our business grows, this level may be more difficult to estimate. A portion of our sales to distributors is generally under terms that provide for certain stock balancing privileges. Under the stock balancing programs, some distributors are permitted to return up to 20% of their prior quarter’s purchases, provided that they place a new order for equal or greater dollar value of the amount returned. We have not historically experienced significant stock balance returns.

Also, returns may adversely affect our relationship with those customers and may harm our reputation. This could cause us to lose potential customers and business in the future. We record a reserve for future returns at the time revenue is recognized. We believe the reserve is adequate given our historical level of returns. If returns increase, however, our reserve may not be sufficient and operating results could be negatively affected.

A number of our products are based on new technology and the designs are complex. As such, they may contain undetected errors or performance problems, particularly during new or enhanced product launches. Despite product testing prior to introduction, our products have in the past, on occasion, contained errors that were discovered after commercial introduction. Errors or performance problems may also be discovered in the future. Any future defects discovered after shipment of our products could result in loss of sales, delays in market acceptance or product returns and warranty costs. We attempt to make adequate allowance in our new product release schedule for testing of product performance. Because of the complexity of our products, however, our release of new products may be postponed should test results indicate the need for redesign and retesting, or should we elect to add product enhancements in response to customer feedback. In addition, third-party products, upon which our products are dependent, may contain defects which could reduce or undermine the performance of our products and adversely affect our operating results.

The sale of our products involves risk of product liability claims against us. We currently maintain product liability insurance, but our product liability insurance coverage is subject to various coverage exclusions and limits and may not be obtainable in the future on terms acceptable to us, or at all. We do not know whether claims against us with respect to our products, if any, would be successfully defended or whether our insurance would be sufficient to cover liabilities resulting from such claims. Any claims successfully brought against us could harm our business.

We believe our future success will depend in large part upon our ability to identify, attract and retain highly skilled managerial, engineering, sales and marketing, finance and operations personnel. Competition for personnel in the technology industry is intense, and we compete for personnel against numerous companies, including larger, more established companies with significantly greater financial resources. There can be no assurance we will be successful in identifying, attracting and retaining personnel.

Our success also depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, finance and manufacturing personnel, many of whom would be difficult to replace. In particular, we believe that our future success depends on Charles R. Mollo, Chief Executive Officer and President, Joan W. Brubacher, Executive Vice President and Chief Financial Officer and Timothy S. Jeffries, Executive Vice President and Chief Operating Officer. We do not maintain key person life insurance on any of our executive officers. Except for Messrs. Mollo and Jeffries and Ms. Brubacher, we do not have employment contracts covering any of our senior management. The loss of the services of any of our key personnel, the inability to identify, attract or retain qualified personnel in the future or delays in hiring required personnel could make it difficult for us to manage our business and meet key objectives, such as timely product introductions.

We expect to expend significant capital to further develop our products, increase awareness of our brand names and to expand our operating and management infrastructure as needed to support our anticipated growth. We may use capital more rapidly than currently anticipated. Additionally, we may incur higher operating expenses and generate lower revenue than currently expected, and we may be required to depend on external financing to satisfy our operating and capital needs, including the repayment of our debt obligations. We may be unable to secure additional debt or equity financing on terms acceptable to us, or at all, at the time when we need such funding. If we do raise funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced, and the securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock or may be issued at a discount to the market price of our common stock which would result in dilution to our existing stockholders. If we raise additional funds by issuing debt, we may be subject to debt covenants, such as the debt covenants under our secured credit facility, which could place limitations on our operations including our ability to declare and pay dividends. Our inability to raise additional funds on a timely basis would make it difficult for us to achieve our business objectives and would have a negative impact on our business, financial condition and results of operations.

The market for mobile electronic devices in general is intensely competitive, subject to rapid changes and sensitive to new product introductions or enhancements and marketing efforts by industry participants. We expect to experience significant and increasing levels of competition in the future. 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. Recently, we settled a patent infringement suit with Comarco, one of our competitors in power products, that resulted in a cross license, which does not include the right to sub-license, relating to our respective power product technology. As a result, Comarco may be positioned to develop and market power products that are substantially similar to our products.

We currently compete with the internal design efforts of both our OEM and non-OEM customers. These OEMs, as well as a number of our non-OEM competitors, have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than we do. There can be no assurance that such competitors will be unable to respond as quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the development, sale and promotion of their products better than we do or develop products that are superior to our products or that achieve greater market acceptance.

Our future success will depend, in part, upon our ability to increase sales in our targeted markets. There can be no assurance that we will be able to compete successfully with our competitors or that the competitive pressures we face will not have a material adverse effect on our business. Our future success will depend in

large part upon our ability to increase our share of our target market and to sell additional products and product enhancements to existing customers. Future competition may result in price reductions, reduced margins or decreased sales.

The demand for the majority of our products and technology is primarily driven by the underlying market demand for mobile electronic devices. Should the growth in demand for mobile electronic devices be inhibited, we may not be able to increase or sustain revenue. Industry growth depends in part on the following factors:


	•	increased demand by consumers and businesses for mobile electronic devices; and

	•	the number and quality of mobile electronic devices in the market.

The market for our products and services depends on economic conditions affecting the broader information technology market. Prolonged weakness in this market has caused in the past and may cause in the future customers to reduce their overall information technology budgets or reduce or cancel orders for our products. In this environment, our customers may experience financial difficulty, cease operations and fail to budget or reduce budgets for the purchase of our products and services. This, in turn, may lead to longer sales cycles, delays in purchase decisions, payment and collection, and may also result in downward price pressures, causing us to realize lower revenue and operating margins. In addition, general economic uncertainty and the recent general decline in capital spending in the information technology sector make it difficult to predict changes in the purchasing requirements of our customers and the markets we serve. We believe that, in light of these events, some businesses have and may continue to curtail or suspend capital spending on information technology. These factors may cause our revenue and operating margins to decline.

Our products must comply with various domestic and international laws, regulations and standards. For example, the shipment of our products from the countries in which they are manufactured to other international or domestic locations requires us to obtain export licenses and to comply with possible import restrictions of the countries in which we sell our products. In the event that we are unable or unwilling to comply with any such laws, regulations or standards, we may decide not to conduct business in certain markets. Particularly in international markets, we may experience difficulty in securing required licenses or permits on commercially reasonable terms, or at all. In addition, we are generally required to obtain both domestic and foreign regulatory and safety approvals and certifications for our products. Failure to comply with existing or evolving laws or regulations, including export and import restrictions and barriers, or to obtain timely domestic or foreign regulatory approvals or certificates could negatively impact our revenue.

Our common stock is currently traded on the Nasdaq National Market. We have in the past experienced, and may in the future experience, limited daily trading volume. The trading price of our common stock has been and may continue to be volatile. The market for technology companies, in particular, has at various times experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may significantly affect the trading price of our common stock, regardless of our actual operating performance. The trading price of our common stock could be affected by a number of factors, including, but not limited to, changes in expectations of our future performance, changes in estimates by securities analysts (or failure to meet such estimates), quarterly fluctuations in our sales and financial results and a variety of risk factors, including the ones described elsewhere in this prospectus. Periods of volatility in the market price of a company’s securities sometimes

result in securities class action litigation. If this were to happen to us, such litigation would be expensive and would divert management’s attention. In addition, if we needed to raise equity funds under adverse conditions, it would be difficult to sell a significant amount of our stock without causing a significant decline in the trading price of our stock.

As of March 4, 2004, we had 27,664,795 shares of common stock outstanding. All of our outstanding shares are currently available for sale in the public market, some of which are subject to volume and other limitations under the securities laws. Future sales of substantial amounts of shares of our common stock by our existing stockholders in the public market, or the perception that these sales could occur, may cause the market price of our common stock to decline. We may be required to issue additional shares upon exercise of previously granted options and warrants that are currently outstanding.

As of March 4, 2004, we had 2,186,551 shares of common stock issuable upon exercise of stock options under our 1996 stock option plan, of which 796,751 options were exercisable as of March 4, 2004; 97,637 shares were available for future issuance under our 1996 stock option plan; 129,685 shares were issuable under options granted outside our plan, of which 14,685 were exercisable as of March 4, 2004; 1,816,903 shares of common stock were issuable under our Employee Stock Purchase Plan; warrants to purchase 255,777 shares of common stock; and 340,628 shares of common stock issuable upon the conversion of 312,991 shares of Series C preferred stock convertible at a 1-to-1.08830 basis. Increased sales of our common stock in the market after exercise of currently outstanding options could exert significant downward pressure on our stock price. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price we deem appropriate.

As of March 4, 2004, our executive officers, directors and principal stockholders together beneficially own approximately 11.3% of the outstanding shares of common stock. As a result, these stockholders, acting together, may be able to exercise substantial influence over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. The concentration of ownership may also have the effect of delaying or preventing a change in our control that may be viewed as beneficial by the other stockholders.

In addition, our certificate of incorporation does not provide for cumulative voting with respect to the election of directors. Consequently, our present directors, executive officers, principal stockholders and our respective affiliates may be able to control the election of the members of the board of directors. Such a concentration of ownership could have an adverse effect on the price of the common stock, and may have the effect of delaying or preventing a change in control, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.

Some provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us even if a change of control would be beneficial to our stockholders. These provisions include:


	•	authorizing the issuance of preferred stock, with rights senior to those of the common stockholders, without common stockholder approval;

	•	prohibiting cumulative voting in the election of directors;

	•	a staggered board of directors, so that no more than two of our five directors are elected each year; and

	•	limiting the persons who may call special meetings of stockholders.

In June 2003, our board of directors adopted a stockholders rights plan. Pursuant to its terms, we have distributed a dividend of one right for each outstanding share of common stock. These rights cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our board of directors and may have the effect of deterring hostile takeover attempts. These provisions could discourage a future takeover attempt which individual stockholders might deem to be in their best interests or in which shareholders would receive a premium for their shares over current prices.

We are subject to the provisions of Section 203 of the Delaware General Corporation Law. These provisions prohibit large stockholders, in particular a stockholder owning 15% or more of the outstanding voting stock, from consummating a merger or combination with a corporation unless this stockholder receives board approval for the transaction or 66 2/3% of the shares of voting stock not owned by the stockholder approve the merger or transaction. These provisions could discourage a future takeover attempt which individual stockholders might deem to be in their best interests or in which shareholders would receive a premium for their shares over current prices.

Our corporate offices are located in Scottsdale, Arizona. This facility consists of approximately 24,000 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, and Dallas, Texas. 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.

Holmes Lundt, et al., plaintiffs, and Jason Carnahan, et. al., intervenors, v. Mobility Electronics, Inc., Portsmith, Inc., Charles R. Mollo, Joan W. Brubacher, Jeffrey R. Harris, Robert P. Dilworth, Larry M. Carr, William O. Hunt, Jerre L. Stead and Darryl Baker, pending in the District Court of the Fourth Judicial District of Idaho, Ada County, Cause No. CV-0C-0302562D. This lawsuit initially was commenced on April 2, 2003, by Holmes Lundt, former President and CEO of Portsmith, Inc., our wholly-owned subsidiary, and his wife, but additional plaintiffs were added, and several of our officers and directors were added as defendants. In their current pleading, the plaintiffs are alleging breach of the Portsmith merger agreement and Mr. Lundt’s employment agreement, wrongful termination of Mr. Lundt, fraudulent misrepresentation, securities fraud, breach of an alleged covenant of good faith and fair dealing, civil conspiracy, and are seeking monetary damages and/or rescission of the Portsmith merger agreement. On February 11, 2004, the court permitted the intervenors to intervene in the lawsuit and the intervenors in turn dismissed a separate lawsuit they had commenced on December 30, 2003. In their current pleading, the intervenors assert claims against the Company, Portsmith, Mr. Mollo and Ms. Brubacher, for breach of contract, breach of an alleged covenant of good faith and fair dealing, unjust enrichment, declaratory judgment, fraud, misrepresentation, concealment, breach of fiduciary duty, constructive trust, conversion, and constructive fraud. Intervenors are seeking monetary damages and/or the recovery of unspecified shares of the Company’s common stock. Among other things, plaintiffs and intervenors dispute that we appropriately calculated and paid the earn-out consideration called for by the Portsmith merger agreement. We intend to vigorously defend against the claims as well as pursue our own claims against the plaintiffs and intervenors.

same United States District Court for the District of Arizona. These lawsuits assert claims for securities fraud under Sections 10(b), 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, on behalf of a purported class of persons who purchased our publicly traded securities between September 2, 2003 and January 5, 2004. The complaints generally allege that various public statements made by or on behalf of us were false or misleading when made, that the individual defendants were allegedly aware of material non-public information at the time that they engaged in transactions in our common stock and that members of the purported stockholder class suffered damages when the market price of our common stock declined following disclosure of the information that allegedly had not been previously disclosed. The complaints seek to proceed on behalf of the alleged class described above, seek monetary damages in an unspecified amount and seek recovery of plaintiffs’ costs and attorneys’ fees. We intend to vigorously defend against these claims.

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.

No matter was submitted to a vote of stockholders during the fourth quarter of 2003.

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

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.

On December 1, 2003, we issued 70,000 shares of our common stock to InVision Wireless, LLC, valued at $11.36 per share, or $795,000, in connection with our acquisition of the hardware business of InVision Software Inc. and InVision Wireless, LLC. This issuance was made in reliance upon the exemption from registration available under Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving any public offering.

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 2004 Annual Meeting of Shareholders scheduled for May 26, 2004.

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 Statements of Operations Data” and “Consolidated Balance Sheet Data” as of and for each of the years in the five-year period ended December 31, 2003 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 of December 31, 2003 and 2002 and for each of the years in the three-year period ended December 31, 2003, are derived from our consolidated financial statements, included elsewhere in this Form 10-K.


(1)	See “Critical Accounting Policies and Estimates — Goodwill” under Item 7. for a description of this item.

The following discussion and analysis of our financial condition and results of operations should be read together with our selected consolidated financial data and the consolidated financial statements and notes thereto contained in this report. The following discussion contains forward-looking statements. Our actual results may differ significantly from the results discussed in these forward-looking statements. Please see the “Disclosure Concerning Forward-Looking Statements” and “Risk Factors” above for a discussion of factors that may affect our future results.

Increased functionality and the ability to access and manage information remotely are driving the proliferation of mobile electronic devices and applications. The popularity of these devices is benefiting from reductions in size, weight and cost and improvements in functionality, storage capacity and reliability. Each of these devices needs to be powered and connected when in the home, the office, or on the road, and can be accessorized, representing an opportunity for one or more of our products.

We use our proprietary technology to design and develop products that make mobile electronic devices more efficient and cost effective, thus enabling professionals and consumers higher use of these mobile electronic devices and the ability to access information more readily. Our products include power, handheld and expansion and docking products.

We sell our products to OEMs, private-label resellers, distributors, resellers, retailers and end-users. We recently entered into strategic reseller agreements with Kensington and Targus to market and distribute our power products on a private-label basis. We sell to retailers such as RadioShack and through distributors such as Ingram Micro. We also sell directly to end users through our company websites and provide customized solutions to corporate customers. Direct sales to OEMs and private-label resellers accounted for approximately 45% for the year ended December 31, 2003 and 62% of revenue for the year ended December 31, 2002. Sales through retailers and distributors accounted for approximately 45% of revenue for the year ended December 31, 2003 and 12% of revenue for the year ended December 31, 2002. The balance of our revenue during these periods was derived from direct sales to end users. In the future, we expect that we will be dependent upon a relatively small number of customers for a significant portion of our revenue, including most notably RadioShack, Targus, Kensington, IBM, Dell, Symbol, and Ingram Micro.

Our early focus was on the development of DC power adapters and remote peripheral component interface, or PCI, bus technology and products based on our proprietary Split Bridge® technology. We invested heavily in our leading edge Split Bridge technology. While we have had some success with Split Bridge in the corporate portable computer market with sales of universal docking stations, it became clear in early 2002 that this would not be the substantial opportunity we originally envisioned. While we continue to produce and sell products and selectively evaluate opportunities using our Split Bridge technology, we are no longer committing substantial resources to this technology.

In 2002, we repositioned ourselves as a provider of power and connectivity products for mobile electronic devices, including portable computers, PDAs, mobile phones, smartphones, digital cameras and DVD players. Through a combination of acquisitions and internal development, we created a much broader base of innovative products for use with mobile electronic devices by capitalizing on our base of technology and distribution channels.

Our long-term goal is to establish an industry standard for all electronic device power adapters based on our patented tip technology. We also believe there are long-term growth opportunities for our handheld products and technology related to the new smartphones that are being introduced by the major phone manufacturers.

Our 2004 development efforts are focused significantly on the development of our Juice family of power adapter products. In particular, we are collaborating with RadioShack to develop and market a line of power adapters, including cigarette lighter adapters, mobile AC adapters, and low power universal AC/ DC adapters, specifically designed for the low power mobile electronics device market. Each of these devices will

Our ability to execute successfully on our near and long-term objectives depends largely upon the general market acceptance of our tip technology which allows users to charge multiple devices with a single adapter and our ability to protect this technology through our intellectual property. Additionally, we must execute on the customer relationships that we have developed and continue to design, develop, manufacture and market new and innovative technology and products that are embraced by these customers and the overall market in general.

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, revenue and expenses and related disclosure of contingent assets and liabilities.

On an on-going basis, we evaluate our estimates, including those related to bad debt expense, warranty obligations and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

Revenue Recognition. Revenue from product sales is recognized upon shipments and transfers of ownership from us or our contract manufacturers to the customers. 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.

Our recognition of revenue from product sales to distributors, resellers and retailers, or the “distribution channel,” is affected by agreements we have giving certain customers rights to return up to 20% of their prior quarter’s purchases, provided that they place a new order for equal or greater dollar value of the amount returned. We also have agreements with certain customers that allow them to receive credit for subsequent price reductions, or “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 by recording an allowance for sales returns in the amount of the difference between the sales price and the cost of goods sold as a reduction of accounts receivable. Gross sales to the distribution channel accounted for approximately 45% for the year ended December 31, 2003 and 12% of revenue for the year ended December 31, 2002.

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 inventory held by our distributors, 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

Inventory Valuation. Inventories consist of finished goods and component parts purchased both partially and fully assembled. We have all normal risks and rewards of our 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. We monitor usage reports to determine if the carrying value of any items should be adjusted due to lack of demand for the items. We make a downward adjustment to the value of our 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.

Goodwill Valuation. 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.

As a result of our acquisitions of Portsmith, Cutting Edge Software and iGo during 2002, we have recorded additional goodwill of approximately $13.0 million as of December 31, 2003. 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, 2003.

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, revenue 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.

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

Revenue. Revenue generally consists of sales of products, net of returns and allowances. To date, our revenues have come predominantly from power adapters, handheld products, expansion and docking products, and accessories. The following table summarizes the year-over-year comparison of our revenue for the periods indicated:

The 2003 increase in revenue is primarily due to the introduction of our new combination AC/ DC universal power adapter in January 2003. As a result, sales of power products increased by $19.6 million, or 241.7%, to $27.8 million during the year ended December 31, 2003 as compared to $8.1 million for the year ended December 31, 2002.

The 2002 increase in revenue was primarily a result of our acquisitions of Portsmith, Cutting Edge Software and iGo during 2002. Approximately $9.7 million of the increase was due to sales of handheld hardware and software products through our Portsmith and Cutting Edge Software subsidiaries, which we acquired in February and August 2002, respectively. 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. 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 in December 2001. We entered into a new distribution agreement with Targus in February 2004. Sales of accessories decreased by approximately $3.0 million during 2002 as a result of general economic conditions

Cost of revenue. Cost of revenue generally consists of costs associated with components, outsourced manufacturing and in-house labor associated with assembly, testing, packaging, shipping and quality assurance, depreciation of equipment and indirect manufacturing costs. The following table summarizes the year-over-year comparison of our cost of revenue for the periods indicated:

The 2003 increase in cost of revenue was due primarily to the 65.5% volume increase in revenue. Cost of revenue as a percentage of revenue decreased to 65.3% for the year ended December 31, 2003 from 76.7% for the year ended December 31, 2002. The reduction in cost of revenue as a percentage of revenue is primarily attributable to the spreading of fixed overhead expenses over increases in sales volumes and the introduction of new higher-margin power products during 2003.

The 2002 decrease in cost of revenue was primarily due to a $3.8 million charge to cost of revenue 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 as a percentage of revenue 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 as a percentage of revenue was 75.0% and 78.6% for the years ended December 31, 2002 and 2001, respectively. The reduction in cost of revenues as a percentage of revenue was primarily attributable to the spreading of fixed overhead expenses over increases in sales volumes.

Gross profit. The following table summarizes the year-over-year comparison of our gross profit for the periods indicated:

Gross margins increased to 34.7% for the year ended December 31, 2003 from 23.3% for the year ended December 31, 2002. The increase in gross margins was primarily due to the introduction of the new higher-margin combination AC/ DC power adapter product in January 2003. Gross profit was also positively impacted by the spreading of fixed overhead expenses over increases in sales volumes.

Gross margins increased to 23.3% for the year ended December 31, 2002 from 9.3% for the year ended December 31, 2001. The increase in gross margins was due primarily to a $3.8 million charge to cost of revenue 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.

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. The following table summarizes the year-over-year comparison of our sales and marketing expenses for the periods indicated:

The 65.5% increase in revenue for the year ended December 31, 2003 as compared to the year ended December 31, 2002, was primarily a result of increased sales through distribution channels which did not require a corresponding increase in sales and marketing expenses. As a result, sales and marketing expenses as a percentage of revenue decreased to 13.9% for the year ended December 31, 2003 from 22.6% for the year ended December 31, 2002.

The 2002 decrease in sales and marketing expenses primarily resulted from a reduction in marketing programs due to our decision to focus our marketing efforts on what we deemed to be the most productive sales channels. As a percentage of 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, outside consulting, lab costs and travel related costs of our product development group. The following table summarizes the year-over-year comparison of our research and development expenses for the periods indicated:

While research and development expenses for the year ended December 31, 2003 decreased as compared to the year ended December 31, 2002, research and development expenses in 2002 included $620,000 of in-process research and development recorded in connection with the acquisition of Cutting Edge Software and $400,000 associated with the write-down of certain tooling equipment which was never used in production. Excluding these charges, research and development expense for 2002 was $4.8 million which is consistent with research and development expenses for 2003.

Excluding the $1.0 million of charges in 2002, research and development expenses for the year ended December 31, 2002 decreased as compared to the year ended December 31, 2001 due to reductions in engineering expenses and staff as a result of the development of Split Bridge technology, which was largely developed in 2000 and the early part of 2001.

General and administrative. General and administrative expenses consist primarily of salaries and other personnel-related expenses of our finance, human resources, information systems, corporate development and other administrative personnel, as well as facilities, professional fees, depreciation and amortization and related expenses. The following table summarizes the year-over-year comparison of our general and administrative expenses for the periods indicated:

The increase in general and administrative expenses for the year ended December 31, 2003 compared to the year ended December 31, 2002 is due primarily to costs incurred in connection with litigation of a patent infringement matter that was settled in July 2003 of approximately $750,000 and an increase of approximately $200,000 in bad debt expense resulting from the increase in sales and accounts receivable during 2003. The balance of the increase was primarily due to information system consolidation and integration efforts relating to our acquisitions of Portsmith, Cutting Edge, and iGo in 2002. General and administrative expenses as a percentage of revenue decreased to 18.2% for the year ended December 31, 2003 from 26.2% for the year ended December 31, 2002.

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 $600,000 relating to the acquisition of Magma in October 2000. Excluding the 2001 write-off 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.

