##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) 
 For the quarterly period ended September 30, 2004 OR [  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period
from

to Commission file number: 0-30907 MOBILITY ELECTRONICS, INC. (Exact Name of Registrant as Specified in its Charter)
 Delaware
(State or Other Jurisdiction of Incorporation) 0-30907
(Commission File Number)
    
    86-0843914
(IRS Employer Identification No.)
 17800 N. Perimeter Dr., Suite 200, Scottsdale, Arizona
(Address of Principal Executive Offices)
    
    85255
(Zip Code)
 (480) 596-0061
(Registrants telephone number, including area code) Not applicable
(Former Name or Former Address, if Changed Since Last Report) Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ]                      NO [    ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ X ]                      NO [    ] At November 1, 2004, there were 28,407,710 shares of the Registrants Common
Stock outstanding.




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MOBILITY ELECTRONICS, INC.
FORM 10-Q TABLE OF CONTENTS PAGE NO.PART I: FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of September 30,
2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2004
and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 2. Changes in Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits and Reports on Form 8-K
    
    
    24SIGNATURES
    
    
    25INDEX TO EXHIBITS
    
    
    26Exhibit 10.1Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1
  - 2 -




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PART I: FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS: MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands) September 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,941
    
    
    $
    11,024Accounts receivable, net
    
    
    15,228
    
    
    
    11,438Inventories
    
    
    7,752
    
    
    
    8,240Prepaid expenses and other current assets
    
    
    289
    
    
    
    311Total current assets
    
    
    34,210
    
    
    
    31,013Property and equipment, net
    
    
    2,123
    
    
    
    2,155Goodwill
    
    
    11,786
    
    
    
    12,961Intangible assets, net
    
    
    3,083
    
    
    
    3,858Other assets
    
    
    2,036
    
    
    
    276Total assets
    
    $
    53,238
    
    
    $
    50,263LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    10,659
    
    
    $
    6,531Accrued expenses and other current liabilities
    
    
    1,550
    
    
    
    1,613Current installments of long-term debt
    
    
    373
    
    
    
    521Total current liabilities
    
    
    12,582
    
    
    
    8,665Long-term debt, less current portion
    
    
    501
    
    
    
    526Total liabilities
    
    
    13,083
    
    
    
    9,191Stockholders equity:Convertible preferred stock
    
    
    3
    
    
    
    3Common stock
    
    
    283
    
    
    
    276Additional paid-in capital
    
    
    146,839
    
    
    
    145,194Accumulated deficit
    
    
    (106,185
    )
    
    
    (104,062
    )Stock subscription notes and deferred compensation
    
    
    (941
    )
    
    
    (487
    )Accumulated other comprehensive income
    
    
    156
    
    
    
    148Total stockholders equity
    
    
    40,155
    
    
    
    41,072Total liabilities and stockholders equity
    
    $
    53,238
    
    
    $
    50,263
 See accompanying notes to unaudited condensed consolidated financial statements. - 3 -




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MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)(unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    18,959
    
    
    $
    12,807
    
    
    $
    49,654
    
    
    $
    37,398Cost of revenue
    
    
    13,102
    
    
    
    8,173
    
    
    
    34,838
    
    
    
    24,325Gross profit
    
    
    5,857
    
    
    
    4,634
    
    
    
    14,816
    
    
    
    13,073Operating expenses:Marketing and sales
    
    
    1,777
    
    
    
    1,623
    
    
    
    4,901
    
    
    
    5,083Research and development
    
    
    1,214
    
    
    
    1,164
    
    
    
    3,926
    
    
    
    3,226General and administrative
    
    
    2,653
    
    
    
    2,131
    
    
    
    7,568
    
    
    
    7,426Total operating expenses
    
    
    5,644
    
    
    
    4,918
    
    
    
    16,395
    
    
    
    15,735Income (loss) from operations
    
    
    213
    
    
    
    (284
    )
    
    
    (1,579
    )
    
    
    (2,662
    )Other income (expense):Interest income (expense), net
    
    
    (27
    )
    
    
    (31
    )
    
    
    (93
    )
    
    
    (20
    )Other income, net
    
    
    (6
    )
    
    
    1
    
    
    
    14
    
    
    
    22Income (loss) from continuing operations
    
    
    180
    
    
    
    (314
    )
    
    
    (1,658
    )
    
    
    (2,660
    )Discontinued operations:Loss from discontinued operations of handheld software
product line
    
    
    (296
    )
    
    
    (92
    )
    
    
    (466
    )
    
    
    (253
    )Net loss
    
    
    (116
    )
    
    
    (406
    )
    
    
    (2,124
    )
    
    
    (2,913
    )Beneficial conversion value of convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (445
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )Net loss attributable to common stockholders