Interest, net. Interest, net consists primarily of interest earned on our cash balances and short-term investments, net of interest expense. Interest expense relates to our line of credit entered into in October 2002. The following table summarizes the year-over-year comparison of interest, net for the periods indicated:

The decreases for the years ended December 31, 2003 and 2002 were primarily due to a reduction in interest income due to decreases in average cash balances in both 2003 and 2002 and an increase in interest expense due to interest paid on borrowings under our line of credit in 2003. For the year ended December 31, 2003, interest expense was $171,000 and interest income was $144,000. Interest expense was less than $5,000 for the year ended 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, 2003, 2002, and 2001. Based on historical operating losses and projections for future taxable income, it is more likely than not that we will not fully realize the benefits of the net operating loss carryforwards. Thus, we have not recorded a tax benefit from our net operating loss carryforwards for the year ended December 31, 2003.

For 2004, we anticipate revenues of at least $80 million, or at least a 53% increase from 2003, with both revenues and profitability trending progressively higher each quarter. Our 2004 outlook is based on the following expectations:


	•	An IDC forecasted portable computer growth rate for the U.S. of 38% in 2004.

	•	A full year of revenue from our combination AC/ DC power adapter programs with IBM and Dell, compared to nine months and less than one month, respectively, in 2003.

	•	A full year of revenue from sales of power adapters designed for use with portable computers to RadioShack, compared to approximately six months of revenue in 2003.

	•	A full year of revenue from sales of power adapters to Kensington’s domestic and international channels, compared to six months and three months, respectively, in 2003.

	•	Nearly a full year of revenue from sales of power adapters to Targus’ domestic and international channels, compared to no revenue in 2003 from either channel.

	•	A half year of revenue from sales of power adapters designed for use with lower-power mobile electronic devices to RadioShack, other Mobility distribution channels, and potential new distribution channels, compared to no revenue contribution in 2003.

	•	Modest growth in sales of handheld hardware and software products and expansion and docking products.

We expect gross margin to increase slightly for 2004 from our 34.7% gross margin for 2003. In the first half of 2004, we expect our gross margin percentage to be at, or slightly below, our 2003 gross margin percentage as a result of our anticipated product mix which includes a higher mix of OEM product sales at typically lower gross margins. However, we expect our gross margin percentage to increase in the second half of the year as we begin to sell power adapters designed for use with lower-power mobile electronic devices to RadioShack. Revenue relating to the sales of these products to RadioShack will be recognized on a net basis resulting in a gross margin of 100% as RadioShack will be our contract manufacturer and a customer for these products. As a result, we will only recognize revenue equal to the mark-up on the resale of these products to RadioShack, with no associated cost of goods sold.

We believe that operating expenses will increase by approximately 14–18% during 2004, although we anticipate that they will trend down as a percentage of revenue. We expect sales and marketing expenses to remain relatively consistent, or to increase slightly, as our anticipated revenue growth continues to come from distribution channels that do not require additional investment in sales and marketing expenses. Research and development expenses are expected to increase significantly during 2004 as we continue to aggressively develop new power and handheld hardware and software products. We also expect general and administrative expenses to increase in 2004 primarily as a result of increased expenses associated with Sarbanes-Oxley compliance and expenses associated with litigation in which we are currently involved.

We do not expect to record any income tax expense or benefit related to net operating loss carryforwards during 2004.

We are currently a party to various legal proceedings. We do not believe that the ultimate outcome of these legal proceedings will have a material adverse effect on our financial position or overall trends in results of operations. However, litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include money damages or the issuance of additional securities which would further dilute our existing stockholders. If an unfavorable ruling were to occur in any specific period, such a ruling could have a material adverse impact on the results of operations of that period, or future periods.

As a result of our planned research and development efforts, we expect to further expand our intellectual property position by aggressively filing for additional patents on an ongoing basis. A portion of these costs are recorded as research and development expense as incurred and a portion are amortized as general and

administrative expense. We may also incur additional legal and related expenses associated with the defense and enforcement of our intellectual property portfolio, which could increase our general and administrative expenses beyond those currently planned.

The following table sets forth for the period presented certain consolidated cash flow information (in thousands):

Cash and Cash Flow. Our cash balances are held in the United States and the United Kingdom. Our intent is that the cash balances will remain in these countries for future growth and investments and we will meet any liquidity requirements in the United States through ongoing cash flows, external financing, or both. Our primary use of cash has been to fund our operating losses, working capital requirements, acquisitions and capital expenditures necessitated by our growth. The growth of our business has required, and will continue to require, investments in accounts receivable and inventories. Our primary sources of liquidity have been funds provided by issuances of equity securities and borrowings under our line of credit.


	•	Net cash used in operating activities. Cash was used in operating activities for the year ended December 31, 2003 primarily to fund operating losses and working capital necessary to support our growing revenue base. Specifically, cash was used to fund accounts receivable and inventory growth that resulted from our 65.5% increase in revenues in 2003 as compared to 2002. In 2004, we expect to generate positive cash flow from operating activities from expected operating income, offset partially by cash used to fund further working capital needs. Our consolidated cash flow operating metrics are as follows:

The improvement in DSOs during 2003 compared to 2002, as well as the decline in DSOs during 2002 compared to 2001, is primarily as a result of a shift in customer mix. We anticipate further improvement in DSOs during 2004 as we continue to leverage our key OEM, private-label reseller and retail customer relationships. The reduction in inventory turns was primarily as a result of growth in handheld hardware product inventory during 2002 and 2003. We expect to reduce our levels of handheld hardware product inventory during 2004.


	•	Net cash used in investing activities. For the year ended December 31, 2003, net cash used in investing activities was primarily for the purchase of property and equipment. We anticipate future investment in capital equipment, primarily for tooling equipment to be used in the production of new products.

	•	Net cash (used in) provided by financing activities. Net cash provided by financing activities for the year ended December 31, 2003 was primarily from net proceeds from the sale of 2,400,000 shares of


		common stock of $13.8 million, the sale of Series E and Series F preferred stock of $1.2 million, exercises of stock options and warrants of $1.9 million, and collections of stock subscription receivables of $1.3 million. Although we expect to generate cash flows from operations sufficient to support our operations, we may issue additional shares of stock in the future to generate cash for growth opportunities.

As of December 31, 2003, we had approximately $95 million of federal, foreign and state net operating loss carryforwards which expire at various dates. We anticipate that the sale of common stock in our initial public offering 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.

Financing Facilities. In October 2002, we entered into a $10.0 million bank line of credit. The line bears interest at prime plus 2.0%, which was 6.0% as of December 31, 2003, interest only payments due monthly, with final payment of interest and principal due on July 31, 2004. The line of credit is secured by all of our assets and subject to financial covenants, with which we were in compliance as of December 31, 2003. We had no outstanding balance against this line of credit as of December 31, 2003. Under the terms of the line, we can borrow up to 80% of eligible accounts receivable. At December 31, 2003, our net borrowing base capacity was $5.0 million. During 2004, we expect to negotiate a new line of credit with terms that are substantially similar to our existing line of credit.

Contractual Obligations. In our day-to-day business activities, we incur certain commitments to make future payments under contracts such as operating leases and purchase orders. Maturities under these contracts are set forth in the following table as of December 31, 2003, in thousands:

Off-Balance Sheet Arrangements. We have no off-balance sheet financing arrangements.

Acquisitions. Our strategy includes the possible acquisition of other businesses to expand or complement our operations. The magnitude, timing and nature of any future acquisitions will depend on a number of factors, including the availability of suitable acquisition candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. Financing of future acquisitions would result in the utilization of cash, incurrence of additional debt, or both.

Liquidity Outlook. Based on our projections for 2004, we believe that our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may use our line of credit or seek to sell additional equity or debt securities. The sale of additional equity or convertible debt securities would result in more dilution to our stockholders. However, upon the expiration of our existing line of credit arrangement on July 31, 2004, financing arrangements may not be available to us, or may be available in amounts or on terms that are not acceptable to us.

On May 15, 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The Statement requires issuers to classify as liabilities (or assets in some circumstance) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, the Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after September 15, 2003. We adopted the provisions of the Statement on July 1, 2003. There was no impact from the adoption of this statement.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“Interpretation 46”) which was then revised in December 2003. 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 December 15, 2003. We adopted the provisions of Interpretation 46 for existing variable interest entities on July 1, 2003. As of December 31, 2003, we do not have any variable interest entities.

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 periods beginning after June 15, 2003. We have adopted the provisions of EITF Issue No. 00-21 on July 1, 2003, which did not have a material effect on our consolidated financial statements.

In December 2003, the Securities and Exchange Commission (“SEC”) issued staff accounting bulleting No. 104 (“SAB 104”) “Revenue Recognition,” which codifies, revises and rescinds certain sections of Staff Accounting Bulletin No. 101 “Revenue Recognition,” in order to make this interpretive guidance consistent with current authoritative accounting guidance and SEC rules and regulations. The changes noted in SAB 104 did not have a material effect on our consolidated financial statements.

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.

See “Liquidity and Capital Resources” for further discussion of our financing facilities and capital structure. Market risk, calculated as the potential change in fair value of our cash and cash equivalents and line of credit resulting from a hypothetical 1.0% (100 basis point) change in interest rates, was not material at December 31, 2003.

We have audited the accompanying consolidated balance sheets of Mobility Electronics, Inc. and subsidiaries as of December 31, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

As described in Note 2 of 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.

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 designs, develops, 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.

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, inventory valuation and goodwill valuation affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. These policies are discussed below.

The 2001 consolidated financial statements include the accounts of Mobility and its wholly owned subsidiaries, Magma, Inc. and Mobility Europe Holdings, Inc. The 2002 and 2003 consolidated financial statements include the accounts of Mobility and its wholly owned subsidiaries, Magma, Inc., 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, 2002 (date of acquisition) collectively to December 31, 2002 and 2003, respectively. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company recognizes net revenue when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title and acceptance, if applicable, as well as fixed pricing and probable collectibility. 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 software and technology license fees 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.

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.

Accounts receivable consist of trade receivables from customers and short-term notes 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. The Company also maintains an allowance for sales returns and credits in the amount of the difference between the sales price and the cost of goods sold based on management’s periodic review and estimate of returns. 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.

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.

Property and equipment are stated at cost. Depreciation on furniture, fixtures and equipment is provided using the straight-line method over the estimated useful lives of the assets ranging from two to seven years. Tooling is capitalized at cost and is depreciated over a two-year period.

Beginning in 2002, with the adoption of FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“Statement 142”), goodwill is no longer amortized but instead tested for impairment at least annually. Prior to 2002, goodwill was amortized using the straight-line method over its estimated period of benefit. In 2002, the carrying value of goodwill exceeded the fair value of the reporting unit and the Company recorded an impairment loss of $5,627,000.

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. We periodically evaluate the recoverability of intangible assets and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that an impairment exists. All of the Company’s intangible assets are subject to amortization.

The Company provides limited warranties on certain of its products for periods generally not exceeding three years. The Company accrues for the estimated cost of warranties at the time revenue is recognized. The accrual is based on the Company’s actual claim experience. Should actual warranty claim rates, or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

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

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

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.

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):

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 10.

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.

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 15), 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.

Certain amounts included in the 2002 and 2001 consolidated financial statements have been reclassified to conform to the 2003 financial statement presentation.

On May 15, 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity. The Statement requires issuers to classify as liabilities (or assets in some circumstance) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, the Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after September 15, 2003. The Company adopted the provisions of the Statement on July 1, 2003. There was no impact from the adoption of this statement.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“Interpretation 46”) which was then revised in December 2003. 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 December 15, 2003. The Company adopted the provisions of Interpretation 46 for existing variable interest entities on July 1, 2003. As of December 31, 2003, the Company does not have any variable interest entities.

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 periods beginning after June 15, 2003. The Company adopted the provisions of EITF Issue No. 00-21 on July 1, 2003, which did not have a material effect on its consolidated financial statements.

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.

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.

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 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 were made during 2003 to the former Portsmith stockholders based upon Portsmith’s performance during the first year after the acquisition, through December 31, 2002, and the fair market value of Portsmith 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. In the event the parties were not able to come to an agreement relative to the earn-out, the fair market value would be determined by an Independent Financial Expert as defined in the agreement. Based on the results of that valuation, the Company determined it owed $6,594,000 to former Portsmith stockholders in aggregate earn-out consideration. The aggregate consideration was reduced by $484,000, representing an amount owed by a former Portsmith stockholder to the Company, resulting in total net earn-out consideration of $6,110,000. The Company determined it would pay the earn-out in shares of Company common stock. Based on the market price of $5.86 per share of the Company’s common stock as of the date of the final determination, as defined in the agreement, the Company issued 1,042,664 shares of common stock representing payment of earn-out consideration during 2003. At December 31, 2002, the Company recorded a liability in the amount of $725,000 as an estimate of the performance component of the earn-out, as this component was determinable as of December 31, 2002. The difference between the $6,110,000 paid during 2003 and the $725,000 liability recorded at December 31, 2002 of $5,385,000 has been recorded as goodwill during 2003. The actual earn-out consideration paid by the Company exceeded the Company’s estimated earn-out liability at December 31, 2002 as the actual consideration paid during 2003 also included the fair market value component of the earn-out, which was not determinable as of December 31, 2002.

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 was 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. During 2003, the Company made one principal installment payment of $82,500 against the promissory note. In June 2003, the outstanding principal of the promissory was converted by Mr. Liggitt into 302,500 shares of the Company’s common stock, at a conversion price of $3.00 per share (see Note 11). In connection with this settlement, the potential earn-

outs under the merger agreement between the Company and Portsmith were 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 was 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. Based on the initial consideration, goodwill of $1,783,000 was recorded as a result of the transaction.

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

Based on earn-out payments and other adjustments made during 2003, goodwill increased by $5,385,000 in connection with the Portsmith acquisition (see Note 6).

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 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, 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):

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.

Through December 31, 2003, the Company has not made any earn-out payments in connection with its acquisition of Cutting Edge Software.

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. As of December 31, 2003, the Company has determined that the contingent performance criteria indicated in the merger agreement was not achieved. Accordingly, no additional consideration has been paid to the former iGo stockholders.

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.

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

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.

On December 1, 2003 the Company acquired certain assets, including a software license, customer relationships, and consulting/employment agreements relating to the handheld hardware business of Invision Software, Inc. and Invision Wireless LLC, for 70,000 shares of common stock, valued at $11.36 per share, or $795,000. In addition, earn-out payments may be made to Invision Software and Invision Wireless, up to a maximum of 150,000 shares of common stock at the rate of 15,000 shares for each $10 million in revenue from the sales of certain handheld hardware products during the three year period following the close date of the acquisition. Other earn-out consideration may be earned and paid in quarterly cash installments based on 15% of sales of certain other handheld hardware products during the same three year period following the close date of the acquisition. 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 fair value of the assets acquired of $1,642,000 exceeds the initial consideration of $795,000 by $847,000. Accordingly, the Company has recorded a current liability of $396,000 and a non-current liability of $451,000, which will be reduced by future earn-out payments or reversed to income if the earn-out criteria are not met. The purchase price of $1,642,000 has been allocated to amortizable intangible assets. No goodwill has been recorded as a result of this transaction. This acquisition is not considered material to the Company’s consolidated financial statements; accordingly, the pro forma results presented above do not reflect the impact of this acquisition.

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 recorded a goodwill impairment loss of $5,627,000 as a result of completing its transitional impairment test, and 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.

As a result of the acquisitions of Portsmith, Cutting Edge Software and iGo during 2002, the Company recorded additional goodwill of $8,265,000.

In accordance with Statement 142, the Company evaluated this goodwill for impairment as of December 31, 2002 and 2003 and determined its recorded goodwill is not impaired as of December 31, 2002 and 2003.

The following table presents net loss attributable to common stockholders and net loss per share as if the non-amortization provisions of Statement 142 had been applied on January 1, 2001 (amounts in thousands, except per share data).

Intangible assets consist of the following at December 31, 2003 and 2002 (amounts in thousands):

Aggregate amortization expense for identifiable intangible assets totaled $719,000 and $607,000 for the years ended December 31, 2003 and 2002, respectively. Estimated amortization expense for each of the five succeeding years ended December 31 is as follows (amounts in thousands):

In October 2002, the Company entered into a $10,000,000 line of credit with a bank. The line bears interest at prime plus 2.0% (6.0% at December 31, 2003), 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 had no outstanding balance against the line of credit at December 31, 2003 and 2002. The line of credit is subject to financial covenants. The Company is currently in compliance with the covenants.

Long-term debt and other non-current liabilities consist 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. In June 2003, the note payable was converted into 302,500 shares of common stock.

In connection with its acquisition of Portsmith, the Company 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. The earn-out 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 second component of the earn-out 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 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. Earn-out payments may be made in cash or shares of stock, at the Company’s discretion. In August 2003, the Company determined it would pay the earn-out in shares of Company common stock and issued an aggregate of 1,042,664 shares of common stock to former Portsmith stockholders in payment of earn-out consideration. The actual earn-out consideration paid by the Company exceeded the Company’s estimated earn-out liability at December 31, 2002 as the actual consideration paid during 2003 also included the fair market value component of the earn-out, which was not determinable as of December 31, 2002.

In connection with its acquisition of certain assets of Invision Software and Invision Wireless, the Company recorded a liability of $847,000, which represents the excess of the fair value of assets acquired over the initial consideration paid for those assets. This liability will be reduced by earn-out payments when the contingent consideration is earned. Accordingly, the Company has recorded a current portion of this liability of $396,000 based on its estimate of contingent consideration to be earned during 2004.

In connection with its settlement of litigation with General Dynamics during 2003, the Company obtained a ten year trademark license from General Dynamics in exchange for $400,000, plus $1,000 in interest charges. During 2003, the Company made a $201,000 installment payment. Future installments are payable as follows: $125,000 on January 15, 2004, which has been recorded as a current liability, $25,000 on January 15, 2005, $25,000 on January 15, 2006, and $25,000 on January 15, 2007.

The Company has entered into various non-cancelable operating lease agreements for its office facilities and office equipment. Existing facility leases require monthly rents plus payment of property taxes, normal

maintenance and insurance on facilities. Rental expense for the operating leases was $1,061,000, $855,000 and $1,000,000 during the years ended 2003, 2002, and 2001, respectively.

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

The Company has generated net operating losses for both financial and income tax reporting purposes since inception. At December 31, 2003, the Company had net operating loss carryforwards for federal income tax purposes of approximately $91,000,000 and approximately $4,500,000 for foreign income tax purposes, which, subject to annual limitations, are available to offset future taxable income, if any. The federal net operating loss carryforwards expire between 2011 and 2023. The Company has generated net operating loss carryforwards for state income tax purposes of approximately $72,000,000, which will expire between 2004 and 2008.

The temporary differences that give rise to deferred tax assets and liabilities at December 31, 2003 and 2002 are as follows (amounts in thousands):

The valuation allowance for deferred tax assets as of December 31, 2003 and 2002 was $36,702,000 and $38,632,000, respectively. The net change in the total valuation allowance for the year ended December 31, 2003 was a decrease of $1,930,000 and for the year ended December 31, 2002 was an increase of $7,658,000. 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.

Series C preferred stock is convertible into shares of common stock. The initial conversion rate was one for one, but is subject to change if certain events occur. Generally, the conversion rate will be adjusted if the Company issues any non-cash dividends on outstanding securities, splits its securities or otherwise effects a change to the number of its outstanding securities. The conversion rate will also be adjusted if the Company issues additional securities at a price that is less than the price that the Series C preferred stockholders paid for their shares. Such adjustments will be made according to certain formulas that are designed to prevent dilution of the Series C preferred stock. The Series C preferred stock can be converted at any time at the option of the holder, and will convert automatically, immediately prior to the consummation of a firm commitment public offering of common stock pursuant to a registration statement filed with the Securities and Exchange Commission having a per share price equal to or greater than $24.00 per share and a total gross offering amount of not less than $15,000,000. The rate of conversion was 1-to-1.0883 as of December 31, 2003.

During 2002, 132,446 shares of Series C preferred stock were converted into 103,070 shares of common stock at an average conversion rate of 1-to-0.77820. During 2003, 220,382 shares of Series C preferred stock were converted into 241,785 shares of common stock at an average rate of 1-to-1.09712. At December 31, 2003, 329,866 shares of Series C preferred stock were outstanding.

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

In January 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.

All of the Series E Warrants have been exercised and converted into 216,263 shares of common stock, and no Series E Warrants were outstanding at December 31, 2003. As of December 31, 2003, there were 232,233 Series F Warrants outstanding and exercisable for 232,233 shares of common stock.

At the date of issuance of the Series E and Series F shares, a non-cash beneficial conversion adjustment of $445,000, which represents a 15% discount to the fair value of the common stock at the date of issuance of the Series E shares and an estimate of the fair value of the Series E and Series F Warrants using the Black-Scholes model, was recorded in the 2003 consolidated financial statements as an increase and decrease to additional paid-in capital. The beneficial conversion adjustment resulted in an increase to net loss attributable to common stockholders of $445,000, or $0.02 per common share. The beneficial conversion adjustment was

recorded upon the issuance of the Series E and Series F convertible preferred stock, as the Series E and Series F shares were immediately convertible upon issuance.

The following assumptions were used to determine the Black-Scholes value of the Series E and Series F Warrants: (1) expected life of 3 years, (2) risk-free interest rate of 3.0%, (3) dividend yield of 0%, and (4) volatility of 100%.

As the closing price of the Company’s common stock was greater than or equal to $2.00 per share for ten consecutive trading days on June 6, 2003, all issued and outstanding shares of Series E and Series F preferred stock automatically converted into 1,594,458 shares of common stock at a conversion rate of 1-to-1. Dividends on Series E and F preferred stock of $20,000 were accrued at June 6, 2003. No shares of Series E and Series F preferred stock were outstanding at December 31, 2003.

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

During 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 2003, the Company entered into an agreement with this consultant to forgive the balance of the promissory note over a service period of time from May 2003 through June 2004. During 2003, the Company reduced the principal balance of the promissory note by $36,480 and recorded compensation expense of $36,480. At December 31, 2003, the outstanding principal balance of the promissory note is $39,720.

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 2003, the remaining principal balance of each of these promissory notes was repaid.

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. During 2003, one promissory note, in the principal amount of $70,000, was repaid. At December 31, 2003, three promissory notes, secured by 150,000 shares of common stock, in the principal sum of $210,000 remain outstanding.

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. During 2003, the remaining principal balance of this promissory note was repaid.

During 2003, in connection with its acquisition of Portsmith, the Company recorded various promissory notes it had acquired in the principal sum of $203,000. During 2003, several promissory notes, in the principal sum of $161,000, were repaid. At December 31, 2003, five promissory notes, in the principal sum of $42,000 remain outstanding.

During 2003, the Company entered into a promissory note in the principal sum of $195,000 with a consultant to finance his purchase of 30,000 shares of common stock at a purchase price of $6.50 per share.

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 $177,000, $114,000 and $36,000 during 2003, 2002 and 2001, respectively.

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 101,171 shares available for grant under the Plan as of December 31, 2003.

The per share weighted average fair value of stock options granted under the Plan for the years ended December 31, 2003, 2002 and 2001, was $5.14, $1.38 and $2.21, respectively, based on the date of grant using the Black-Scholes method with the following weighted average assumptions:

The following table summarizes information regarding stock option activity for the years ended December 31, 2001, 2002 and 2003:

The following table summarizes information about the stock options outstanding at December 31, 2003:

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 research and development expense over the term of the related license agreement.

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

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

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.

During 2003, the Company issued warrants to purchase an aggregate of 559,084 shares of common stock, par value $0.01 per share, in connection with the private placement of shares of Series E and Series F Preferred Stock. 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”). At the date of issuance of the Series E and Series F shares, a non-cash beneficial conversion adjustment of $445,000, which represents a 15% discount to the fair value of the common stock at the date of issuance of the Series E shares and an estimate of the fair value of the Series E and Series F Warrants using the Black-Scholes model, was recorded in the 2003 consolidated financial statements as an increase and decrease to additional paid-in capital. The beneficial conversion adjustment resulted in an increase to net loss attributable to common stockholders of $445,000, or $0.02 per common share. The beneficial conversion adjustment was recorded upon the issuance of the Series E and Series F convertible preferred stock, as the Series E and Series F shares were immediately convertible upon issuance. The following assumptions were used to determine the Black-Scholes value of the Series E and Series F Warrants: (1) expected life of 3 years, (2) risk-free interest rate of 3.0%, (3) dividend yield of 0%, and (4) volatility of 100%.

During 2003, the Company issued 5,000 warrants to a bank in connection with an amendment to its line of credit agreement. These warrants, valued at $25,000, using the Black-Scholes pricing model, are exercisable at $7.59 per share. The value of these warrants has been recorded as a component of other assets to be amortized to interest expense over the term of the line of credit agreement.

During 2003, 200,442 warrants expired. At December 31, 2003, 255,777 unexercised warrants remained outstanding at exercise prices ranging from $1.02 to $7.59 per share.

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 $17,000. In 2002, 78,928 shares were issued under the Purchase Plan for net proceeds of $83,000. In 2003, 78,374 were issued under the Purchase Plan for net proceeds of $102,000. At December 31, 2003, 1,816,903 shares were available for issuance under the Purchase Plan.

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

(15) 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.

Four customers accounted for 15%, 14%, 11% and 10% of net sales for the year ended December 31, 2003. 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.

Four customers’ accounts receivable balances accounted for 22%, 14%, 12% and 11% of net accounts receivable at December 31, 2003. Three customers’ accounts receivable balances accounted for 32%, 19% and 11% of net accounts receivable at December 31, 2002.

Export sales were approximately 14%, 14% and 31% of the Company’s net sales for the years ended December 31, 2003, 2002 and 2001, respectively. The principal international market served by the Company was Europe.

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, 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.

The following tables summarize the Company’s revenues by product line, as well as its revenues by geography.

Holmes Lundt, et al., plaintiffs, and Jason Carnahan, et. al., intervenors, v. Mobility Electronics, Inc., Portsmith, Inc., Charles R. Mollo, Joan W. Brubacher, Jeffrey R. Harris, Robert P. Dilworth, Larry M. Carr, William O. Hunt, Jerre L. Stead and Darryl Baker, pending in the District Court of the Fourth Judicial District of Idaho, Ada County, Cause No. CV-0C-0302562D. This lawsuit initially was commenced on April 2, 2003, by Holmes Lundt, former President and CEO of Portsmith, Inc., the Company’s wholly-owned subsidiary, and his wife, but additional plaintiffs were added, and several of the Company’s officers and directors were added as defendants. In their current pleading, the plaintiffs are alleging breach of the Portsmith merger agreement and Mr. Lundt’s employment agreement, wrongful termination of Mr. Lundt, fraudulent misrepresentation, securities fraud, breach of an alleged covenant of good faith and fair dealing, civil conspiracy, and are seeking monetary damages and/or rescission of the Portsmith merger agreement. On February 11, 2004, the court permitted the intervenors to intervene in the lawsuit and the intervenors in turn dismissed a separate lawsuit they had commenced on December 30, 2003. In their current pleading, the intervenors assert claims against the Company, Portsmith, Mr. Mollo and Ms. Brubacher, for breach of contract, breach of an alleged covenant of good faith and fair dealing, unjust enrichment, declaratory judgment, fraud, misrepresentation, concealment, breach of fiduciary duty, constructive trust, conversion, and constructive fraud. Intervenors are seeking monetary damages and/or the recovery of unspecified shares of the Company’s common stock. Among other things, plaintiffs and intervenors dispute that the Company appropriately calculated and paid the earn-out consideration called for by the Portsmith merger agreement.

The Company intends to vigorously defend against the claims as well as pursue its own claims against the plaintiffs and intervenors.

On February 10, 2004, a stockholder class-action lawsuit was filed against the Company and two of its executive officers in the United States District Court for the District of Arizona. A second stockholder class-action lawsuit was filed on February 20, 2004 against the Company and the same two executive officers in the same United States District Court for the District of Arizona. These lawsuits assert claims for securities fraud under Sections 10(b), 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, on behalf of a purported class of persons who purchased the Company’s publicly traded securities between September 2, 2003 and January 5, 2004. The complaints generally allege that various public statements made by or on behalf of the Company were false or misleading when made, that the individual defendants were allegedly aware of material non-public information at the time that they engaged in transactions in the Company’s common stock and that members of the purported stockholder class suffered damages when the market price of the Company’s common stock declined following disclosure of the information that allegedly had not been previously disclosed. The complaints seek to proceed on behalf of the alleged class described above, seek monetary damages in an unspecified amount and seek recovery of plaintiffs’ costs and attorneys’ fees. The Company intends to vigorously defend against these claims.

The Company is from time to time involved in various legal proceedings incidental to the conduct of its business. The Company believes that the outcome of all such pending legal proceedings will not in the aggregate have a material adverse effect on its business, financial condition, results of operations or liquidity.

The Company previously had an agreement with a related entity under which this entity provided management services. The Company discontinued its agreement with this related party effective August 31, 2003. The Company paid the consultant approximately $8,000, $10,000 and $20,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

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. During 2003, each promissory note was paid in full.

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. During 2003, one promissory note was paid in full. The outstanding notes are reflected as contra equity on the statement of stockholders’ equity.

A summary of additions and deductions related to the allowances for accounts receivable for the years ended December 31, 2003, 2002 and 2001 follows (amounts in thousands):

A summary of the quarterly data for the years ended December 31, 2003 and 2002 follows (amounts in thousands, except per share amounts):

Based upon their evaluations of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were adequate and designed to ensure that information required to be disclosed by us in this report is recorded, processed, summarized and reported by the filing date of this report, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 2004 Annual Meeting of Shareholders under the captions “Proposal No. 1 Election of Directors”, “Executives and Executive Compensation”, “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Principal Stockholders” and is incorporated by reference herein.

The information required by this Item for our executive officers is set forth under Part I of this Annual Report on Form 10-K, under the subheading “Executive Officers of the Company”.

We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. A copy of the Code of Business Conduct and Ethics is posted on our Internet website at www.mobilityelectronics.com. If we make any amendment to, or grant any waivers of, a provision of the Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer principal accounting officer or controller, or persons performing similar functions, where such amendment or waiver is required to be disclosed under applicable SEC rules, we intend to disclose such amendment or waiver and the reasons therefore on our Internet website at www.mobilityelectronics.com.

The response to this Item will be contained in the Proxy Statement for the 2004 Annual Meeting of Shareholders under the captions “Director Compensation Committee Report”, “Executive Compensation” and is incorporated by reference herein.

The response to this Item will be contained in the Proxy Statement for the 2004 Annual Meeting of Shareholders under the caption “Principal Stockholders” and is incorporated by reference herein.

The response to this Item will be contained in the Proxy Statement for the 2004 Annual Meeting of Shareholders under the caption “Certain Relationships and Related Transactions” and is incorporated by reference herein.

The response to this item will be contained in the Proxy Statement for the 2004 Annual Meeting of Shareholders under the caption “Independent Public Accountants” and is incorporated by reference herein.

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

We filed the following report on Form 8-K during the quarter ended December 31, 2003:


	•	Form 8-K dated October 22, 2003, furnishing under Items 7 and 12 our press release, dated October 22, 2003, announcing our results of operations for the quarter ended September 30, 2003.

The Exhibit Index and required Exhibits are immediately following the Signatures to this Form 10-K are filed as part of, or hereby incorporated by reference into, this Form 10-K.

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 following persons in the capacities indicated on March 5, 2004.


	MOBILITY ELECTRONICS, INC.

	/s/ CHARLES R. MOLLO

	Charles R. Mollo
	President, Chief Executive Officer and
	Chairman of the Board (Principal Executive Officer)

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 5, 2004.


	**	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 Current Report on Form 8-K dated October 17, 2000.

	(2)	Previously filed as an exhibit to Form 10-K for the year ended December 31, 2001.

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

	(4)	Previously filed as an exhibit to Form 10-K for the year ended December 31, 2002.

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

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

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

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

	(9)	Previously filed as an exhibit to Current Report on Form 8-K filed on June 19, 2003.


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

(11)	Previously filed as an exhibit to Registration Statement No. 333-108623 on Form S-3 filed on September 9, 2003.

(12)	Previously filed as an exhibit to Form 10-Q for the quarter ended September 30, 2003.

(13)	Previously filed as an exhibit to Registration Statement No. 333-69336 on Form S-8 filed on September 13, 2001.

(14)	Previously filed as an exhibit to Form 10-K for the period ended December 31, 2000.

(15)	Previously filed as an exhibit to Form 10-Q for the quarter ended June 30, 2003.

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

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

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

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

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

All other schedules and exhibits are omitted because they are not applicable or because the required information is contained in the Financial Statements or Notes thereto. EX-10.32 3 p68849exv10w32.txt EX-10.32 Exhibit 10.32 ASSET PURCHASE AGREEMENT BY AND AMONG INVISION WIRELESS, LLC AND INVISION SOFTWARE INC. TOGETHER AS "SELLER" AND MOBILITY ELECTRONICS, INC. AS "BUYER" Dated as of November 14, 2003 TABLE OF CONTENTS

i EXHIBITS

SCHEDULES Schedule 1.17 Equipment Schedule 1.18.12 Other Excluded Assets Schedule 2.4.1.3 Non-Symbol Branded Cradles Schedule 4.1 Ownership Schedule 4.3 Changes Schedule 4.5.2 Assumed Contracts Schedule 4.6 Permits and Consents Schedule 4.8 Financial Statements and Non-GAAP Items Schedule 4.10 Litigation Schedule 4.15 Intellectual Property Assets Schedule 4.17 Customers Schedule 4.18 Warranties Schedule 4.19 Liabilities ASSET PURCHASE AGREEMENT This Asset Purchase Agreement ("Agreement"), dated as of November 14, 2003, is by and among Mobility Electronics, Inc., a Delaware corporation ("Buyer") and InVision Wireless, LLC, a New York limited liability company, ("InVision Wireless") and InVision Software Inc. a New York corporation ("InVision Software," and together with InVision Wireless, collectively referred to herein as "Seller"). RECITALS A. Seller owns certain assets which it uses in its conduct of the Business (as defined below). B. Buyer desires to purchase from Seller, and Seller desires to sell to Buyer, such assets as more specifically identified below and in Schedules attached hereto, upon the terms and subject to the conditions of this Agreement. AGREEMENT NOW THEREFORE, in consideration of the mutual covenants and promises contained herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 Defined Terms. As used herein, the terms below shall have the following meanings. Any of such terms, unless the context otherwise requires, may be used in the singular or plural, depending upon the reference. 1.2 "Affiliate" shall have the meaning set forth in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 1.3 "Ancillary Agreements" shall mean the Bill of Sale, Assignment of Contract Rights, and Assumption of Contract Rights between Buyer and Seller, and the Consulting Agreement between Joseph Spiteri and Buyer, and the Employment Agreement between Herbert Feinstein and Buyer, executed as of the Closing Date. 1.4 "Assets" shall mean all of the right, title and interest of Seller in and to the business, properties, assets and rights of any kind, whether tangible or intangible, and constituting, or used or useful in connection with, or related to, the Business, including without limitation all of Seller's right, title and interest in the following (but not including, in any case, the Excluded Assets): 1.4.1 all rights of Seller under the Assumed Contracts listed on Schedule 4.5.2; 1.4.2 all Equipment related to the Business; 1.4.3 all Books and Records related to the Business; 1.4.4 all Intellectual Property Assets related to the Business; 1.4.5 to the extent transferable, all Permits related to the Business; 1.4.6 all current software related to the Business; 1.4.7 all available sales literature, promotional literature, customer, supplier and distributor lists, display units and purchasing records related to the Business; 1.4.8 those rights under or pursuant to warranties, representations and guarantees made by suppliers and dealers in connection with the Assets or services furnished to Seller pertaining to the Business or affecting the Assets, to the extent such warranties, representations and guarantees (i) are not required by Seller to fulfill its obligations under this Agreement and (ii) are assignable; and 1.4.9 except as may relate to Excluded Assets, all claims, causes of action, choices in action, rights of recovery and rights of set-off of any kind, against any person or entity, including without limitation any liens, security interests, pledges or other rights to payment or to enforce payment in connection with products delivered by Seller in connection with the Business on or prior to the Closing Date. 1.5 "Balance Sheet" shall mean the balance sheet of InVision Wireless dated as of the date hereof, together with the notes thereon. 1.6 "Books and Records" shall mean (a) all records and lists of Seller pertaining to the Assets, (b) all records and lists which pertain to the Business, customers of the Business, suppliers of the Business, or personnel of Seller working in connection with the Business, (c) all product, business and marketing plans of Seller, and (d) all books, ledgers, trial balances, files, reports, plans, drawings and operating records of every kind maintained by Seller relating to the Assets, but excluding the originals of Seller's minute books, stock books, tax returns and accounting ledgers (provided that Buyer will be provided copies of tax returns and accounting records if it so requests). 1.7 "Business" shall mean Seller's hardware business, including, but not limited to, all direct and indirect sales of hardware to Symbol or to Symbol's customers. 1.8 "Cash Equivalents" shall mean (i) marketable direct obligations issued by the United States Government or any state or any political subdivision thereof maturing within one year from the date of acquisition thereof; (ii) commercial paper maturing no more than 270 days from the date of creation thereof; (iii) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof; and (iv) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (iii) above. 1.9 "Closing" or "Closing Date" shall mean December 1, 2003, or such other date as Buyer and Seller shall mutually agree upon. 2 1.10 "Closing Balance Sheet" shall mean the Balance Sheet of InVision Wireless dated as of the Closing Date. 1.11 "Closing Financial Statements" shall mean the Closing Balance Sheet and the income statement of InVision Wireless dated as of the Closing Date. 1.12 "Code" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder. 1.13 "Consent" shall mean any consent, approval, authorization, waiver, permit, grant, franchise, concession, agreement, license, exemption or order of, registration, certificate, declaration or filing with, or report or notice to, any person or entity, including but not limited to any governmental authority. 1.14 "Contract" shall mean any agreement, contract, note, loan, evidence of indebtedness, purchase, order, letter of credit, franchise agreement, undertaking, covenant not to compete, employment agreement, license, instrument, obligation or commitment to which Seller is a party or is bound and which relates to the Business or the Assets, whether oral or written. 1.15 "Damages" shall mean any and all claims, damages, costs, losses (including without limitation diminution in value), Taxes, liabilities, judgments, penalties, fines, obligations, lawsuits, deficiencies, demands and expenses (whether or not arising out of third-party claims), including without limitation interest, penalties, costs of mitigation, losses in connection with any environmental law (including without limitation any clean-up or remedial action), lost profits and other losses resulting from any shutdown or curtailment of operations, damages to the environment, attorneys' fees, experts' fees and all amounts paid in investigation, defense or settlement of any of the foregoing. 1.16 "Encumbrance" shall mean any claim, lien, pledge, option, charge, easement, security interest, deed of trust, mortgage, right-of-way, encroachment, building or use restriction, conditional sales agreement, encumbrance or other right of third parties, whether voluntarily incurred or arising by operation of law, and includes, without limitation, any agreement to give any of the foregoing in the future, and any contingent sale or other title retention agreement or lease in the nature thereof. 1.17 "Equipment" shall mean the engineering and manufacturing equipment of Seller exclusively used to test or manufacture products produced in connection with the Business and all tools, supplies, equipment, machinery, signs and other tangible personal property owned by Seller and used in connection with the Business, including without limitation all items listed on Schedule 1.17 (but not including any Excluded Assets). 1.18 "Excluded Assets," notwithstanding any other provision of this Agreement, shall mean the following assets of Seller which are not to be acquired by Buyer hereunder: 1.18.1 all cash and Cash Equivalents held by Seller (including bank accounts); 1.18.2 Buyer's name, Website, email address, telephone and facsimile numbers currently used in the Business; 3 1.18.3 all accounts receivable listed on the Closing Balance Sheet; 1.18.4 prepayments or prepaid expenses (including all prepaid insurance premiums and prepaid taxes) of Seller; 1.18.5 all Permits, to the extent not transferable; 1.18.6 the Real Property; 1.18.7 all claims, causes of action, choices in action, rights of recovery and rights of set-off of any kind against any person or entity arising out of or relating to the Assets to the extent directly related to the Excluded Liabilities or to the Excluded Assets; 1.18.8 all Contracts other than the Assumed Contracts; 1.18.9 the Purchase Price received by Seller in connection with this Agreement; 1.18.10 all contract software work produced by Seller that is unrelated to the Business; 1.18.11 all Inventory relating to the Business; 1.18.12 certain other assets listed on Schedule 1.18.12. 1.19 "Facility" shall mean the offices, maintenance and storage facilities, warehouses, improvements, other structures, and all real property and related facilities which are used in the conduct of the Business, and which is located at 110 Lake Avenue South, Suite 35, Nesconset, New York 11767. 1.20 "Financial Statements" shall mean the Year-End Financial Statements, the Balance Sheet and the Closing Financial Statements. 1.21 "Intellectual Property" shall mean any and all United States and foreign: (a) patents (including reexaminations, design patents, industrial designs and utility models) and patent applications (including docketed patent disclosures awaiting filing, provisional applications, reissues, divisions, continuations, continuations-in-part and extensions), patent disclosures awaiting filing determination, inventions and improvements thereto; (b) trademarks, service marks, trade names, trade dress, logos, business and product names, slogans, and registrations and applications for registration thereof; (c) copyrights (including software) and registrations thereof; (d) inventions, processes, designs, formulae, trade secrets, know-how, industrial models, confidential and technical information, manufacturing, engineering and technical drawings, product specifications and confidential business information; (e) mask work and other rights and registrations thereof; (f) intellectual property rights similar to any of the foregoing; (g) copies and tangible embodiments thereof (in whatever form or medium, including electronic media). 1.22 "Inventory" shall mean all of Seller's finished goods, accessory goods and raw materials inventory, and all of Seller's new and/or usable repair or replacement parts, supplies, 4 and packaging items and similar items with respect to the Business, in each case, wherever the same may be located. 1.23 "Material Adverse Effect" or "Material Adverse Change" shall mean with respect to the Business or the Assets any significant and substantial adverse effect or change in the condition (financial or other), business, results of operations, prospects, assets, liabilities or operations of the Business and/or the Assets or on the ability of Seller to consummate the transactions contemplated hereby, or any event or condition which would, with the passage of time, constitute a "Material Adverse Effect" or "Material Adverse Change. 1.24 "Mobility Shares" shall mean the Closing Shares and the Earnout Shares. 1.25 "Permits" shall mean all licenses, permits, franchises, approvals, authorizations, consents or orders of, or filings with, any governmental authority, whether foreign, federal, state or local, or any other person, necessary or desirable for the past, present or anticipated conduct of, or relating to the operation of, the Business. 1.26 "Real Property" shall mean all real property either owned, leased, or used by Seller which is used in the conduct of the Business, including without limitation all rights, easements and privileges appertaining or relating thereto, all buildings, fixtures, and improvements located thereon and all Facilities thereon, if any. 1.27 "Representative" shall mean any officer, director, principal, attorney, agent, employee or other representative. 1.28 "Symbol" shall mean Symbol Technologies, Inc., a Delaware corporation. 1.29 "Tax" shall mean any federal, state, local, foreign or other tax, levy, impost, fee, assessment, custom duty, or other government charge, including without limitation income, estimated income, business, occupation, franchise, property, payroll, personal property, sales, transfer, use, employment, commercial rent, occupancy, franchise or withholding taxes, and any premium, including without limitation interest, penalties and additions in connection therewith. 1.30 "Warranties" shall mean standard and customary warranties provided by Seller in connection with products sold by Seller in connection with the Business, as set forth on Schedule 4.18. 1.31 "Year-End Financial Statements" shall mean the balance sheets and income statements of InVision Wireless dated as of InVision Wireless' fiscal years ended 2001 and 2002. 1.32 Other Defined Terms. The following terms shall have the meanings defined for such terms in the Sections set forth below:

ARTICLE II PURCHASE AND SALE OF ASSETS 2.1 Transfer of Assets. Upon the terms and subject to the conditions contained herein, at the Closing, Seller will sell, convey, transfer, assign and deliver to Buyer free and clear of any Encumbrance (other than Assumed Liabilities), and Buyer will acquire from Seller, the Assets. 2.2 Assumption of Liabilities. Upon the terms and subject to the conditions contained herein, at the Closing, Buyer shall assume and thereafter pay, perform or discharge, as the case may be, all obligations and liabilities accruing, arising out of, or relating to events or occurrences happening after the Closing Date under the Assumed Contracts listed on Schedule 4.5.2, but not including any obligation or liability for any breach of any Contract occurring on or prior to the Closing Date (the "Assumed Liabilities"). 2.3 Excluded Liabilities. Notwithstanding any other provision of this Agreement, except for the Assumed Liabilities expressly specified in Section 2.2, Buyer shall not assume, or otherwise be responsible for, any of Seller's liabilities or obligations, whether actual or contingent, matured or un-matured, liquidated or un-liquidated, known or unknown, or related or unrelated to the Business or the Assets, whether arising out of occurrences prior to, at or after the date hereof (collectively, "Excluded Liabilities"), which Excluded Liabilities include, without limitation: 6 2.3.1 any liability or obligation to or in respect of any employees or former employees of Seller including without limitation (i) any employment agreement, whether or not written, between Seller and any person, (ii) any liability under any employee plan at any time maintained, contributed to or required to be contributed to by or with respect to Seller or under which Seller may incur liability, or any contributions, benefits or liabilities therefor, or any liability with respect to Seller's withdrawal or partial withdrawal from or termination of any employee plan and (iii) any claim of an unfair labor practice, or any claim under any state unemployment compensation or worker's compensation law or regulation or under any federal or state employment discrimination law or regulation, which shall have been asserted on or prior to the Closing Date or is based on acts or omissions which occurred on or prior to the Closing Date; 2.3.2 any liability or obligation of Seller in respect of any Tax; 2.3.3 any liability arising from service and dealer work performed; 2.3.4 any liability arising from any injury to or death of any person or damage to or destruction of any property, whether based on negligence, breach of warranty, strict liability, enterprise liability or any other legal or equitable theory arising from defects in products sold or services performed by or on behalf of Seller or any other person or entity on or prior to the Closing Date, or arising from any other cause, including without limitation any liabilities arising (on a date of occurrence basis or otherwise) on or prior to the Closing Date relating to the use or misuse of Equipment; 2.3.5 any liability or obligation of Seller arising out of or related to any Action against Seller or any Action which adversely affects the Assets and which shall have been asserted on or prior to the Closing Date or to the extent the basis of which shall have arisen on or prior to the Closing Date; 2.3.6 any liability or obligation of Seller resulting from entering into, performing its obligations pursuant to or consummating the transactions contemplated by, this Agreement (including without limitation any liability or obligation of Seller pursuant to Article VIII hereof); 2.3.7 any liability or obligation related to the Facilities; 2.3.8 any liability or obligation arising out of any environmental law; 2.3.9 any liability or obligation arising under or related to any lease relating to the Real Property; and 2.3.10 any outstanding debt obligations of Seller. 2.4 Purchase Price. 2.4.1 Purchase Price. Upon the terms and subject to the conditions set forth herein, Buyer shall pay to InVision Wireless, in consideration for the Assets, the following (the "Purchase Price"): 7 2.4.1.1 on the Closing Date, Buyer shall issue to InVision Wireless Seventy Thousand (70,000) shares of Mobility's common stock, $0.01 par value per share (the "Closing Shares"); 2.4.1.2 for a period of thirty-six months following the Closing Date, Buyer shall issue to InVision Wireless, up to a maximum aggregate of One Hundred and Fifty Thousand (150,000) shares of Mobility's common stock, $0.01 par value per share (the "Earnout Shares") at the rate of Fifteen Thousand (15,000) Earnout Shares for each $10 million in Net Revenue (as defined below) received by Buyer from Symbol during the first thirty-six (36) months after the Closing Date (the "Earnout Period"). "Net Revenue" shall mean gross revenue minus discounts from selling price and actual product returns as determined by Buyer in accordance with generally accepted accounting principles. The Earnout Shares will be issued to InVision Wireless within sixty (60) days after each such goal is achieved; and 2.4.1.3 for a period of three (3) years following the Closing Date, Buyer will pay InVision Wireless a quarterly cash payment (the "Quarterly Cash Payment") equal to fifteen percent (15%) of the Net Revenue generated by Buyer from sales of non-Symbol branded cradles set forth on Schedule 2.4.1.3 attached hereto , but not to exceed fifty percent (50%) of Buyer's gross margin on such products (all as determined by Buyer in accordance with generally accepted accounting principles). The Quarterly Cash Payment shall be paid to InVision Wireless within forty-five (45) days following the last day of each fiscal quarter of Buyer during such three (3) year period. 2.4.2 Allocation of Purchase Price. The Purchase Price shall be allocated among the Assets in the manner required by Section 1060 of the Code and regulations thereunder. Buyer and Seller agree to each prepare and file on a timely basis with the Internal Revenue Service substantially identical initial and supplemental Internal Revenue Service Forms 8594 "Asset Acquisition Statements Under Section 1060." 2.5 Personal Property Taxes. Seller's prorated share of the personal property taxes shall be payable notwithstanding the fact that such tax may become payable after the Closing Date. Accordingly, Seller will be responsible for paying its prorated share of the 2003 personal property taxes in amounts required by law when such taxes become due and payable. 2.6 Closing Costs; Transfer Taxes and Fees. Seller shall be responsible for paying (i) any documentary and transfer taxes and any sales, use or other taxes imposed by reason of the transfers of Assets provided hereunder and any deficiency, interest or penalty asserted with respect thereto and (ii) all costs of obtaining the transfer of existing Permits which may be lawfully transferred, (iii) all fees and costs of recording or filing all applicable conveyancing instruments described in Section 3.1, and (iv) all fees and costs of recording or filing all UCC termination statements and other releases of Encumbrances. 2.7 Risk of Loss. All risk of loss with respect to the Assets and Business of Seller on or before the Closing Date shall remain the sole risk of Seller. ARTICLE III 8 CLOSING 3.1 Conveyances at Closing by Seller. To effect the sale and transfer referred to in Section 2.1 hereof and subject to satisfaction or waiver by Seller of the conditions set forth in Section 7.2 hereof, at Closing, Seller agrees to execute and deliver to Buyer, or file with such governmental authorities as may be appropriate: 3.1.1 one or more bills of sale, each in the form of Exhibit A attached hereto, conveying in the aggregate all of Seller's owned personal property included in the Assets, free and clear of all Encumbrances; 3.1.2 subject to Section 7.1.6, Assignments of Contract Rights, in the form of Exhibit B attached hereto, with respect to the Assumed Contracts; 3.1.3 assignments of Intellectual Property Assets, in recordable form to the extent necessary to assign such rights, each in a form acceptable to Buyer; 3.1.4 subject to Section 7.1.6, all Permits and any other third party consents required for the valid transfer of the Assets as contemplated by this Agreement; 3.1.5 the Closing Financial Statements; 3.1.6 the certificates and other documents described in Article VII hereof; 3.1.7 all documents necessary to release the Assets from all Encumbrances; 3.1.8 resolutions adopted by Seller's board of directors and, to the extent necessary, shareholders approving this Agreement, certified by the secretary of Seller; 3.1.9 a certificate from the Secretary of State of the State of New York as to Seller's good standing as of the date of the Closing; and 3.1.10 such other instruments as shall be reasonably requested by Buyer to vest in Buyer title in and to the Assets in accordance with the provisions hereof, all of which instruments including those specifically listed above shall be in form and substance acceptable to Seller and its counsel. 3.2 Conveyances at Closing by Buyer. To effect the assumption of liabilities referred to in Section 2.2 hereof and the payment obligations set forth in Section 2.4 hereof, subject to satisfaction or waiver by Buyer of the conditions set forth in Section 7.1 hereof, at Closing, Buyer agrees to execute and deliver to InVision Wireless, or file with such governmental authorities as may be appropriate: 3.2.1 the Closing Shares pursuant to Section 2.4.1.1 hereof; 3.2.2 an Assumption of Contract Rights, in the form attached hereto as Exhibit C (the "Assumption of Contract Rights"), with respect to the Assumed Contracts; 9 3.2.3 the certificates and other documents described in Article VII hereof; 3.2.4 a certificate from the Secretary of State of the State of Delaware as to Buyer's good standing as of the date of the Closing; and 3.2.5 such other instruments as shall be reasonably requested by Seller in accordance with the provisions hereof, all of which instruments including those specifically listed above shall be in the form and substance reasonably acceptable to Buyer and its counsel. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER Each Seller hereby jointly and severally represents and warrants to Buyer as follows, which representations and warranties as of the dates of delivery of the respective Schedules and as of the Closing Date shall be true and correct: 4.1 Organization of Seller. InVision Wireless is a limited liability company duly organized, validly existing and in good standing under the laws of the State of New York. Copies of the Articles of Organization and Operating Agreement, and all amendments thereto, heretofore delivered to Buyer are accurate and complete as of the date hereof. InVision Software is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. Copies of the Certificate of Incorporation and Bylaws of InVision Software, and all amendments thereto, heretofore delivered to Buyer are accurate and complete as of the date hereof. Other than as listed on Schedule 4.1, Seller has no direct or indirect stock or other equity or ownership interest (whether controlling or not) in any corporation, association, partnership, joint venture or other entity which engages in a business substantially similar to the Business. 4.2 Authorization. Seller has all requisite corporate power and authority, and has taken all corporate action necessary, to own, lease and operate the Assets, to conduct the Business as it is presently being conducted, to execute and deliver this Agreement and each Ancillary Agreement to which it will be a party, to consummate the transactions contemplated hereby and to perform its obligations hereunder. This Agreement has been duly executed and delivered by Seller and is a legal, valid and binding obligation of Seller enforceable against it in accordance with its terms. Following their execution and delivery by Seller and the other parties thereto each of the Ancillary Agreements and other documents delivered by Seller at Closing will be a legal, valid and binding obligation of Seller, enforceable against it in accordance with their terms. 4.3 No Changes to the Assets. Other than as set forth on Schedule 4.3, since the date of the Balance Sheet: 4.3.1 there has been no actual or threatened adverse change in the financial condition or results of operation, the Business or the Assets or any event, condition or state of facts, in either case that is, or would result in a Material Adverse Change in the Assets or the Business or the prospects for the Business, including without limitation the loss of any material customers; 10 4.3.2 there has not been any sale or other disposition, except in the ordinary course of Seller's Business, of any of the assets of the Business, or any Encumbrance placed on the Assets; 4.3.3 Seller has operated the Business in the ordinary course consistent with Seller's past practice so as to preserve the Business intact, and to preserve the Business and the goodwill of Seller's suppliers, customers, distributors and others having business relations with it; 4.3.4 Seller has not changed its accounting methods or practices (including any change in depreciation or amortization policies or rates) or revalued any of its assets. 4.4 Assets. Seller has good and marketable fee simple title to the Assets and upon the consummation of the transactions contemplated hereby will transfer to Buyer good and marketable title to all of the Assets, free and clear of any Encumbrances, except for any Encumbrance that Buyer, in its sole discretion, specifically accepts in writing. The Assets constitute all assets necessary for the conduct of the Business as presently conducted. 4.5 Contracts and Commitments. 4.5.1 Contracts. Seller has heretofore provided to Buyer a complete and accurate list of all Contracts of the following categories: 4.5.1.1 Contracts not made in the ordinary course of Seller's conduct of the Business; 4.5.1.2 Licenses for Intellectual Property used in connection with the Business; 4.5.1.3 Distribution, dealer, franchise, license, sales or commission contracts related to the Assets or the Business; 4.5.1.4 Contracts involving expenditures or liabilities, actual or potential, in excess of $10,000 or otherwise material to the Business or the Assets, and not cancelable (without liability) within 30 calendar days; 4.5.1.5 Contracts or commitments relating to commission arrangements with others related to the Assets; 4.5.1.6 Promissory notes, loans, agreements, and evidences of indebtedness relating to an obligation to pay money where Seller shall be the borrower, lender or guarantor thereunder or whereby any Assets are pledged to secure such obligation; 4.5.1.7 Leases of personal property related to the Assets; and 4.5.1.8 Contracts containing covenants limiting the freedom of Seller or any officer, director or shareholder of Seller to engage in any line of business or compete with any person to the extent related to the Assets or the Business. 11 4.5.2 Assumed Contracts. All of the Contracts which will be assumed by Buyer (the "Assumed Contracts") are listed on Schedule 4.5.2 and are valid and in full force and effect. Seller has duly performed all of its obligations under the Assumed Contracts to the extent those obligations to perform have accrued, and no violation of, or default or breach under any Assumed Contracts by Seller or, to Seller's knowledge, any other party has occurred and neither Seller nor, to Seller's knowledge, any other party has repudiated any provisions thereof. 4.6 Permits and Consents. Seller has all Permits required to conduct the Business, except where the failure to obtain such Permits would not have a Material Adverse Effect on the Assets or the Business. All Permits of Seller related to the Business are valid and in full force and effect and are listed on Schedule 4.6. Except as disclosed on Schedule 4.6, no notice to, declaration, filing or registration with, or authorization, or Consent or approval of, or Permit from, any governmental or regulatory body or authority, or any other person or entity, is required to be made or obtained by Seller in connection with the execution, delivery or performance of this Agreement and the consummation of the transactions contemplated hereby, except where the failure to comply with such requirement would not have a Material Adverse Effect on the Assets or the consummation of the transactions contemplated hereby. Schedule 4.6 sets forth all Consents required for the assignment by Seller to Buyer of the Assumed Contracts. All of the Assumed Contracts will be enforceable by Buyer after the Closing to the same extent as if the transactions contemplated by this Agreement had not been consummated. 4.7 No Conflict or Violation. After giving effect to Consents and lien releases that have been obtained from third parties or will be so obtained prior to the Closing Date, neither the execution and delivery of this Agreement by Seller, nor the consummation of the transactions contemplated hereby, nor compliance by Seller with any of the provisions hereof, will (a) violate or conflict with any provision of the Certificate of Incorporation or Bylaws of Seller, (b) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any Encumbrance upon any of the Assets under, any of the terms, conditions or provisions of any Contract, Permit, agreement, or other instrument or obligation (i) to which Seller is a party or (ii) by which the Assets are bound, (c) violate, except where such violation would not, individually or in the aggregate, have a Material Adverse Effect on the Assets or the Business, any statute, rule, regulation, ordinance, code, order, judgment, ruling, writ, injunction, decree or award or (d) impose any Encumbrance, restriction or charge on the Assets or the Business. 4.8 Financial Statements. Attached hereto as Schedule 4.8 are the Financial Statements of InVision Wireless. The Financial Statements (a) are in accordance with the underlying books and records of Seller, (b) have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby (except as otherwise described in Schedule 4.8) and (c) fairly and accurately present the assets, liabilities (including all reserves) and financial position of InVision Wireless as of the respective dates thereof and the results of operations and changes in cash flows for the periods then ended (subject, in the case of interim Financial Statements, to normal year-end adjustments). At the respective dates of the Financial Statements, there were no liabilities of InVision Wireless, which, in accordance with generally accepted accounting principles, should have been shown or 12 reflected in the Financial Statements or the notes thereto, which are not shown or reflected in the Financial Statements or the notes thereto. 4.9 Books and Records. Seller has made and kept (and given Buyer access to) Books and Records and accounts, which, in reasonable detail, accurately and fairly reflect the activities of Seller in connection with the Business. A copy of the minute book of Seller has been previously delivered to Buyer. The copies of the stock book records of Seller previously delivered to Buyer are true, correct and complete, and accurately reflect all transactions effected in Seller's stock through and including the date hereof. 4.10 Litigation. Except as set forth on Schedule 4.10, there is no action, order, writ, injunction, judgment or decree outstanding or any claim, suit, litigation, proceeding, labor dispute, arbitral action, governmental audit or investigation (collectively, "Actions") pending, or to the best knowledge of Seller, threatened or anticipated (a) against, related to or affecting Seller, the Business or the Assets or (b) seeking to delay, limit or enjoin the transactions contemplated by this Agreement. Seller is not in default with respect to or subject to any judgment, order, writ, injunction or decree of any court or governmental agency, and there are no unsatisfied judgments against Seller, the Business or the Assets. 4.11 Labor Matters. Seller is not a party to any labor agreement with respect to its employees with any labor organization, union, group or association and there are no employee unions (nor any other similar labor or employee organizations) under local statutes, custom or practice. Seller has not experienced any attempt by organized labor or its representatives to make Seller conform to demands of organized labor relating to its employees or to enter into a binding agreement with organized labor that would cover the employees of Seller. 4.12 Compliance with Law. Seller, the conduct of the Business and the operation of the Facilities have not violated and are in compliance with all laws, statutes, ordinances, regulations, rules and orders of any foreign, federal, state or local government and any other governmental department or agency, and any judgment, decision, decree or order of any court or governmental agency, department or authority, including without limitation environmental laws, relating to the Assets, Facilities or Business or operations of Seller, except where the violation or failure to comply, individually or in the aggregate, would not have a Material Adverse Effect on the Facilities, the Assets or the Business. Seller and the conduct of the Business and the operation of the Facilities are in conformity with all energy, public utility, zoning, building and health codes, regulations and ordinances, OSHA and environmental laws and all other foreign, federal, state, and local governmental and regulatory requirements, except where any nonconformity would not have a Material Adverse Effect on the Facilities, the Assets or the Business. Seller has not received any notice to the effect that, or otherwise been advised that, it is not in compliance with any such statutes, regulations, rules, judgments, decrees, orders, ordinances or other laws, and Seller has no reason to anticipate that any existing circumstances are likely to result in violations of any of the foregoing, which non-compliance or violation could, in any one case or in the aggregate, have a Material Adverse Effect on the Facilities, the Assets or the Business. 4.13 No Brokers. Neither Seller nor any of its respective officers, directors, employees, shareholders or Affiliates has employed or made any agreement with any broker, 13 finder or similar agent or any person or firm which will result in an obligation to pay any finder's fee, brokerage fees or commission or similar payment in connection with the transactions contemplated hereby. 4.14 No Other Agreements to Sell the Assets. Neither Seller nor any of its respective officers, directors, shareholders or Affiliates have any commitment or legal obligation, absolute or contingent, to any other person or firm other than the Buyer to sell, assign, transfer or effect a sale of any of the Assets (other than inventory in the ordinary course of business), or to effect a liquidation, dissolution or other reorganization of Seller. 4.15 Intellectual Property. 4.15.1 Intellectual Property. Schedule 4.15 contains a complete and correct list and a brief description, of all Intellectual Property in which Seller has any interest whatsoever and that is primarily related to, used in, held for use in connection with, or necessary for the conduct of, or otherwise material to, the Business (the "Intellectual Property Assets"). The Intellectual Property Assets listed in Schedule 4.15 are all those used by Seller in connection with the Business and are identified as "owned" and "licensed" Intellectual Property Assets. 4.15.2 Royalties and Licenses. Except as set forth on Schedule 4.15, no person has a right to receive a royalty or similar payment in respect of any Intellectual Property Assets. Except as set forth on Schedule 4.15, Seller has no licenses granted, sold or otherwise transferred by or to it or other agreements to which it is a party, relating in whole or in part to any of the Intellectual Property Assets. 4.15.3 Ownership and Protection of Intellectual Property. As applicable, Seller owns or has the right to use pursuant to license, sublicense, agreement, or permission all Intellectual Property Assets free from any Encumbrances, and as to the owned Intellectual Property Assets, free from any requirement of any past, present, or future royalty payments, license fees, charges or other payments, or conditions or restrictions whatsoever. None of the owned Intellectual Property Assets are involved in any pending or to the best knowledge of Seller, threatened litigation, none of the licensed Intellectual Property Assets are involved in any pending or, to the best knowledge of Seller, threatened litigation involving Seller and, to the best of Seller's knowledge, none of the licensed Intellectual Property Assets are involved in any pending or threatened litigation involving parties other than Seller. Seller has not received any notice of invalidity or infringement of any rights of others with respect to such Intellectual Property Assets. To the best of Seller's knowledge after reasonable investigation, the conduct of the Business does not infringe or otherwise conflict with any rights of any other firm, corporation, association or person in respect of any Intellectual Property. To the best knowledge of Seller after reasonable investigation, none of the owned Intellectual Property Assets are being infringed or otherwise used or available for use by any other firm, corporation, association or person. Seller has taken all reasonable and prudent steps to protect the owned Intellectual Property Assets from infringement by any other firm, corporation, association or person. Seller's use of the Intellectual Property Assets is not, to the best of Seller's knowledge after reasonable investigation, infringing upon or otherwise violating the rights of any third party in or to such Intellectual Property Assets, nor, to the best of Seller's knowledge after reasonable investigation, has such infringement been alleged by any third party. All of the Intellectual Property Assets are 14 valid and enforceable rights of Seller, and the owned Intellectual Property Assets, will be quit-claimed to Buyer and will not cease to be valid and in full force and effect by reason of the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated by this Agreement. 4.16 Tax Matters. 4.16.1 Filing of Tax Returns. Seller has timely filed with the appropriate taxing authorities all returns (including without limitation information returns and other material information) in respect of Taxes required to be filed through the date hereof and will timely file any such returns required to be filed on or prior to the Closing Date. The returns and other information filed are complete and accurate in all material respects. Neither Seller, nor any group of which Seller now or was a member, has requested any extension of time within which to file returns (including without limitation information returns) in respect of any taxes. 4.16.2 Payment of Taxes. All Taxes, in respect of periods beginning before the Closing Date, have been timely paid, or will be timely paid, or an adequate reserve has been established therefor, as set forth in the Financial Statements, and Seller does not have any liability for Taxes in excess of the amounts so paid or reserves so established. There are no liens for Taxes (other than as could be asserted for current Taxes not yet due and payable) on the Assets. 4.16.3 Audits, Investigations or Claims. There are no pending or, to the best of Seller's knowledge, threatened audits, investigations or claims for or relating to any material additional liability in respect of Taxes, and there are no matters under discussion with any governmental authorities with respect to Taxes that in the reasonable judgment of Seller, or its counsel, is likely to result in a material additional liability for Taxes. Seller has not been notified that any taxing authority intends to audit a return for any period. No extension of a statute of limitations relating to Taxes is in effect with respect to Seller. 4.16.4 No Withholding. The transaction contemplated herein is not subject to the tax withholding provisions of Section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code or of any other provision of law. 4.17 Customers. Seller has previously provided to Buyer true and correct lists of (a) the names and addresses of all domestic customers of the Business that ordered products, goods, or services from Seller during the twelve (12) month period ended as of the date of the date of the Balance Sheet, and (b) the amount for which each such customer was invoiced during such period related to the Business. Except as set forth in Schedule 4.17, Seller has received no notice and Seller has no reason to believe that any customer of Seller (i) has ceased, or will cease, to use the products, goods, or services of Seller which relate to the Business, (ii) has substantially reduced, or will substantially reduce, the use of products, goods, or services of Seller which relate to the Business or (iii) has sought, or is seeking, to reduce the price it will pay for products, goods or services of Seller, which relate to the Business, including in each case after the consummation of the transactions contemplated hereby. To the best of Seller's knowledge, no customer of Seller with respect to the Business has otherwise threatened to take any action described in the preceding sentence as a result of the consummation of the transactions contemplated by this Agreement. 15 4.18 Warranties. Except as set forth in Schedule 4.18, (a) there are no warranties, express or implied, written or oral, with respect to the products of the Business and (b) other than as have occurred in the ordinary course of Seller's business, there are no pending or threatened claims with respect to any such warranty, and (c) Seller has not, and to the best knowledge of Seller, neither Buyer nor any of its affiliates will have, any liability, after the Closing with respect to any such warranty, whether known or unknown, absolute, accrued, contingent or otherwise and whether due or to become due, other than customary returns in the ordinary course of the Business which are reserved against in accordance with generally accepted accounting principles in the most recent Financial Statements of Seller. Other than as disclosed in writing to Buyer, Seller has received no material complaints from customers relating to the Business. 4.19 Liabilities. Except as set forth on Schedule 4.19, Seller has no liabilities or obligations with respect to the Business or the Assets to be transferred (absolute, accrued, contingent or otherwise) except (i) liabilities which are reflected on the Balance Sheet or which are not required under generally accepted accounting principles to be reflected on the Balance Sheet, (ii) liabilities incurred in the ordinary course of the business and consistent with past practice since the date of the Balance Sheet, and (iii) liabilities arising under the Contracts previously furnished to Buyer. 4.20 Securities Law Matters. 4.20.1 InVision Wireless confirms that it is acquiring the Mobility Shares for its own account as principal, for investment purposes only, and not with a view to, or for, resale or distribution thereof, and no other person has or will have a direct or indirect beneficial interest in the Mobility Shares. 4.20.2 InVision Wireless understands that the offering and sale of the Mobility Shares is intended to a be a transaction by an issuer not involving any public offering exempt from registration under the Securities Act of 1933 (the "Securities Act") by virtue of Section 4(2) of the Securities Act and the rules and regulations of the Securities and Exchange Commission (the "Commission") thereunder; 4.20.3 InVision Wireless represents that it is an "accredited investor" as such term is defined in Rule 501 under the Securities Act; 4.20.4 InVision Wireless understands and acknowledges that there are substantial risks of loss of investment involved in an investment in the Mobility Shares, and that the investment in the Mobility Shares is an illiquid investment subject to transfer restrictions, and InVision Wireless represents and warrants that it has the financial ability to bear the economic risk of such investment; 4.20.5 InVision Wireless has such knowledge and experience in financial and business matters, including investments of the type represented by the Mobility Shares, as to be capable of evaluating the merits of investment therein; 4.20.6 InVision Wireless has been furnished with a copy of the most recent periodic reports filed by Buyer with the Commission and any document requested by InVision 16 Wireless, and InVision Wireless has carefully read and understands such materials and has evaluated the risks of an acquisition of the Mobility Shares; 4.20.7 InVision Wireless has been given the opportunity to ask questions of, and receive answers from, Representatives of Buyer in order for it to evaluate the merits and risks of investment in the Mobility Shares; 4.20.8 InVision Wireless has not been furnished with or relied upon any oral or written representation, warranty or information in connection with the offering of the Mobility Shares except as set forth in this Agreement. 4.20.9 The instruments evidencing the Mobility Shares shall bear a restrictive legend in substantially the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"). These securities have been acquired for investment and not with a view to distribution or resale, and may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement for such shares under the Act or an opinion of counsel satisfactory in form and content to the issuer that such registration is not required under such Act." 4.21 Disclosure. Neither this Agreement nor any of the Schedules or Exhibits hereto contains or shall contain when delivered at Closing any untrue statement of a material fact or shall omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading; and there is no fact with respect to the Business which has not been disclosed to Buyer which Materially Adversely Affects or could reasonably be anticipated to Materially Adversely Affect the Assets being transferred, financial condition or results of operations, customer, employee or supplier relations, business condition or prospects of Seller. ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller as follows, which representations and warranties are, and as of the Closing Date shall be, true and correct: 5.1 Organization of Buyer. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 5.2 Authorization. Buyer has all requisite corporate power and authority, and has taken all corporate action necessary, to execute and deliver this Agreement and each Ancillary Agreement to which it will be a party, to consummate the transactions contemplated hereby and to perform its obligations hereunder. This Agreement has been duly executed and delivered by Buyer and is a legal, valid and binding obligation of Buyer enforceable against it in accordance with its terms. Following their execution and delivery by Buyer and the other parties thereto each of the Ancillary Agreements and other documents delivered by Buyer at Closing will be a legal, valid and binding obligation of Buyer, enforceable against it in accordance with their terms. 17 5.3 No Conflict or Violation. Neither the execution, delivery or performance of this Agreement or the Ancillary Agreements nor the consummation of the transactions contemplated hereby or thereby, nor compliance by Buyer with any of the provisions hereof or thereof, will (a) violate or conflict with any provision of the Certificate of Incorporation or Bylaws of Buyer, or (b) violate any statute, rule, regulation, ordinance, code, order, judgment, ruling, writ, injunction, decree or award binding upon Buyer. 5.4 Consents and Approvals. No notice to, declaration, filing or registration with, or authorization, Consent or approval of, or permit from, any governmental or regulatory body or authority, or any other person or entity, is required to be made or obtained by Buyer in connection with the execution, delivery and performance of this Agreement or the Ancillary Agreements and the consummation of the transactions contemplated hereby or thereby, except (a) as may be required by Buyer to operate the Business after the Closing, or (b) as has been obtained on or prior to the date hereof. 5.5 No Brokers. Neither Buyer nor any of its respective officers, directors, employees, shareholders, or Affiliates has employed or made any agreement with any broker, finder, or similar agent or any person or firm which will result in an obligation to pay any finder's fee, brokerage fees, or commission or similar payment in connection with the transactions contemplated hereby. 5.6 Mobility Shares. The Mobility Shares to be issued pursuant to this Agreement, when issued and delivered in accordance with the terms of this Agreement, will be duly authorized, validly issued, fully paid, and nonassessable and free of preemptive rights. 5.7 SEC Information Furnished Concerning Buyer. For the period from January 1, 2003 to the date hereof, Buyer has filed with the Commission those filings and reports required pursuant to the Securities and Exchange Act of 1934 (the "SEC Documents"). The audited consolidated financial statements for the year ended December 31, 2002, contained within the SEC Documents have been prepared in accordance with generally accepted accounting principles consistently applied (except as may be otherwise noted therein) and fairly present the consolidated financial position of Buyer and its subsidiaries as of such date and the consolidated results of operations of Buyer and its subsidiaries for the year then ended. To Buyer's knowledge, as of their respective dates, the SEC Documents, including, but not limited to, the financial statements contained therein, did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. ARTICLE VI COVENANTS OF SELLER AND BUYER Buyer and Seller each covenant with the other as follows: 6.1 License and Software Upgrades. As of, and following, the Closing Date, InVision Software grants to Buyer a perpetual, irrevocable, transferable, worldwide, fully sub-licensable, royalty-free license to use, reproduce, license, market and distribute (a) the software programs designed, sold and supported by InVision Software in connection with the Business, 18 including without limitation the "eConnect" software program (the "Software Programs"); and (b) the "eConnect" and "InVision" trademarks and tradenames (subsections (a) and (b) referred to herein as the "InVision License"); provided, however, that notwithstanding the foregoing, the InVision License shall not permit the Buyer to sell the "eConnect" software program to Symbol, either alone or embedded in hardware cradles, in such a way that interferes with the licensing revenue that InVision Software currently receives directly from Symbol. In addition, following the Closing Date, InVision Software will provide to Buyer, at InVision Software's expense, ongoing software upgrades and maintenance for the Software Programs, and Buyer will have the right to the object code for the Software Programs. In connection with the InVision License, InVision Software represents and warrants that it owns or has license rights to all Intellectual Property in the Software Programs, and that it is authorized, empowered, and able, on behalf of itself and its direct and indirect Affiliates having an interest in the Software Programs, to enter into and fully perform its obligations under this Agreement, including without limitation, the granting of all rights set forth herein. 6.2 Further Assurances. Upon the terms and subject to the conditions contained herein, each of the parties hereto agrees, both before and after the Closing, (i) to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, (ii) to execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the transactions contemplated hereunder, and (iii) to cooperate with each other in connection with the foregoing, including using their respective best efforts (A) to obtain all necessary waivers, Consents and approvals from other parties to the Contracts to be assumed by Buyer; provided, however, that Buyer shall not be required to make any payments, commence litigation or agree to modifications of the terms thereof in order to obtain any such waivers, Consents or approvals, (B) to obtain all necessary Permits as are required to be obtained under any federal, state, local or foreign law or regulations, (C) to effect all necessary registrations and filings, including without limitation submissions of information requested by governmental authorities, and (D) to fulfill all conditions to this Agreement. 6.3 Registration Rights for Closing Shares. 6.3.1 Registration Procedures and Expenses. As soon as reasonably possible following the Closing Date, Buyer will use its best efforts to effect the registration under the Securities Act for resale of the Closing Shares issued to InVision Wireless on the Closing Date, by performing the following: 6.3.1.1 Buyer shalluse its best efforts to prepare and file with the Commission a registration statement with respect to the resale of the Closing Shares by Invision Wireless, and shall use its best efforts to cause such registration statement to become and remain effective for the lesser of a period of one (1) year or until InVision Wireless is free to resell the Closing Shares without restriction or limitation pursuant to Rule 144(k) of the Securities Act. 6.3.1.2 Buyer shall use its best efforts to register or qualify the Closing Shares for sale in such states as InVision Wireless shall reasonably designate and to keep such 19 registration or qualification in effect for so long as the registration statement filed under the Securities Act remains in effect. 6.3.1.3 Buyer shall prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to update and keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the sale of all securities covered by such registration statement. 6.3.1.4 Buyer shall notify InVision Wireless upon discovery that the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and at the request of InVision Wireless promptly prepare and furnish to each of them a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that such prospectus will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made; provided that, after such notification and until such supplement or amendment has been so delivered, InVision Wireless will not deliver or otherwise use the original prospectus. 6.3.1.5 Buyer shall cause to be furnished to InVision Wireless copies of such registration statement and of each amendment and supplement thereto (in each case including all exhibits) and such number of copies of the preliminary and final prospectuses and any other prospectus filed under Rule 424 of the Securities Act as InVision Wireless may reasonably request in order to facilitate the sale of the Closing Shares. InVision Wireless will comply with all prospectus delivery requirements under the Securities Act. It will be a condition to Buyer's obligations to effect registration of the Closing Shares that InVision Wireless provide Buyer with all material facts including, without limitation, furnishing such certificates and questionnaires as may be required by Buyer concerning the Closing Shares to be registered which are reasonably required for Buyer to complete and file the registration statement or in the prospectus or are otherwise required in connection with the offering. 6.3.1.6 InVision Wireless shall pay for all selling commissions applicable to the sales of the Closing Shares and all fees and disbursements of counsel for InVision Wireless (the "Selling Expenses"). 6.3.2 Indemnification Relating to Registration Rights. 6.3.2.1 Buyer will indemnify and hold harmless InVision Wireless and each person, if any, who controls InVision Wireless within the meaning of the Securities Act, for, from and against any and all losses, damages, liabilities, costs and expenses to which InVision Wireless or any such controlling person may become subject under the Securities Act, any state securities laws, or otherwise, insofar as such losses, claims, damages, liabilities, costs or expenses are caused by a failure to comply with such laws or by any untrue statement or alleged untrue statement of any material fact contained in a registration statement under which the Closing Shares are registered, any prospectus contained therein or any amendment or supplement thereto, or arise out of or based upon the omission or alleged omission to state 20 therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that, Buyer will not be liable in any such case to the extent that any such loss, claim, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by or on behalf of InVision Wireless or such controlling person in writing specifically for use in the preparation thereof. 6.3.2.2 Seller will indemnify and hold harmless Buyer and each person, if any, who controls Buyer within the meaning of the Securities Act, from and against any and all losses, damages, liabilities, costs and expenses to which Buyer or any such controlling person may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in a registration statement under which the Closing Shares are registered, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein, in light of the circumstances under which they were made, not misleading, to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with written information furnished by or on behalf of InVision Wireless specifically for use in the preparation thereof. 6.3.2.3 Promptly after receipt by an indemnified party pursuant to the provisions of paragraphs 6.3.2.1 and 6.3.2.2 of this provision of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraphs 6.3.2.1 and 6.3.2.2, promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have hereunder unless the indemnifying party has been materially prejudiced thereby nor will such failure to so notify the indemnifying party relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, if the defendants in any action include both the indemnified party and the indemnifying party and the indemnified parties have defenses or may have defenses additional to or different than the indemnifying parties, or there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party will not be liable to such indemnified party pursuant to the provisions of said paragraph 6.3.2.1 or 6.3.2.2 for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the provisions of the preceding sentence, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action or (iii) the indemnifying 21 party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. ARTICLE VII CONDITIONS PRECEDENT 7.1 Conditions to Obligations of Buyer. The obligations of Buyer to consummate the transactions contemplated hereby shall be subject to the fulfillment (or waiver by Buyer, in its sole discretion) on or prior to the Closing Date of the following additional conditions, which Seller agrees to use reasonable good faith efforts to cause to be fulfilled: 7.1.1 Representations, Performance. All representations and warranties of Seller contained in this Agreement shall be true and correct in all respects at and as of the date hereof, and shall be true and correct in all respects on and as of the Closing Date with the same effect as though made on and as of the Closing Date. 7.1.2 Performance of Covenants and Conditions. Seller shall have duly performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date. 7.1.3 Officer's Certificate. Seller shall have delivered to Buyer a duly authorized, properly executed certificate, dated the Closing Date in which the President of Seller shall certify that he has no reason to believe that the conditions set forth in Sections 7.1.1 and 7.1.2 have not been fulfilled. 7.1.4 Secretary's Certificate. Seller shall have furnished to Buyer (i) a copy of the text of the resolutions by which the Board of Directors of Seller have approved this Agreement and the Ancillary Agreements, (ii) certified copies of the Seller's Articles of Incorporation, (iii) a copy of Seller's Bylaws, and (iv) a certificate executed on behalf of the Seller by its corporate secretary certifying to Buyer that such resolutions are true, correct and complete, were duly adopted and have not been amended or rescinded, and that prior to the Closing, the Articles of Incorporation and Bylaws of Seller have not been amended or rescinded. 7.1.5 Consents. Seller shall have obtained and shall have delivered to Buyer copies of (i) all governmental approvals required to be obtained by Seller in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and (ii) all Consents (including, without limitation, all Consents set forth on Schedule 4.6), necessary to be obtained in order to consummate the transactions contemplated by this Agreement. 7.1.6 Consulting Agreement. Buyer shall have received the signed Consulting Agreement between Buyer and Joseph Spiteri substantially in the form attached hereto as Exhibit D. 7.1.7 Employment Agreement. Buyer shall have received the signed Employment Agreement between Buyer and Herbert Feinstein substantially in the form attached hereto as Exhibit E. 22 7.1.8 Closing Financial Statements. Buyer shall have received the Closing Financial Statements. 7.1.9 No Material Adverse Effect. No event, occurrence, fact, condition, change, development or effect shall have occurred, exist or come to exist since the date of the Balance Sheet that, individually or in the aggregate, has constituted or resulted in, or could reasonably be expected to constitute or result in, a Material Adverse Effect. 7.1.10 Corporate, Other Proceedings. All corporate and other proceedings of Seller in connection with this Agreement and the transactions contemplated hereby, and all documents and instruments incident thereto, shall be reasonably satisfactory in substance and form to Buyer and its counsel, and Buyer and its counsel shall have received all such documents and instruments, or copies thereof, certified if requested, as may be reasonably requested. 7.1.11 No Proceedings or Litigation. No Action by any governmental authority or other person shall have been instituted or threatened which questions the validity or legality of the transactions contemplated hereby and which could reasonably be expected to damage Buyer materially if the transactions contemplated hereby are consummated, including without limitation any Material Adverse Effect on the right or ability of Buyer to own, operate, possess or transfer the Assets after the Closing. There shall not be any statute, rule or regulation that makes the purchase and sale of the Business or the Assets contemplated hereby illegal or otherwise prohibited. 7.1.12 Conveyancing Documents; Release of Encumbrances. Seller shall have executed and delivered each of the documents described in Article III hereof so as to effect the transfer and assignment to Buyer of all right, title and interest in and to the Assets and Seller shall have filed (where necessary) and delivered to Buyer all documents necessary to release the Assets from all Encumbrances, which documents shall be in a form reasonably satisfactory to Buyer and its counsel. 7.1.13 Tax Clearance Certificate. Seller shall have provided to Buyer a clearance certificate or similar document(s) that may be required by any state taxing authority in order to relieve Buyer of any obligation to withhold any portion of the Purchase Price. 7.1.14 Permits. Buyer shall have obtained or been granted the right to use all Permits necessary to its operation of the Business 7.1.15 Due Diligence Review. Buyer and its Representatives shall have conducted a due diligence review of Seller's Books and Records, Financial Statements, and other records and accounts of the Business, and in the sole discretion of Buyer, Buyer shall be satisfied with such review. Such review shall have no effect whatsoever on the liability of Seller to Buyer under this Agreement or otherwise for breach of any representations, warranties, or covenants of Seller or hereunder. Seller shall have also delivered to Buyer all Schedules to be supplied hereunder at least two (2) business days prior to Closing, which shall be satisfactory to Buyer. 7.2 Conditions to Obligations of Seller. The obligations of Seller to consummate the transactions contemplated hereby shall be subject to the fulfillment (or waiver by Seller, in its 23 sole discretion) on or prior to the Closing Date of the following additional conditions, which Buyer agrees to use reasonable good faith efforts to cause to be fulfilled. 7.2.1 Representations, Performance. All representations and warranties of Buyer contained in this Agreement shall be true and correct in all respects at and as of the date hereof, and shall be repeated and shall be true and correct in all respects on and as of the Closing Date with the same effect as though made on and as of the Closing Date. 7.2.2 Performance of Covenants and Conditions. Buyer shall have duly performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date. 7.2.3 Officer's Certificate. Buyer shall have delivered to Seller a duly authorized, properly executed certificate, dated the Closing Date in which the Chief Executive Officer of Buyer shall certify that he has no reason to believe that the conditions set forth in Sections 7.2.1 and 7.2.2 have not been fulfilled. 7.2.4 Secretary's Certificate. Buyer shall have furnished to Seller (i) a copy of the text of the resolutions by which the Board of Directors of Buyer have approved this Agreement and the Ancillary Agreements, (ii) certified copies of Buyer's Certificate of Incorporation, as amended, (iii) a copy of Buyer's Bylaws, and (iv) a certificate executed on behalf of Buyer by its corporate secretary certifying to Seller that such resolutions are true, correct and complete, were duly adopted and have not been amended or rescinded, and that prior to the Closing, the Certificate of Incorporation and Bylaws of Buyer have not been amended or rescinded. 7.2.5 Corporate, Other Proceedings. All corporate and other proceedings of Buyer in connection with this Agreement and the transactions contemplated hereby, and all documents and instruments incident thereto, shall be reasonably satisfactory in substance and form to Seller and its counsel, and Seller and its counsel shall have received all such documents and instruments, or copies thereof, certified if requested, as may be reasonably requested. 7.2.6 No Proceedings or Litigation. No Action by any governmental authority or other person shall have been instituted or threatened which questions the validity or legality of the transactions contemplated hereby. There shall not be any statute, rule or regulation that makes the purchase and sale of the Business or the Assets contemplated hereby illegal or otherwise prohibited. 7.2.7 Conveyances. Buyer shall have delivered, or cause to be delivered, to Seller items or documents identified in Article III hereof. ARTICLE VIII CONDUCT OF SELLER AND BUYER PENDING THE CLOSING 8.1 Seller Covenants. Seller hereby covenants and agrees that from the date hereof to the Closing Date: 24 8.1.1 Conduct of Business Pending the Closing. Except as specifically contemplated in this Agreement or as disclosed in any Schedule hereto, the Business of Seller shall be conducted only in, and Seller shall take no action except in, the ordinary course, on an arm's length basis, and in accordance with all applicable laws, rules, and regulations and past custom and practice, including, without limitation, making any loans or any cash payments, or transferring any other assets or properties of Seller to any employee, officer, shareholder, or director of Seller; and Seller will not, directly or indirectly, do or permit to occur any of the following: 8.1.1.1 Cancel or terminate or permit to be canceled or terminated its current insurance (or reinsurance) policies or permit any of the coverage thereunder to lapse, unless simultaneous with such termination, cancellation, or lapse, replacement policies providing coverage equal to or greater than the coverage under the canceled, terminated, or lapsed policies are in full force and effect; 8.1.1.2 Default under any material contract, agreement, commitment, or undertaking; 8.1.1.3 Knowingly violate or fail to comply with any laws applicable to it or the Business; 8.1.1.4 Commit any act or permit the occurrence of any event or the existence of any condition of the type described in Section 4.3 hereof; 8.1.1.5 Except in the ordinary course of business consistent with historical practices, enter into or modify any employment, severance, or similar agreements or arrangements with, or grant any bonuses, salary increases, or severance or termination pay to, any officers, directors, employees, or consultants, or adopt or amend any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment, or other benefit plan, trust, fund, or group arrangement for the benefit or welfare of any officers, directors, or employees; 8.1.1.6 Directly or indirectly enter into or modify any contract, agreement, or understanding or enter into any transaction not in the ordinary course of business; 8.1.1.7 Cancel, without full payment, any note, loan, or other obligation owing to Seller relating to the Business except in the ordinary course of business; 8.1.1.8 Acquire (by merger, exchange, consolidation, acquisition of stock or assets, or otherwise) any corporation, partnership, joint venture, or other business organization or division or material assets thereof; 8.1.1.9 Issue any additional shares of capital stock or permit the transfer of any outstanding shares of Seller's capital stock or declare any dividends or distributions; 8.1.1.10 Issue or create any warrants, obligations, subscriptions, options, convertible securities, or other commitments under which any additional shares of its capital 25 stock might be directly or indirectly authorized, issued, or transferred from treasury, or incur any indebtedness for borrowed money or issue any debt securities except the borrowing of working capital in the ordinary course of business and consistent with past practice; 8.1.1.11 Pay any obligation or liability, fixed or contingent, except in the ordinary course of business; 8.1.1.12 Waive or compromise any right or claim, other than as required to resolve any pending or threatened litigation disclosed in the Schedules attached hereto; 8.1.1.13 Agree to do any of the actions described in the preceding clauses 8.1.1.1 through 8.1.1.12 8.1.2 Business Relationships. Seller will exercise its best efforts to preserve intact its business organization and goodwill, keep available the services of its officers and employees as a group, and maintain satisfactory relationships with suppliers, distributors, customers, and others having business relationships with it. 8.1.3 Notification of Certain Matters. Seller shall (i) confer on a regular basis with Representatives of Buyer and report operational matters and the general status of ongoing operations, (ii) notify Buyer of any Material Adverse Change in the normal course of its business and of any governmental or third party complaints, investigations, or hearings (or communications indicating that the same may be contemplated); and (iii) promptly notify Buyer if Seller shall discover that any representation or warranty made by it in this Agreement was when made, or has subsequently become, untrue. 8.1.4 Transfer of Permits. Seller will use its best efforts to assist Buyer to effect the assignment or other transfer of Permits from Seller to Buyer as of or as soon as practicable after the Closing Date. 8.1.5 Closing. Seller shall use its best efforts to cause the conditions specified in Article VII hereof to be satisfied at or prior to the Closing Date. 8.2 No Negotiations. Seller shall not, directly or indirectly, through any officer, director, agent, or otherwise, solicit, initiate, or encourage submission of any proposal or offer from any person or entity (including any of its or their officers or employees) relating to any liquidation, dissolution, recapitalization, merger, consolidation, or acquisition or purchase of all or a material portion of the assets of, or any equity interest in, Seller or other similar transaction or business combination involving Seller, or participate in any negotiations regarding, or furnish to any other person any information with respect to, or otherwise cooperate in any way with, or assist, participate in, facilitate, or encourage, any effort or attempt by any other person or entity to do or seek any of the foregoing. Seller shall promptly notify Buyer if any such proposal or offer, or any inquiry from or contact with any person with respect thereto, is made and shall promptly provide Buyer with such information regarding such proposal, offer, inquiry, or contact as Buyer may request. 8.3 Public Announcements. The parties hereto shall not issue any press release or public announcement, including announcements by any party for general reception by or 26 dissemination to employees, agents, or customers, with respect to this Agreement and the other transactions contemplated by this Agreement without the prior written consent of the other parties hereto (which consent shall not be withheld unreasonably); provided, however, that Buyer may make any disclosure of announcement of information, it is obligated to make pursuant to applicable law or regulation, including any applicable law or regulation of the Nasdaq National Market or any other national securities exchange, as applicable. 8.4 Confidentiality. Each party hereto, and its officers, directors, agents, and affiliates, will hold in strict confidence, and will not divulge, communicate, use to the detriment of any other party hereto or for the benefit of any other person or persons, or misuse in any way, any financial information or other data obtained in connection with this Agreement, including, without limitation, any confidential information or trade secrets of such other party, personnel information, secret processes, know how, customer lists, formulas, or other technical data; and if the transactions contemplated by this Agreement are not consummated, each party hereto, and its officers, directors, agents and Affiliates, will return to each other party all such data an information, including without limitation, work sheets, test reports, manuals, lists, memoranda, and other documents prepared by or made available in connection with this transaction (and all copies of same). The parties hereto may disclose such information to their respective attorneys, accountants and other agents so long as they agree to keep such information confidential. Notwithstanding the foregoing, confidential information shall not include any information which a party can demonstrate: (i) was already in such party's possession prior to negotiations related to this transaction; (ii) is or becomes publicly and openly known and in the public domain through no fault of such party; or (iii) is received by such party in a non-confidential manner from a third party having the right to disclose such information. ARTICLE IX ACTIONS BY SELLER AND BUYER AFTER THE CLOSING 9.1 Non-Competition and Non-Solicitation. 9.1.1 Non-Competition. For a period of five (5) years from the Closing Date, Seller agrees that it will not, and will not permit any of its Affiliates, either alone or in conjunction with any third party, directly or indirectly to compete with the Business anywhere throughout the world. 9.1.2 Non-Solicitation of Employees. For a period of five (5) years from the Closing Date, Seller agrees that it will not, and will not permit any of its Affiliates, either alone or in conjunction with any other third party, directly or indirectly to, go into business with any employee of Buyer or solicit, induce, or recruit any employee of Buyer to leave the employ of Buyer. For the purpose of this Section 9.1, Buyer employee means any employee of the Buyer or any of its subsidiaries, or any of Buyer's Affiliates as of, or immediately prior to the date hereof or during this five (5) year non-solicitation period. 9.1.3 Non-Solicitation of Customers. For a period of five (5) years from the Closing Date, Seller agrees that it will not, and will not permit any of its Affiliates, either alone or in conjunction with any other third party, directly or indirectly to, call on, solicit, take away, accept as a client or customer, or attempt to call on, solicit, take away, or accept as a client or customer, any third party that was a client, customer, or prospective client or customer of the 27 Business, as of, or immediately prior to the Closing Date or during this five (5) year non-solicitation period. 9.1.4 Acknowledgement as to Reasonableness of Restrictions. Seller hereby expressly agrees and acknowledges that: 9.1.4.1 the Business is conducted throughout the world, and that competition with and against such business interests would be harmful to the Buyer; 9.1.4.2 the covenants contained in this Section 9.1 are reasonable as to time and geographical area and do not place any unreasonable burden upon Seller or any of its Affiliates; 9.1.4.3 the parties have entered into the covenants contained herein in connection with and as a condition precedent to the consummation of the Agreement, pursuant to which Buyer has acquired the Business; the agreements, actions, covenants, and promises contained herein are intended to protect and ensure the value of the Business, including its goodwill, which actions, covenants, and promises are a material consideration to Buyer in connection with the Agreement; and this Agreement shall be interpreted, construed, and/or enforced as a covenant given in connection with the sale of a business and its goodwill, notwithstanding any employment by Buyer of any Affiliate of Seller following the Closing; and 9.1.4.4 Seller and its Affiliates understand and hereby agree to each and every term and condition contained in this Section 9.1. 9.1.5 Remedies; Enforceability. Seller and its Affiliates recognize and acknowledge that irreparable damage will result to Buyer in the event of a breach of the provisions of this Section 9.1, and, accordingly, in the event of such a breach, Buyer will be entitled, in addition to any other legal or equitable damages and remedies to which it may be entitled or which may be available, to seek an injunction to restrain the violation thereof. If any provision of this Section 9.1 shall be adjudicated by a court of competent jurisdiction to be invalid or unenforceable because of the scope, duration, or area of its applicability, the court making such determination will have the power to modify such scope, duration, or area, or all of them and such provision will then be applicable in such modified form. 9.2 Books and Records; Payment of Liabilities. 9.2.1 Books and Records. Each party agrees that it will cooperate with and make available to the other party, during normal business hours, all Books and Records, information and employees (without substantial disruption of employment) retained and remaining in existence after the Closing which are necessary or useful in connection with any tax inquiry, audit, investigation or dispute, any litigation or investigation or any other matter related to the Business or the Assets requiring any such Books and Records, information or employees for any reasonable business purpose. 9.2.2 Cooperation and Records Retention. Seller and Buyer shall (i) each provide the other with such assistance as may reasonably be requested by any of them in connection with the preparation of any return, audit, or other examination by any taxing 28 authority or judicial or administrative proceedings relating to liability for Taxes, (ii) each retain and provide the other with any records or other information that may be relevant to such return, audit or examination, proceeding or determination, and (iii) each provide the other with any final determination of any such audit or examination, proceeding, or determination that affects any amount required to be shown on any tax return of the other for any period. Without limiting the generality of the foregoing, Buyer and Seller shall each retain, until the applicable statutes of limitations (including any extensions) have expired, copies of all tax returns, supporting work schedules, and other records or information, in a timely manner, as and that may be relevant to such returns for all tax periods or portions thereof ending on or before the Closing Date and shall not destroy or otherwise dispose of any such records without first providing the other party with a reasonable opportunity to review and copy the same. 9.2.3 Payment of Liabilities. Following the Closing Date, Seller shall pay promptly, in a timely manner, as and when due all of the debts and liabilities of Seller relating to the Business, which are not Assumed Liabilities, including without limitation any accounts payable and any liability of Seller for Taxes. 9.3 Survival of Representations, Etc. All statements contained in any certificate, schedule, exhibit, instrument or conveyance delivered by or on behalf of the parties pursuant to this Agreement or in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the parties hereunder. The representations and warranties of Seller and Buyer contained herein and all claims and causes of action with respect thereto (other than the provisions of Sections 4.4, 4.16 and this Section 9.3, and all claims and causes of action with respect thereto) shall survive for a period of three (3) years from the Closing Date, except that the representations and warranties in Section 4.4 shall survive forever. The representations and warranties in Section 4.16 shall survive until the expiration of the applicable statute of limitations (with extensions) with respect to the matters addressed in such section. The termination of the representations and warranties provided herein shall not affect the rights of a party in respect of any Claim made by such party in a writing received by the other party prior to the expiration of the applicable survival period provided herein. 9.4 Indemnifications. 9.4.1 By Seller. Regardless of Seller's knowledge of the existence of an Indemnifiable Event (as defined below), Seller shall indemnify, defend, save and hold harmless Buyer, its Affiliates and subsidiaries, and their respective Representatives, from and against any and all Damages incurred in connection with, arising out of, resulting from or incident to (i) any breach of any representation or warranty, or the inaccuracy of any representation or warranty, made by Seller in or pursuant to this Agreement (it being understood and agreed that, notwithstanding anything to the contrary contained in this Agreement, to determine if there had been an inaccuracy or breach of a representation or warranty of the Seller and the losses arising from such inaccuracy or breach, such representation or warranty shall be read as if it were not qualified by materiality, including, without limitation, qualifications indicating accuracy in all material respects, or accuracy except to the extent the inaccuracy will not have a Material Adverse Effect); (ii) any breach of any covenant or agreement made by Seller in or pursuant to this Agreement; (iii) any Excluded Liability; (iv) any liability imposed upon Buyer by reason of Buyer's status as transferee of the Business or the Assets except to the extent such liability arises 29 out of or results from Buyer's operation of the Business after the Closing Date; (v) any liability arising under any environmental law on account of the conduct of Seller or prior owners or users of the Facilities or other persons, or on account of the operation of the Business or the Facilities, or related to any environmental condition (collectively, the "Indemnifiable Events"). 9.4.2 By Buyer. Buyer shall indemnify, defend, save and hold harmless Seller, its Affiliates and its Representatives from and against any and all Damages incurred in connection with, arising out of, resulting from or incident to (i) any breach of any representation or warranty, or the inaccuracy of any representation or warranty, made by Buyer in or pursuant to this Agreement (it being understood and agreed that, notwithstanding anything to the contrary contained in this Agreement, to determine if there had been an inaccuracy or breach of a representation or warranty of the Buyer and the losses arising from such inaccuracy or breach, such representation or warranty shall be read as if it were not qualified by materiality, including, without limitation, qualifications indicating accuracy in all material respects, or accuracy except to the extent the inaccuracy will not have a Material Adverse Effect); (ii) any breach of any covenant or agreement made by Buyer in or pursuant to this Agreement; or (iii) any Assumed Liability insofar as such Assumed Liability arises from and after the Closing. 9.4.3 Cooperation. The indemnified party shall cooperate in all reasonable respects with the indemnifying party and such party's attorneys in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom; provided, however, that the indemnified party may, at its own cost, participate in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom. The parties shall cooperate with each other in any notifications to insurers. 9.4.4 Defense of Claims. If a claim for Damages (a "Claim") is to be made by a party entitled to indemnification hereunder against the indemnifying party, the party claiming such indemnification shall, subject to Section 9.3, give written notice (a "Claim Notice") to the indemnifying party as soon as practicable after the party entitled to indemnification becomes aware of any fact, condition or event which may give rise to Damages for which indemnification may be sought under this Section 9.4. If any lawsuit or enforcement action is filed against any party entitled to the benefit of indemnity hereunder, written notice thereof shall be given to the indemnifying party as promptly as practicable (and in any event within fifteen (15) calendar days after the service of the citation or summons). The failure of any indemnified party to give timely notice hereunder shall not affect rights to indemnification hereunder, except to the extent that the indemnifying party demonstrates actual damage caused by such failure. After such notice, if the indemnifying party shall acknowledge in writing to the indemnified party that the indemnifying party shall be obligated under the terms of its indemnity hereunder in connection with such lawsuit or action, then the indemnifying party shall be entitled, if it so elects, (i) to take control of the defense and investigation of such lawsuit or action, (ii) to employ and engage attorneys of its own choice (which shall be reasonably acceptable to the indemnified party) to handle and defend the same, at the indemnifying party's cost, risk and expense unless the named parties to such action or proceeding include both the indemnifying party and the indemnified party and the indemnified party has been advised in writing by counsel that there may be one or more legal defenses available to such indemnified party that are different from or additional to those available to the indemnifying party, and (iii) to compromise or settle such claim, which compromise or settlement shall be made only with the written consent of the indemnified party, 30 such consent not to be unreasonably withheld; provided, however, if the remediation or resolution of any such Claim is reasonably expected to have a Material Adverse Effect on the indemnified party's business operations, then, notwithstanding the foregoing, the indemnified party shall be entitled to control such remediation or resolution, including without limitation to take control of the defense and investigation of such lawsuit or action, to employ and engage attorneys of its own choice to handle and defend the same, at the indemnifying party's cost, risk and expense, and to compromise or settle such Claim. If the indemnifying party fails to assume the defense of such claim within fifteen (15) calendar days after receipt of the Claim Notice, the indemnified party against which such claim has been asserted will (upon delivering notice to such effect to the indemnifying party) have the right to undertake, at the indemnifying party's cost and expense, the defense, compromise or settlement of such claim on behalf of and for the account and risk of the indemnifying party. In the event the indemnified party assumes the defense of the claim, the indemnified party will keep the indemnifying party reasonably informed of the progress of any such defense, compromise or settlement. The indemnifying party shall be liable for any settlement of any action effected pursuant to and in accordance with this Section 9.4 and for any final judgment (subject to any right of appeal), and the indemnifying party agrees to indemnify and hold harmless an indemnified party from and against any Damages by reason of such settlement or judgment. 9.4.5 Buyer's Right of Offset. Anything in this Agreement to the contrary notwithstanding, Buyer may withhold and set off any amount as to which Seller is obligated to indemnify Buyer pursuant to Section 9.4 herein, against any Earnout Shares that have not been delivered to Seller. In order to exercise its rights under this Section 9.4.5, Buyer must deliver written notice of such exercise (a "Set-Off Notice") to Seller setting out in reasonable detail the grounds on which Buyer is claiming such set-off, including (i) the factual basis of Buyer's claim against Seller, (ii) the provisions of this Agreement, if any, to which such claim applies or in respect of which such claim is made, and (iii) Buyer's reasonable estimate of the dollar value of such claim, if such an estimate is determinable. Buyer and Seller will meet or correspond as soon as reasonably practicable after delivery by Buyer of a Set-Off Notice and will use reasonable efforts to negotiate a settlement or other resolution of Buyer's claim. If Buyer and Seller are unable to resolve Buyer's claim, the Parties will use reasonable efforts to negotiate an agreed-upon Set-Off amount. If Buyer and Seller are unable to determine the Set-Off amount within thirty (30) days after delivery to Seller of the applicable Set-Off Notice, Buyer may proceed to set off any amounts determined by Buyer in good faith. For purposes of determining the number of shares that Buyer may set-off in connection with its rights pursuant to this Section 9.4.5, the value of the Earnout Shares shall be based on the average reported closing price of Buyer's common stock on the Nasdaq National Market, or such other national securities exchange as applicable, as reflected in the Western Edition of the Wall Street Journal for the fifteen (15) trading days immediately preceding, but not including, the date of the Set-Off Notice. 9.4.6 Limitations. Neither Buyer nor Seller shall be liable to the other under this Section 9.4 for any Damages until the amount otherwise due the party being indemnified exceeds $10,000 in the aggregate, in which case such indemnifying party will be liable to the indemnified party for all such amounts, including the first $10,000. Notwithstanding the preceding sentence, this limitation shall not apply with respect to Excluded Liabilities, Damages arising out of a breach of a representation or warranty contained in Sections 4.4 or 4.16, the 31 covenants contained in Section 9.2.3 or any Damages arising out of fraud or intentional misrepresentation. Buyer shall give Seller prompt notice of any Damages that might apply toward the first $10,000. 9.4.7 Liability and Remedies, etc. Nothing herein shall relieve either party of any liability to make any payment expressly required to be made by such party pursuant to this Agreement. The term "Damages" as used in this Section 9.4 is not limited to matters asserted by third parties against Seller or Buyer, but includes Damages incurred or sustained by Seller or Buyer in the absence of third party claims. Payments by Buyer of amounts for which Buyer is indemnified hereunder, and payments by Seller of amounts for which Seller is indemnified, shall not be a condition precedent to recovery. Seller's obligation to indemnify Buyer, and Buyer's obligation to indemnify Seller, shall not limit any other rights, including without limitation rights of contribution which either party may have under statute or common law. Buyer and Seller agree and acknowledge that offset against the Earnout Shares shall not be Buyer's exclusive method of receiving indemnification from Seller pursuant to Section 9.4; rather, Buyer will have all other remedies provided by law or in this Agreement. 9.5 Taxes. Subject to Section 2.6, Seller shall pay, or cause to be paid, when due all Taxes for which Seller is or may be liable or that are or may become payable with respect to all taxable periods ending on or prior to the Closing Date. Buyer shall pay, or cause to be paid, when due all Taxes for which Buyer is or may be liable or that are or may become payable with respect to all taxable periods ending after the Closing Date. 9.6 Further Action. After the Closing, Seller shall take all actions reasonably necessary to effect the conveyance of the Assets to Buyer free and clear of all Encumbrances. 9.7 Depletion of Existing Inventory. Notwithstanding anything herein to the contrary, Seller shall be permitted to sell, and retain the proceeds from the sale of, any Inventory existing as of the Closing Date and located at Seller's Facility; provided, however, that Seller shall retain and indemnify Buyer with respect to any liabilities relating to such Inventory or the sale of such Inventory following the Closing Date. Seller shall promptly notify Buyer of each sale effected by Seller pursuant to this Section 9.7. ARTICLE X TERMINATION 10.1 Termination. This Agreement will terminate upon the occurrence of any of the following events: 10.1.1 Upon the written agreement of Seller and Buyer; or 10.1.2 At such time as Seller or Buyer provides written notice to the other party if the transactions contemplated hereby shall not have been consummated pursuant hereto by 5:00 p.m. Phoenix, Arizona time on December 1, 2003, unless such date shall be extended by the mutual written consent of Seller and Buyer; or 10.1.3 At such time as Buyer provides written notice to Seller if (i) the representations and warranties of Seller shall not have been true and correct in all material 32 respects as of the date when made, (ii) if any of the conditions set forth in Section 7.1 shall not have been, or if it becomes apparent that any of such conditions will not be, fulfilled by 5:00 p.m. Phoenix, Arizona time on December 1, 2003, or (iii) if Seller violates the provisions of Section 8.2 herein; or 10.1.4 At such time as Seller provides written notice to Buyer if (i) the representations and warranties of Buyer shall not have been true and correct in all material respects as of the date when made or (ii) if any of the conditions set forth in Section 7.2 shall not have been, or if it becomes apparent that any of such conditions will not be fulfilled by 5:00 p.m. Phoenix, Arizona time on December 1, 2003. 10.2 Effect of Termination. In the event of the termination of this Agreement pursuant to the provisions of Section 10.1, this Agreement shall become void and have no effect, without any liability to any person or entity in respect hereof or of the transactions contemplated hereby on the part of any party hereto, or any of its directors, officers, employees, agents, consultants, representatives, advisers, stockholders or affiliates; provided, however, that in the event this Agreement is terminated by Buyer pursuant to Section 10.1.4(iii), Seller shall pay to Buyer, a termination fee in the amount of $100,000. ARTICLE XI MISCELLANEOUS 11.1 Assignment. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by any party without the prior written consent of the other parties; except that Buyer may, without such consent, assign all such rights to any lender as collateral security and assign all such rights and obligations to a wholly-owned subsidiary (or a partnership or other entity controlled by Buyer) or subsidiaries of Buyer or to a successor in interest to Buyer which shall assume all obligations and liabilities of Buyer under this Agreement. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and no other person shall have any right, benefit or obligation under this Agreement as a third party beneficiary or otherwise. 11.2 Notices. All notices, requests, demands and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method; the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., Federal Express); and upon receipt, if sent by certified or registered mail, return receipt requested. In each case notice shall be sent to: If to Seller, addressed to: InVision Wireless, LLC InVision Software Inc. 110 Lake Avenue South, Suite 35 Nesconsent, NY 11767 Attn: Joseph Spiteri 33 If to Buyer, addressed to: Mobility Electronics, Inc. 17800 N. Perimeter Dr., Suite 200 Scottsdale, AZ 85255 Attn: Charles R. Mollo or to such other place and with such other copies as either party may designate as to itself by written notice to the others. 11.3 Choice of Law. This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of Arizona (without reference to the choice of law provisions thereof), except with respect to matters of law concerning the internal corporate affairs of any corporate entity which is a party to or the subject of this Agreement, and as to those matters the law of the jurisdiction under which the respective entity derives its powers shall govern. 11.4 Entire Agreement; Amendments and Waivers. This Agreement, together with all exhibits and schedules hereto, constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 11.5 Multiple Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11.6 Expenses. Except as otherwise specified in this Agreement, each party hereto shall pay its own legal, accounting, out-of-pocket and other expenses incident to this Agreement and to any action taken by such party in preparation for carrying this Agreement into effect. 11.7 Invalidity. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such instrument. 11.8 Titles. The titles, captions or headings of the Articles, Sections and subsections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 11.9 Cumulative Remedies. All rights and remedies of either party hereto are cumulative of each other and of every other right or remedy such party may otherwise have at 34 law or in equity, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies. 11.10 Arbitration. Any controversy arising after the Closing out of or relating to this Agreement (including, without limitation, pursuant to Section 2.4 or 9.4) or relating to the breach hereof, shall be settled by arbitration conducted in the State of Arizona in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect (except as otherwise expressly provided in this Agreement). The award rendered by the arbitrator(s) shall be final and judgment upon the award rendered by the arbitrator(s) may be entered upon it in any court having jurisdiction thereof. The arbitrator(s) shall possess the powers to issue mandatory orders and restraining orders in connection with such arbitration. The expenses of the arbitration shall be borne by the losing party unless otherwise allocated by the arbitrator(s). The agreement to arbitrate shall be specifically enforceable under the prevailing arbitration law. During the continuance of any arbitration proceedings, the parties shall continue to perform their respective obligations under this Agreement. 11.11 Consideration. InVision Software acknowledges and agrees that the it has received adequate consideration in return for entering into this Agreement, and combined with the consideration to be received by InVision Wireless, such consideration is adequate and sufficient for InVision Software to execute and perform all of its obligations pursuant to this Agreement. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 35 IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be duly executed on their respective behalf, by their respective officers thereunto duly authorized, all as of the day and year first above written. MOBILITY ELECTRONICS, INC. By:__________________________________ Name:________________________________ Its:_________________________________ INVISION WIRELESS, LLC By:__________________________________ Name:________________________________ Its:_________________________________ INVISION SOFTWARE INC. By:__________________________________ Name:________________________________ Its:_________________________________ 36 EX-10.33 4 p68849exv10w33.txt EX-10.33 Exhibit 10.33 STANDARD MULTI-TENANT OFFICE LEASE - GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Provisions ("Basic Provisions"). 1.1. PARTIES: This Lease ("LEASE"), dated for reference purposes only July 17, 2002, is made by and between I.S. CAPITAL, LLC, an Arizona limited liability corporation ("LESSOR") and MOBILITY ELECTRONICS, INC., a Delaware corporation ("LESSEE"), (collectively the "PARTIES", or individually a "PARTY"). 1.2.(a) PREMISES: That certain portion of the Project (as defined below), known as Suite Numbers(s) 200, 201 on the 2nd floor(s) and 1,500 square feet located on the 1st Floor, known as Suite, consisting of a total of approximately 20,182 rentable square feet ("PREMISES"). The Premises are located at: 17800 N. Perimeter Drive, in the City of Scottsdale, County of Maricopa, State of Arizona, with zip code 85254. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, the exterior walls, the area above the dropped ceilings, or the utility raceways of the building containing the Premises ("BUILDING") or to any other buildings in the Project. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "PROJECT." The Project consists of approximately 50,000 rentable square feet. (See also Paragraph 2) 1.2(b) PARKING: Sixty-five (65) unreserved and fifteen (15) reserved and covered vehicle parking spaces at a monthly cost of $0.0 per unreserved space and $O.O per reserved space. (See Paragraph 2.6) 1.3. TERM: Five (5) years and eight (8) months ("ORIGINAL TERM") commencing February 1, 2003 ("Commencement Date") and ending September 30, 2008 ("EXPIRATION DATE"). (See also Paragraph 3) 1.4. EARLY POSSESSION: Upon completion of tenant improvements ("Early Possession Date" which the Parties shall use best efforts to establish as November 1, 2002). (See also Paragraphs 3.2 and 3.3) 1.5. BASE RENT: $31 ,642.33 per month ("BASE RENT)", with the first payment prorated in the amount of $13,423.30 (plus 1.9% rental tax) due on November 15, 2003, and each monthly payment payable on the first (1st) day of each month thereafter. (See also "Paragraph 2, "Tenant Work Letter and Free Rent" of the Addendum.) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6. LESSEE'S SHARE OF OPERATING EXPENSE INCREASE: Forty and three tenths percent (40.3%) ("LESSEE'S SHARE"). Lessee's Share has been calculated by dividing the approximate rentable square footage of the Premises by the total approximate square footage of the rentable space contained in the Project and shall not be subject to revision except in connection with an actual change in the size of the Premises or a change in the space available for lease in the Project. 1.7. BASE RENT AND OTHER MONIES PAID NOVEMBER 15, 2003: (a) BASE RENT: $13,423.30 (pro-rated for November, 2003, plus 1.9% rental tax) then $31,642.33 base rent (plus 1.9% rental tax), payable beginning December 1, 2003. (b) SECURITY DEPOSIT: $31,642.33 ("SECURITY DEPOSIT"). (See also Paragraph 5) (c) PARKING: FREE. (d) OTHER: N/A (e) TOTAL DUE NOVEMBER 15, 2003: $45,065.63. 1.8. AGREED USE: General office use, including laboratory and Tenant's design group use, including milling and painting use (See also Paragraph 6). 1.9. BASE YEAR; Insuring Party. The Base Year is 2003. Lessor is the "INSURING PARTY". (See also Paragraphs 4.2 and 8) 1.10. REAL ESTATE BROKERS: (See also Paragraph 15) (a) REPRESENTATION: The following real estate brokers (the "BROKERS") and brokerage relationships exist in this transaction (check applicable boxes): [X] Colliers Classic (Joe Welchert) represents Lessor exclusively ("LESSOR'S BROKER"); [X] CB Richard Ellis (Chuck Nixon), represents Lessee exclusively ("LESSEE'S BROKER"); or [ ] , represents both Lessor and Lessee ("DUAL AGENCY"). (b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Brokers the brokerage fee agreed to in a separate written agreement (or if there is no such agreement, the sum of -- or --o% of the total Base Rent for the brokerage services rendered by the Brokers). 1.11. GUARANTOR. The obligations of the Lessee under this Lease shall be guaranteed by N/A ("GUARANTOR"). (See also Paragraph 37) 1.12. BUSINESS HOURS (AS USED HEREIN) FOR THE BUILDING:: 7:00 a.m. to 6:00 p.m., Mondays through Fridays (except Building Holidays) and 7:00 a.m. to 1:00 p.m. on Saturdays (except Building Holidays). "BUILDING HOLIDAYS" shall mean the dates of observation of New Year's Day, President's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day, and tenant shall have access, services and utilities supplied twenty-four (24) hours per day, seven (7) days per week. 1.13. LESSOR SUPPLIED SERVICES. This shall be a full-service lease. 1.14. ATTACHMENTS. Attached hereto are the following, all of which constitute a part of this Lease: [X] an Addendum consisting of Paragraphs 1 through 8; [X] a plot plan depicting the Premises; [X] a current set of the Rules and Regulations; [ ] a Work Letter; [ ] a janitorial schedule; [ ] other (specify): 2. PREMISES. 2.1. LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. NOTE: LESSEE IS ADVISED TO VERIFY THE ACTUAL SIZE PRIOR TO EXECUTING THIS LEASE. 2.2. CONDITION. Lessor shall deliver the Premises to Lessee in a clean condition on the Commencement Date or the Early Possession Date, whichever first occurs ("START DATE"), and warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), and all other items which the Lessor is obligated to construct pursuant to the Work Letter attached hereto, if any, other than those constructed by Lessee, shall be in good operating condition on said date. 2.3. COMPLIANCE. Lessor warrants that the Improvements comprising the Premises and the Common Areas comply with, the building codes that were in effect at the time that each such improvement, or portion thereof, was constructed, and also with all applicable laws, covenants or restrictions of record, regulations, and ordinances ("APPLICABLE REQUIREMENTS") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises, modifications which may be required by the Americans with Disabilities Act or any similar Laws as a result of Lessee's use (see Paragraph 50), or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a) made or to be made by Lessee. NOTE: LESSEE IS RESPONSIBLE FOR DETERMINING WHETHER OR NOT THE ZONING AND OTHER APPLICABLE REQUIREMENTS ARE APPROPRIATE FOR LESSEE'S INTENDED USE, AND ACKNOWLEDGES THAT PAST USES OF THE PREMISES MAY NO LONGER ALLOWED. If the Premises do not comply with said warranty, Lessor shall, except as otherwise - -------- - -------- Initials Page 1 of 17 provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Premises ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as follows: (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to 6 months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the cost of such Capital Expenditure as follows: Lessor shall advance the funds necessary for such Capital Expenditure but Lessee shall be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying Lessee's share of the cost of such Capital Expenditure (the percentage specified in Paragraph 1.6 by a fraction, the numerator of which is one, and the denominator of which is 144 (i.e. 1/144th of the cost per month). Lessee shall pay interest on the unamortized balance of Lessee's share at a rate that is commercially reasonable in the judgment of Lessor's accountants. Lessee may, however, prepay its obligation at any time. Provided, however, that if such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to nonvoluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4. ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) Lessee has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's Intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefore as the same relate to Its occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (ii) It Is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5. LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date, Lessee was the owner or occupant of the Premises, in such event, Lessee shall be responsible for any necessary corrective work. 2.6. VEHICLE PARKING. So long as Lessee is not in default, and subject to the Rules and Regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to the rentfree use of the number of parking spaces specified in Paragraph 1.2(b). (a) If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.7. COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project and interior utility raceways and installations within the Premises that are provided and designated by the Lessor from time to time for the general nonexclusive use of Lessor, Lessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and, including, but not limited to, common entrances, lobbies, corridors, stairwells, public restrooms, elevators, parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas. 2.8. COMMON AREAS - LESSEE'S RIGHTS. Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the nonexclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project, Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9. COMMON AREAS - RULES AND REGULATIONS. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to adopt, modify, amend and enforce reasonable rules and regulations ("RULES AND REGULATIONS") for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. The Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the noncompliance with said Rules and Regulations by other tenants of the Project. 2.10. COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Project to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate. - -------- - -------- Initials Page 2 of 17 Notwithstanding the Provisions affecting Paragraph 2.10, Lessor shall not make changes or alterations to the Common Area or Premises which alter the Tenant Improvements constructed by Lessee pursuant to the Tenant Improvement Contract, or otherwise Interfere with Lessee's reasonable use and enjoyment of the Premises. 3. Term. 3.1. TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2. EARLY POSSESSION. The Lessor shall use reasonable commercial efforts to permit the Lessee to complete the Tenant Improvements and allow Early Possession on or before November 1, 2002. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3. DELAY IN POSSESSION. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Early Possession Date. If, despite said efforts, Lessor is unable to deliver possession by such date, Lessor shall not be subject to any liability therefore, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession is not delivered by the Commencement Date, as the same may be extended under the terms of any Work Letter executed by Parties, Lessee may, at its option, by notice in writing within 10 days after the Commencement Date, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period, Lessee's right to cancel shall terminate. 3.4. LESSEE COMPLIANCE. Lessor shall not be required to deliver possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. Rent. 4.1. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("RENT"). 4.2. OPERATING EXPENSE INCREASE. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share of the amount by which all Operating Expenses for each Comparison Year exceeds the amount of all Operating Expenses for the Base Year, such excess being hereinafter referred to as the "OPERATING EXPENSE INCREASE", in accordance with the following provisions: (a) "BASE YEAR" is as specified in Paragraph 1.9. (b) "COMPARISON YEAR" is defined as each calendar year during the term of this Lease subsequent to the Base Year; provided, however, Lessee shall have no obligation to pay a share of any operating expense or the Operating Expense Increase applicable to the early occupancy period or the base year. Lessee's Share of the Operating Expense Increase for the first and last Comparison Years of the Lease Term shall be prorated according to that portion of such Comparison Year as to which Lessee is responsible for a share of such increase. (c) "OPERATING EXPENSES" include all costs incurred by Lessor relating to the ownership and operation of the Project, calculated as if the Project was at least 95% occupied (with the Tenant improvements completed), including, but not limited to, the following: (i) The operation, repair, and maintenance in neat, clean, safe, good order and condition, but not the replacement (see subparagraph (g)), of the following: () The Common Areas, including their surfaces, coverings, decorative items, carpets, drapes and window coverings, and including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, building exteriors and roofs, fences and gates; (bb) All heating, air conditioning, plumbing, electrical systems, life safety equipment, communication systems and other equipment used in common by, or for the benefit of, lessees or occupants of the Project, including elevators and escalators, tenant directories, fire detection systems including sprinkler system maintenance and repair. (ii) Trash disposal, janitorial and security services, pest control services, and the costs of any environmental inspections; (iii) Any other service to be provided by Lessor that is elsewhere In this Lease stated to be an "Operating Expense"; (iv) The cost of the premiums for the insurance policies maintained by Lessor pursuant to paragraph 8 and any deductible portion of an insured loss concerning the Building or the Common Areas; (v) The amount of the Real Property Taxes payable by Lessor pursuant to paragraph 10; (vi) The cost of water, sewer, gas, electricity, and other publicly mandated services not separately metered; (vii) Labor, salaries, and applicable fringe benefits and costs, materials, supplies and tools, used in maintaining and/or cleaning the Project and accounting and management fees attributable to the operation of the Project; (viii) The cost of any Capital Expenditure to the Building or the Project not covered under the provisions of Paragraph 2,3 provided; however, that Lessor shall allocate the cost of any such Capital Expenditure over a 12 year period and Lessee shall not be required to pay more than Lessee's Share of 1/144th of the cost of such Capital Expenditure in any given month;. (ix) Replacement of equipment or improvements that have a useful life for accounting purposes of 5 years or less. (d) Any item of Operating Expense that is specifically attributable to the Premises, the Building or to any other building in the Project or to the operation, repair and maintenance thereof, shall be allocated entirely to such Premises, Building, or other building. However, any such item that is not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Project. (e) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(c) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Project already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (f) Lessee's Share of Operating Expense Increase shall be payable by Lessee within 10 days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time in advance of Lessee's Share of the Operating Expense Increase for any Comparison Year, and the same shall be payable monthly during each Comparison Year of the Lease term, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expense Increase as aforesaid, Lessor - -------- - -------- Initials Page 3 of 17 shall deliver to Lessee within 60 days after the expiration of each Comparison Year a reasonably detailed statement showing Lessee's Share of the actual Operating Expense Increase incurred during such year. If Lessee's payments under this paragraph (f) during said Comparison Year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expense Increase next falling due. If Lessee's payments under this paragraph during said Comparison Year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within 10 days after delivery by Lessor to Lessee of said statement. Lessor and Lessee shall forthwith adjust between them by cash payment any balance determined to exist with respect to that portion of the last Comparison Year for which Lessee is responsible as to Operating Expense Increases, notwithstanding that the Lease term may have terminated before the end of such Comparison Year. (g) Operating Expenses shall not include the costs of replacement for equipment or capital components such as the roof, foundations, exterior walls or a Common Area capital improvement, such as the parking lot paying, elevators, fences that have a useful life for accounting purposes of 5 years or more unless it is of the type described in paragraph 4.2(c) (viii), in which case their cost shall be included as above provided. (h) Operating Expenses shall not include any expenses paid by any tenant directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or by insurance proceeds. 4.3. PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States on or before the day on which it is due, without offset or deduction (except as specifically permitted in this Lease). Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any Late Charge. Payments will be applied first to accrued late charges and attorney's fees, second to accrued interest, then to Base Rent and Operating Expense Increase, and any remaining amount to any other outstanding charges or costs. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefore, deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 14 days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within 30 days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 6. USE. 6.1. USE. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements of the Building, will not adversely affect the mechanical, electrical, HVAC, and other systems of the Building, and/or will not affect the exterior appearance of the Building. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in the Agreed Use. 6.2. HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, byproducts or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use such as ordinary office supplies (copier toner, liquid paper, glue, etc.) and common household cleaning materials, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any Liability therefore. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, comply with all Applicable Requirements and take all Investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or by any third party as agent for Lessee. (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from areas outside of the Project not caused or contributed to by Lessee). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created - -------- - -------- Initials Page 4 of 17 or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which result from Hazardous Substances which existed on the Premises prior to Lessee's occupancy or which are caused by the gross negligence or willful misconduct of Lessor, Its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) INVESTIGATIONS AND REMEDIATION. Lessor shell retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to Lessee's occupancy, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined In paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition (see Paragraph 9.1 (e)) occurs during the term of this Lease, unless Lessee is legally responsible therefore (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3. LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4. INSPECTION; COMPLIANCE. Lessor and Lessor's "LENDER" (as defined in Paragraph 30) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such Inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous Substance Condition (see paragraph 9.1 e) is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1. LESSEE'S OBLIGATIONS. Notwithstanding Lessor's obligation to keep the Premises In good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any improvements with the Premises. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. 7.2. LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 4.2 (Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, fire alarm and/or smoke detection systems, fire hydrants, and the Common Areas. Lessee expressly waives the benefit of any statute now or hereafter in effect to the extent It Is Inconsistent with the terms of this Lease. 7.3. UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS. The term "UTILITY INSTALLATIONS" refers to all floor and window coverings, air lines, vacuum lines,' power panels, electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, and plumbing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term " ALTERATIONS" shall mean any modification of the Improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7,4(a). (b) CONSENT. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not Involve puncturing, relocating or removing the roof, ceilings, floors or any existing walls, will not affect the electrical, plumbing, HVAC, and/or life safety systems, and the cumulative cost thereof during this Lease as extended does not exceed $10,000. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor, Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with asbullt plans and specifications. For work which costs an amount in excess of one month's Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation. (c) LIENS; BONDS. Lessee shall pay, when due, all claims for labor or materials furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the - -------- - -------- Initials Page 5 of 17 Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor, against liability for the same. If Lessor elects to participate in any such action, Lessor and Lessee shall cooperate in the selection of attorneys. 7.4. OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at the commencement date or within ten (10) days of written notice from Lessee of the installation of other improvements, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations(except the telephone system, which shall remain Lessee's property) shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) REMOVAL. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) SURRENDER; RESTORATION. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall also completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from areas outside of the Project) even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 8. INSURANCE; INDEMNITY. 8.1. INSURANCE PREMIUMS. The cost of the premiums for the insurance policies maintained by Lessor pursuant to paragraph 8 are included as Operating Expenses (see paragraph 4.2 (c)(iv)). Said costs shall include increases in the premiums resulting from additional coverage related to requirements of the holder of a mortgage or deed of trust covering the Premises, Building and/or Project, increased valuation of the Premises, Building and/or Project, and/or a general premium rate increase. Said costs shall not, however, Include any premium increases resulting from the nature of the occupancy of any other tenant of the Building. If the Project was not insured for the entirety of the Base Year, then the base premium shall be the lowest annual premium reasonably obtainable for the required insurance as of the Start Date, assuming the most nominal use possible of the Building and/or Project. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $2,000,000 procured under Paragraph 8.2(b). 8.2. LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000, an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3. PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force a policy or policies of insurance in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Building and/or Project. The amount of such insurance shall be equal to the full replacement cost of the Building and/or Project, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence. (b) RENTAL VALUE. Lessor shall also obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days ("RENTAL VALUE INSURANCE"). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period. (c) ADJACENT PROMISES. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Project if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) LESSEE'S IMPROVEMENTS. Since Lessor is the insuring Party, Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the Item in question has become the property of Lessor under the terms of this Lease. 8.4. LESSEE'S PROPERTY; BUSINESS INTERRUPTION INSURANCE. (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property. Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost - --------- - --------- Initials Page 6 of 17 coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or Indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of Insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5. INSURANCE POLICIES. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 30 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6. WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right lo recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7. INDEMNITY. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and' all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, Involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8. EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor nor from the failure of Lessor to enforce the provisions of any other lease in the Project. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom 9. Damage or Destruction. 9.1. DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 3 months or less from the date of the damage or destruction, and the cost thereof does not exceed a sum equal to 6 month's Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 3 months or less from the date of the damage or destruction and/or the cost thereof exceeds a sum equal to 6 month's Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance, described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing Immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as d defined in Paragraph 6.2(a), in, on, or under the Premises which requires repair, remediation, or restoration. 9.2. PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $5,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefore. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received. Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (II) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3. PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused, by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this - -------- - -------- Initials Page 7 of 17 Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4. TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction, If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5. DAMAGE NEAR END OF TERM. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES, (a) ABATEMENT. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous,, Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) REMEDIES. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair o r restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. "Commence" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7. TERMINATION; ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8. WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1. DEFINITIONS. As used herein, the term "REAL PROPERTY TAXES" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Project, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Project address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Project is located. "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, but shall not include, a change in the ownership of the Project or any portion thereof or a change in the improvements thereon. 10.2. PAYMENT OF TAXES. Except as otherwise provided in Paragraph 1 0.3, Lessor shall pay the Real Property Taxes applicable to the Project, and said payments shall be included in the calculation of Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.3. ADDITIONAL IMPROVEMENTS. Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional Improvements placed upon the Project by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.2 hereof, Lessee shall, however, pay to Lessor at the time Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes If assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request after the Commencement Date. 10.4. JOINT ASSESSMENT. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5. PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises. When possible. Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES AND SERVICES. 11.1. SERVICES PROVIDED BY LESSOR. Lessor shall provide and pay for, subject to the Operating expense reimbursements of Paragraph 4.2; heating, ventilation, air conditioning, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use in connection with an office, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. Lessor shall also provide janitorial services to the Premises and Common Areas five (5) times per week, excluding Building Holidays, or pursuant to the attached janitorial schedule, if any. Lessor shall not, however, be required to provide janitorial services to kitchens or storage areas included within the Premises, other than normal emptying of trash. 11.2. HOURS OF SERVICE. Said services and utilities shall be provided during times set forth in Paragraph 1.12, Utilities and services required at times other than Business Hours shall be subject to reimbursement by Lessee to Lessor of the cost thereof, but there shall be no charge to Lessee for the first 11/2% of after-Normal Business Hour use for HVAC over the full monthly HVAC charge. This assumes that the Premises are sub-zoned to allow economic partial use by Lessee. - ------- - ------- Initials Page 8 of 17 11.3. EXCESS USAGE BY LESSEE. Except as otherwise approved by Lessor, Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security and trash services, over standard office usage for the Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.4. INTERRUPTIONS. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. ASSIGNMENT AND SUBLETTING. 12.1. LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent not to be unreasonably withheld. (b) Unless Lessee is a corporation and its stock is publicly traded on a national stock exchange, a change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buyout or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 50% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its reasonable consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles. (d) An assignment or subletting without Lessor's reasonable consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2. TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay In the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. ,, (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (See also Paragraph 36) (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or Inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. (f) Lessor's consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor In writing. (See Paragraph 39.2) 12.3. ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 12.4. Notwithstanding anything to the contrary contained in this Lease, Lessee shall have the right to sublet or assign all or any portion of the lease premises prior to the last calendar year of the primary term (unless Lessee has exercised its renewal rights, in - -------- - -------- Initials Page 9 of 17 which event Lessee shall have the right at any time prior to the last year of the renewal term) to assign or sublet its interests to any of the following: (a) Where such assignment and subletting is a consolidation merger acquisition of all or substantially all the assets of the Lessee; (b) Where the proposed assignee or sublessee has a tangible net worth as of the date of the Proposed Assignment or Sublease, at least equal to or greater than Lessee's net worth as of March 31, 2002; (c) Said proposed assignee or sublessee has a tangible net worth as of the date of the Proposed Assignment or Sublease, equal to fifty percent (50%) or greater of the net worth of Lessee as of March 31, 2002 and Lessee agrees to share equally with Lessor any net profits by which rents under the proposed Sublease or Assignment exceed the rent reserved herein. The proposed assignee must also comply with the use clause contained herein and be of good business character and reputation. For purposes of this provision, net profits shall be net of Lessee's expenditures for tenant improvements and leasing commissions. 13. DEFAULT; BREACH; REMEDIES. 13.1. DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A "BREACH" is defined as the occurrence of one or more of the, following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8,3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (ill) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 41 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee's Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2. REMEDIES. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefore. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's Interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not - ------------- - ------------- Initials Page 10 of 17 relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3. INTENTIONALLY OMITTED. 13.4. LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 7 business days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to 5% of each such overdue amount or $100, whichever is greater. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5. INTEREST. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within 30 days following the date on which it was due for nonscheduled payment, shall boar interest from the date when due, as to scheduled payments, or the 31st day after It was due as to nonscheduled payments. The interest ("INTEREST") charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6. BREACH BY LESSOR. (a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion. (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent the actual and reasonable cost to perform such cure, provided however, that such offset shall not exceed an amount equal to the greater of one month's Base Rent or the Security Deposit, reserving Lessee's right to seek reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the rentable floor area of the Premises, or more than 25% of Lessee's Reserved Parking Spaces, if any, are taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. BROKERAGE FEES. 15.1. ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Brokers shall be third party beneficiaries of the provisions of Paragraphs 1.10,15, 22 and 31. If Lessor fails to pay to Brokers any amounts due as and for brokerage fees pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker for the limited purpose of collecting any brokerage fee owed. 15.2. REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 16. ESTOPPEL CERTIFICATES. (a) Each Party (as "RESPONDING PARTY") shall within 10 days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "ESTOPPEL CERTIFICATE" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. DEFINITION OF LESSOR. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. - -------- - -------- Initials Page 11 of 17 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. DAYS. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. LIMITATION ON LIABILITY. The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor or its partners, members, directors, officers or shareholders, and Lessee shall look to the Project, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor's partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys' fees) of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 23. NOTICES. 23.1. NOTICE REQUIREMENTS. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2. DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 48 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. DISCLOSURES REGARDING THE NATURE OF A REAL ESTATE AGENCY RELATIONSHIP. (a) When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows: (i) LESSOR'S AGENT. A Lessor's agent under a listing agreement with the Lessor acts as the agent for the Lessor only. A Lessor's agent or subagent has the following affirmative obligations: To the Lessor: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor: a. Diligent exercise of reasonable skills and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above. (ii) LESSEE'S AGENT. An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor's agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee and the Lessor: a. Diligent exercise of reasonable skills and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above. (iii) AGENT REPRESENTING BOTH LESSOR AND LESSEE. A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: a. A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Lesser or the Lessee. b. Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii). In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other Party that the Lessor will accept rent in an amount less than that indicated in the listing or that the Lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advise is desired, consult a competent professional. (b) Brokers have no responsibility with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys' fees), of any Broker with respect to any breach of duty, error or omission relating to this Lease shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. (c) Buyer and Seller agree to identify to Brokers as "Confidential" any communication or information given Brokers that is considered by such Party to be confidential. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 150% of the Base Rent - ------------- - ------------- Initials Page 12 of 17 applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1. SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "LENDER") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2. ATTORNMENT. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Device to which this Lease is subordinated (i) Lessee shall, subject to the nondisturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter Into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of such new owner, this Lease shall automatically become a new Lease between Lessee and such new owner, upon all of the terms and conditions hereof, for the remainder of the term hereof, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor's obligations hereunder, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month's rent. ' 30.3. NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "NON- DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease. Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee's option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4. SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attomment and/or Non-Disturbance Agreement provided for herein. 31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse alt attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation). 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last 6 months of the term hereof place on the Premises any ordinary "For Lease" signs. In addition, Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forcible or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. SIGNS. Lessee shall not place any sign upon the Project without Lessor's prior written consent. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an Invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable' detail within 10 business days following such request. - --------- - --------- Initials Page 13 of 17 37. GUARANTOR. 37.1. EXECUTION. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association. 37.2. DEFAULT. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. OPTIONS. If Lessee is granted an Option, as defined below, then the following provisions shall apply. 39.1. DEFINITION. "OPTION" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor, (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.2. OPTIONS PERSONAL TO ORIGINAL LESSEE. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 39.3. MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4. EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3, or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (II) If Lessee commits a Breach of this Lease. 40. SECURITY MEASURES. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. In the event, however, that Lessor should elect to provide security services, then the cost thereof shall be an Operating Expense. 41. RESERVATIONS. (a) Lessor reserves the right: (i) to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, (ii) to cause the recordation of parcel maps and restrictions, (iii) to create and/or install new utility raceways, so long as such easements, rights, dedications, maps, restrictions, and utility raceways do not unreasonably interfere with the use of the Premises by Lessee. Lessor may also: change the name, address or title of the Building or Project upon at least 90 days prior written notice; provide and install, at Lessee's expense, Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; grant to any lessee the exclusive right to conduct any business as long as such exclusive right does not conflict with any rights expressly given herein; and to place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the Building or the Project or on pole signs in the Common Areas. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate such rights. The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, by third parties, shall in no way affect this Lease or impose any liability upon Lessor. (b) Lessee shall not suffer or permit anyone, except in emergency, to go upon the roof of the Building. 42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to" the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 43. AUTHORITY. (a) If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within 30 days after request, deliver to the other party satisfactory evidence of such authority. (b) If this Lease is executed by more than one person or entity as "Lessee", each such person or entity shall be jointly and severally liable hereunder. It is agreed that any one of the named Lessees shall be empowered to execute any amendment to this Lease, or other document ancillary thereto and bind all of the named Lessees, and Lessor may rely on the same as if all of the named Lessees had executed such document. 44. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 45. OFFER. Preparation of this Lease by either party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 46. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable nonmonetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 47. MULTIPLE PARTIES. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 48. WAIVER OF JURY TRIAL. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT. 49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [ ] is [ ] is not attached to this Lease. 50. AMERICANS WITH DISABILITIES ACT. In the event that as a result of Lessee's use, or intended use, of the Premises the Americans with Disabilities Act or any similar law requires modifications or the construction or installation of improvements in or to the Premises, Building, Project and/or Common Areas, the Parties agree that such modifications, construction or improvements shall be made at:[ ] Lessor's expense [X] Lessee's expense. - -------- - -------- Initials Page 14 of 17 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES THE ZONING AND SIZE OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: ________________________ Executed at: ____________________ on: July 17,2002 on: July 18,2002 By LESSOR: By LESSEE: I.S. CAPITAL, LLC, an Arizona limited MOBILITY ELECTRONICS, INC., A liability corporation a Delware corporation By: /s/ Japeh Youssef By: /s/ [ILLEGIBLE] -------------------------------- -------------------------- Name Printed: JAPEH YOUSSEF; Name Printed: ___________________ Title: Managing Member Title: __________________________ By: _________________________________ By: _____________________________ Name Printed: _______________________ Name Printed: ___________________ Title: ______________________________ Title: __________________________ Address: ____________________________ Address: ________________________ _____________________________________ _________________________________ _____________________________________ _________________________________ _____________________________________ _________________________________ Telephone / Facsimile Telephone / Facsimile Federal ID No. ______________________ Federal ID No. __________________ LESSOR'S LESSEE'S BROKER: BROKER: COLLIERS CLASSIC CB RICHARD ELLIS Attn: Joe Welchert Attn: Chuck Nixon Address: 7845 E. Redfield Road, Suite Address: 24l5 E. Cambelback Road 100 Scottsdale, AZ 85260 Phoenix, AZ 85016 _____________________________________ _________________________________ Telephone / Facsimile No. Telephone / Facsimile No. Phone: 480-596-9000 / Fax: 480-948-0502 Phone: 602-735-5653 / Fax: 480-948-0502 Fax: 602-735-5655 These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 700 South Flower Street, Suite 600, Los Angeles, CA 90017. (213)687-8777. (C)Copyright 1999-By American Industrial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing. ________ ________ Initials Page 15 of 17 RULES AND REGULATIONS FOR STANDARD OFFICE LEASE Dated: As of July 17, 2002 By and Between IS CAPITAL, LLC AND MOBILITY ELECTRONICS, INC. GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety and reputation of the Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessees or persons having business within the Project. 4. Lessee shall not keep animals or birds within the Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. After initial occupancy, Lessee shall not alter any lock or install new or additional locks or bolts, other than internal doors. 7. Lessee shall be responsible for the inappropriate use in the Premises of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the Premises or Project. 9. Lessee shall not suffer or permit anything in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Project. 10. Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Except as otherwise provided, Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 12. Lessor reserves the right to close and lock the Building on Saturdays, Sundays and Building Holidays, and on other days between the hours of 7:00 P.M. and 6:00 A.M. of the following day; Lessor to provide keys to Lessee to allow access during such hours. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry. 13. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 14. No window coverings, shades or awnings shall be installed or used by Lessee, except as approved by Lessor, which approval shall not be unreasonably withheld. 15. No Lessee, employee or invitee shall go upon the roof of the Building. 16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 17. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's consent which shall not be unreasonably withheld. 19. The Premises shall not be used for lodging or manufacturing, cooking or food preparation, except for microwave use. 20. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agency. 21. Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 22. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required. 23. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges. Lessee will pay such replacement charge as is reasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws and/or agreements. 5. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 6. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 7. Validation, if established, will be permissible only by such method or methods as Lessor and/or its licensee may establish at rates generally applicable to visitor parking. 8. The maintenance washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 9. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements. 10. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. 12. Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. Initials Page 16 of 17 ADDENDUM TO LEASE DATED AS OF JULY 17,2002 BY AND BETWEEN IS CAPITAL, LLC, AN ARIZONA LIMITED LIABILITY CORPORATION, AS LESSOR AND MOBILITY ELECTRONICS, INC., AS LESSEE COVERING PREMISES AT 1780 NORTH PERIMETER DRIVE, SCOTTSDALE, ARIZONA 1. BASE RENT. THE MONTHLY BASE RENT SHALL BE AS FOLLOWS:

* - plus applicable rental tax, currently 1.9%. 2. TENANT WORK LETTER AND FREE RENT. The parties agree that the Lessor shall use best efforts to reasonably cooperate to allow the Lessee to begin completion of tenant improvements as soon as possible after the execution of this Lease. The improvements will cost no less than $303,000 and will be constructed by the Lessee's Contractor. Lessor has previously received, reviewed, and approved Lessee's preliminary Plans and Specifications for the Tenant Improvements, which were developed by Lessee's architect or design professional. Any substantial changes to the Plans and Specifications are subject to Lessor's reasonable consent. Lessee shall have control over the design and construction of the Tenant Improvements, and Lessee will contract with Gerald Martin, a licensed contractor, to construct said improvements under a Tenant improvement contract, (the "Tenant Improvement Contract"). The Tenant shall pay the contractor directly. when due, all sums due under the Tenant Improvement Contract, (but never later than 30 days after move-in). Lessee agrees to secure full lien waivers from all contractors providing labor and materials. Lessee reserves the right to select the architect for the tenant improvement project. The final space plan shall be developed by the Architect and lessee, subject to Lessor's reasonable written approval of any and all significant changes from the preliminary plan previously reviewed and approved by Lessor which significantly affect the use or enjoyment of the remainder of the Building. In lieu of Lessor providing Lessee with a Tenant Improvement Allowance paid by Lessor, Lessee shall occupy the Premises Rent Free for the period from February 1,2003, until November 15,2003 (the "Free Rent Period"). In addition to the Free Rent Period, Tenant shall be entitled to early possession of the property, rent free upon completion of tenant improvements prior to the Commencement Date of February 1,2003. Lessor and Lessee acknowledge that the Commencement Date shall be February 1, 2003, subject to the Free Rent Period. Lessor shall use best efforts to reasonably cooperate to allow the Lessee to complete the tenant improvements approximately three (3) months prior to the Commencement Date. Lessor agrees not to charge a construction management fee Additionally, Lessor agrees that it will consent to Lessee's removal of the existing carpeting and replacement by Lessee with equal quality carpeting chosen by Lessee, all as part of the Tenant Improvement Allowance, which Is included in the cost of Tenant Improvements for purposes of determining the Duration of the Free Rent Period. The existing telephone systems and furniture in the possession of Lessor shall become the property of Lessee at no charge to Lessee. 3. SECURITY DEPOSIT. On November 15, 2003, Lessee will provide a cash security deposit equal to $31,642.33. 4. PRODUCT DESIGN. Lessor and Lessee agree to locate an area on the first floor within the building as shown on Exhibit Attached hereto to accommodate Lessee's product design department and related equipment, which shall be a part of the Premises for purposes of this Lease. The required square footage is 1,500 square feet which is part of the rentable square footage of the Premises as described in paragraph 1.2 and is part of the lease rental in Paragraph 1.5 5. SlGNAGE: Lessee shall have the right to building signage and monument signage, as permitted by the City of Scottsdale. Costs of said signage will be the responsibility of Lessee. Specific signage available to the Tenant needs to be defined by the Landlord prior to Lease execution. 6. RENEWAL OPTIONS. Lessee will have the right to renew this Lease for an additional five (5) year period at ninety-five (95%) of the then net effective fair market value by Lessee giving written notice six (6) months prior to the expiration of the primary term, the renewal term shall be subject to all the terms and conditions of the Lease (except rental rate and the Tenant Improvement Allowance) and escalation charges equal to 2% per year. The rate during the option period shall take into consideration tenant improvements allowances at then market amounts on a par square foot basis. 7. EXPANSION OPTION. Lessee will have the right of first refusal for all vacant square footage within the building for the term of the Lease, to be exercised by Lessee within ten (10) days following written notice by Lessor to Lessee of Lessor's receipt of a bonafide and acceptable offer to lease available space acceptable to Lessor. If Lessee elects to exercise such right, the available space shall be added to the existing Lease at the rental rate contained in the offer, and shall run co-terminous with this Lease and shall be under the same terms and conditions as contained in this Lease. 8. BROKERAGE FEE. Lessor shall pay a fee to CB Richard Ellis equal to three percent (3%) of the gross lease rental, for the five (5) year, eight (8) month lease term. Said fee will be paid one-half (1/2) upon lease execution and one-half (1/2) upon Lessee's first rental payment. All other terms and conditions shall remain the same. In the event of any conflict between the terms of this Addendum and the Lease, the terms hereof shall apply. AGREED: LESSOR: I.S. Capital, LLC, an Arizona limited liability company By: /s/ [ILLEGIBLE] --------------------------- Dated: July 17, 2002 LESSEE: Mobility Electronics, Inc., a Delware corporation By: /s/ Charles R. Mollo --------------------------- Dated: 7/18, 2002 Charles R. Mollo - ---------- - ---------- Initials Page 17 of 17 EX-10.34 5 p68849exv10w34.txt EX-10.34 Exhibit 10.34 Amendment to Lease Agreement AMENDMENT TO LEASE AGREEMENT Effective Date: February 1, 2003 I.S. Capital, LLC (LESSOR) and Mobility Electronics, Inc. (LESSEE), entered into that certain Standard Multi-Tenant Office Lease dated July 17, 2002 (the "LEASE"). The Lease provides that Lessor will provide janitorial services, the cost of which will be included in Lessee's RENT and proportionate share of OPERATING EXPENSES, as those terms are defined in the Lease. The parties wish to amend the Lease pursuant to this amendment (AMENDMENT), and provide instead that Lessee shall be responsible for all arrangements and payment of the expenses associated with janitorial services provided to Lessee's leased premises (PREMISES), in consideration for a reduction of $1,100.00 per month in Rent. Additionally, Section 2 of the Lease's Addendum accounts for a "FREE RENT PERIOD" during Lessee's initial months of occupancy, in lieu of a Tenant Improvement Allowance, in consideration for Lessee's direct payment for its tenant improvements costing no less than $303,000. Section 4.1 of the Lease defines Rent to include all monetary obligations of Lessee to Lessor under the Lease except the Security Deposit, which by such definition includes the Tenant Improvement Allowance and therefore any credits in lieu. Accordingly, effective as of the date of this Amendment, Lessor shall be relieved from any obligation under the Lease to provide janitorial services to the Premises, Lessor shall reduce the monthly Rent by $1,100.00 each month that Rent is due, and the first month in which Rent is due after the Free Rent Period (November 2003), is recomputed to $3,152.10. Correspondingly, Lessee shall be relieved of, and Lessor may not demand payment of, any janitorial expense as it relates to Lessee's Rent or proportionate share of Operating Expenses for the Premises, and Lessee's first Rent payment becomes $3,152.10. This Amendment does not affect Lessor's obligation to provide any janitorial services to the common areas of the project, which remain as stated in the Lease. In the event of any conflict between the Lease and this Amendment, this Amendment will control. The parties acknowledge that the effective date stated above is correct, even though this Amendment was not executed as of the effective date. The Lease shall remain in full force and effect except to the extent amended hereby. MOBILITY ELECTRONICS, INC. I.S. CAPITAL, LLC LESSEE LESSOR By: By: --------------------------- --------------------------------- Name: Joan W. Brubacher Name: ------------------------- ------------------------------- Title: EVP & CFO Title: ------------------------ ------------------------------ Date: March 5, 2003 Date: ------------------------- ------------------------------- Lease Amend Perimeter 3/5/03 EX-10.35 6 p68849exv10w35.txt EX-10.35 Exhibit 10.35 SECOND AMENDMENT TO LEASE AGREEMENT This Second Amendment to Lease Agreement (the "Amendment") is entered into effective as of January 15, 2004, by and between I.S. Capital, LLC ("Lessor") and Mobility Electronics, Inc. ("Lessee"). WHEREAS, Lessor and Lessee entered into that certain Standard Multi-Tenant Office Lease dated July 17, 2002, as amended by that certain Amendment to Lease Agreement dated February 1, 2003 (together, the "Lease"), pertaining to the lease of certain premises (the "Premises") located at 17800 N. Perimeter Drive, Scottsdale, Arizona 85255 (the "Building"); and WHEREAS, Lessee desires to lease from Lessor certain other space situated in the Building, and Lessor has agreed to lease to Lessee such other space, and, accordingly, Lessor and Lessee desire to further modify the terms and provisions of the Lease as hereinafter provided. NOW, THEREFORE, for and in consideration of the premises and mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Additional Space. For a term commencing on the Effective Date (as hereinafter defined) and continuing until the expiration of the term of the Lease (as herein modified), Lessor hereby leases and demises to Lessee, and Lessee hereby leases from Lessor, an aggregate of 3,797 rentable square feet of space in the Building (the "Additional Space"), such space consisting of the following, as more particularly depicted on the floor plan attached hereto as Exhibit A:

As of the Effective Date, the Additional Space shall, for all purposes, be deemed to be included within the term "Premises" as used in the Lease and shall be subject in all respects to the terms, provisions and conditions set forth therein. 2. Additional Parking. For a term commencing on the Effective Date (as hereinafter defined) and continuing until the expiration of the term of the Lease (as herein modified), Lessee will be entitled to (2) additional reserved, covered parking spaces. 3. Base Rent. Notwithstanding anything to the contrary in the Lease, Lessor and Lessee hereby agree that, commencing on the Effective Date and continuing through and including the Expiration Date (as defined in the Lease), the base rent applicable to the Additional Space and including the Additional Parking shall be Eighty-Three Thousand, Five Hundred Thirty-Four Dollars ($83,534.00) per year, or Six Thousand Nine Hundred Sixty-One Dollars and Seventeen Cents ($6,961.17) per month. This amount shall be in addition to the Base Rent and related adjustments to the Base Rent per the Lease. 4. Security Deposit. Within five (5) days of the execution of this Amendment, Lessee shall deposit with Lessor the sum of Six Thousand Nine Hundred Sixty-One Dollars and Seventeen Cents ($6,961.17), which shall be added to the security deposit previously paid by Lessee pursuant to Section 1.7(b) of the Lease (the "Security Deposit"). The Security Deposit shall be subject to the terms and conditions set forth in Section 5 of the Lease. 5. Tenant Improvements. Lessor shall improve the Additional Space in accordance with the applicable terms and provisions of Exhibit B attached to this Amendment. Lessor agrees that it shall diligently pursue the completion of such improvements on or before February 1, 2004, and Lessee covenants to use good faith efforts to assist Lessor in the pursuit of such completion. 6. Acceptance/Effective Date. Lessee will accept the Additional Space and commence payment of the Base Rent for the Premises specified in Section 2 above as of the Effective Date. For purposes hereof, the "Effective Date" shall mean the first to occur of (a) the date that Lessee first occupies the Additional Space for its intended purpose or (b) the date that Lessor substantially completes the improvements contemplated under Section 3 above and tenders the Additional Space to Lessee. 7. Janitorial Services. Lessee shall be responsible for all arrangements and payment of the expenses associated with janitorial services for the Additional Space. 8. Miscellaneous. a. All terms and conditions of the Lease not expressly modified by this Amendment shall remain in full force and effect, and, in the event of any inconsistencies between this Amendment and the terms of the Lease, the terms set forth in this Amendment shall govern and control. Except as expressly amended hereby, the Lease shall remain in full force and effect as of the date hereof. b. This Amendment may be executed in one or more counterparts which shall be construed together as one document. c. Captions used herein are for convenience only and are not to be utilized to ascribe any meaning to the contents hereof. Unless defined differently herein or the context clearly requires otherwise, all terms used in this Amendment shall have the meanings ascribed to them under the Lease. d. This Amendment (i) shall be binding upon and shall inure to the benefit of each of the parties and their respective successors, assigns, receivers and trustees; (ii) may be modified or amended only by a written agreement executed by each of the parties; and (iii) shall be govered by and construed in accordance with the laws of the State of Arizona. Executed as of the date first written above. I.S. CAPITAL, LLC MOBILITY ELECTRONICS, INC. (LESSOR) (LESSEE) By:____________________________ By:_____________________________ Name:__________________________ Name: Joan W. Brubacher Title:___________________________ Title: Chief Financial Officer EXHIBIT A EXHIBIT B Lessor shall be responsible for improvements to the Additional Space to accommodate access to interior office space not included in the Additional Space. Such improvements shall include, but are not limited to, moving a lobby wall along with the related electrical adjustments, modifying the front lobby door as necessitated by moving the wall, and closing off access to the Additional Space from the interior space not included in the Additional Space. In addition, Lessor agrees to add a wall and door to close off a portion of the kitchen area which includes the water heater, for which Lessee agrees to reimburse Lessor $3,000.00. Lessee agrees to install cabinets in the kitchen area for which Lessor agrees to reimburse Lessee $2,500.00. These two reimbursable items may be offset, which results in a net amount due to Lessor by Lessee of $500.00. EX-23.1 7 p68849exv23w1.htm EX-23.1 exv23w1

We consent to the incorporation by reference in the registration statements (Nos. 333-102990, 333-69336 and 333-47210 on Form S-8, and Nos. 333-99845, 333-108623, 333-108283 and 333-112023 on Form S-3) of Mobility Electronics, Inc. of our report dated February 4, 2004, with respect to the consolidated balance sheets of Mobility Electronics, Inc. and subsidiaries as of December 31, 2003 and 2002, 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, 2003, which report appears in the December 31, 2003, annual report on Form 10-K of Mobility Electronics, Inc. As described in Note 2 of 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.

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

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

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

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

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

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, the Chief Executive Officer and the Chief Financial Officer of Mobility Electronics, Inc. (the “Company”), each certifies that, to his or her knowledge on the date of this certification:

1. The annual report of the Company for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on this date (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


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

		For the fiscal year ended December 31, 2003

OR

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

		For the transition period from to


Delaware	0-30907	86-0843914
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)


		Page

PART I
Item 1.	Business		2
	Executive Officers of the Company		10
	Risk Factors		11
Item 2.	Properties		22
Item 3.	Legal Proceedings		22
Item 4.	Submission of Matters to a Vote of Security Holders		23
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		24
Item 6.	Selected Consolidated Financial Data		25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 7A	Quantitative and Qualitative Disclosures About Market Risk		36
Item 8.	Financial Statements and Supplementary Data		37
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		68
Item 9A	Controls and Procedures		68
PART III
Item 10.	Directors and Executive Officers		68
Item 11.	Executive Compensation		68
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		68
Item 13.	Certain Relationships and Related Transactions		68
Item 14.	Principal Accountant Fees and Services		69
PART IV
Item 15.	Exhibits, Financial Statements, Schedules and Reports on Form 8-K		69
EX-10.32
EX-10.33
EX-10.34
EX-10.35
EX-23.1
EX-31.1
EX-31.2
EX-32.1


		High		Low

Year Ended December 31, 2002
	Quarter Ended March 31, 2002	$	1.68	$	1.11
	Quarter Ended June 30, 2002	$	2.41	$	1.30
	Quarter Ended September 30, 2002	$	2.29	$	0.90
	Quarter Ended December 31, 2002	$	1.06	$	0.60
Year Ended December 31, 2003
	Quarter Ended March 31, 2003	$	1.40	$	0.70
	Quarter Ended June 30, 2003	$	4.24	$	1.19
	Quarter Ended September 30, 2003	$	9.59	$	3.77
	Quarter Ended December 31, 2003	$	12.50	$	7.90



	Years Ended December 31,

	2003			2002			2001			2000			1999


	(In thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue	$	51,870		$	31,334		$	28,325		$	28,005		$	13,952
Cost of revenue		33,888			24,040			25,703			20,215			11,751

Gross profit		17,982			7,294			2,622			7,790			2,201
OPERATING EXPENSES:
Sales and marketing		7,208			7,080			8,129			8,323			5,208
Research and development		4,751			5,782			5,598			5,882			3,377
General and administrative		9,569			8,235			9,957			6,776			3,651

Total operating expenses		21,528			21,097			23,684			20,981			12,236

Loss from operations		(3,546	)		(13,803	)		(21,062	)		(13,191	)		(10,035	)
Other (expense) income:
Interest, net		(27	)		627			1,313			570			(1,456	)
Non-cash deferred loan cost amortization		—			—			—			(2,527	)		(4,840	)
Other, net		4			(60	)		65			(138	)		(126	)

Loss before cumulative effect of change in accounting principle		(3,569	)		(13,236	)		(19,684	)		(15,286	)		(16,457	)
Cumulative effect of change in accounting principle(1)		—			(5,627	)		—			—			—

Net loss		(3,569	)		(18,863	)		(19,684	)		(15,286	)		(16,457	)
Beneficial conversion cost of preferred stock		(445	)		—			—			(49	)		(1,450	)
Preferred stock dividend		(20	)		—			—			—			—

Net loss attributable to common stockholders	$	(4,034	)	$	(18,863	)	$	(19,684	)	$	(15,335	)	$	(17,907	)

Net loss per share — basic and diluted:
Loss per share before cumulative effect of change in accounting principle	$	(0.17	)	$	(0.78	)	$	(1.33	)	$	(1.55	)	$	(3.59	)
Cumulative effect of change in accounting principle(1)		—			(0.33	)		—			—			—

	$	(0.17	)	$	(1.11	)	$	(1.33	)	$	(1.55	)	$	(3.59	)

Weighted average common shares outstanding:
Basic and diluted		23,440			17,009			14,809			9,885			4,994

CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents	$	11,024		$	3,166		$	14,753		$	30,369		$	4,792
Working capital		22,348			5,645			19,392			37,013			5,483
Total assets		50,263			28,369			35,037			55,674			14,899
Long-term debt and other non-current liabilities, less current portion		526			1,385			—			—			8,051
Total stockholders’ equity		41,072			17,628			30,148			48,904			2,310


17800 N. Perimeter Dr., Suite 200, Scottsdale, Arizona (Address of Principal Executive Offices)		85255 (Zip Code)


OEM/Private Label Resellers		Retailers/Distributors

Apple(1)		Brookstone, Inc.
Dell		CDW
Dicota		Ingram Micro
Digidesign, a division of		Insight(1)
Avid Technologies, Inc.
Gateway		RadioShack
IBM
Kensington
Sun Microsystems, Inc.
Symbol
Targus


	*If our revenue is not sufficient to absorb our expenses, we will not be profitable in the future.*


	*Our operating results are subject to significant fluctuations, and if our results are worse than expected, our stock price could fall.*


	If we fail to continue to introduce new products and product enhancements that achieve broad market acceptance on a timely basis, we will not be able to compete effectively, and we will be unable to increase or maintain our revenue.


	*The average selling prices of our products may decrease over their sales cycles, especially upon the introduction of new products, which may negatively affect our gross margins.*


	*We depend on large purchases from a few significant customers, and any loss, cancellation or delay in purchases by these customers could cause a shortfall in revenue.*


	*Our success depends in part upon sales to OEMs, whose unpredictable demands and requirements may subject us to potential adverse revenue fluctuations.*


	*Our success is dependent in part upon our relationships with strategic private-label resellers.*


Item 1.	*Business*


	*We outsource the manufacturing and fulfillment of our products, which limits our control of the manufacturing process and may cause a delay in our ability to fill orders.*


	*Our reliance on sole sources for key components may inhibit our ability to meet customer demand.*


	*If we fail to protect our intellectual property, our business and ability to compete could suffer.*


	*We may be subject to intellectual property infringement claims that are costly to defend and could limit our ability to use certain technologies in the future.*


	*Acquisitions could have negative consequences, which could harm our business.*


	*We may not be able to adequately manage our anticipated growth, which could impair our efficiency and negatively impact operations.*


	*We have experienced returns of our products, which could in the future harm our reputation and negatively impact our operating results.*


	*We may have design quality and performance issues with our products that may adversely affect our reputation and our operating results.*


	*We may incur product liability claims which could be costly and could harm our reputation.*


	*If we are unable to hire additional qualified personnel as necessary or if we lose key personnel, we may not be able to successfully manage our business or achieve our objectives.*


	*We may not be able to secure additional financing to meet our future capital needs.*


	*Intense competition in the market for mobile electronic devices could adversely affect our revenue and operating results.*


	*Should the market demand for mobile electronic devices decrease, we may not achieve anticipated revenue.*


	If our products fail to comply with domestic and international government regulations, or if these regulations result in a barrier to our business, our revenue could be negatively impacted.


	*Our common stock price has been volatile, which could result in substantial losses for stockholders.*


	*Our stock price may decline if additional shares are sold in the market.*


	*Our executive officers, directors and principal stockholders have substantial influence over us.*


	*Provisions of our certificate of incorporation and bylaws could make a proposed acquisition that is not approved by our board of directors more difficult.*


	*Our stockholder rights plan may make it more difficult for others to obtain control over us, even if it would be beneficial to our stockholders.*


	*Delaware law may delay or prevent a change in control.*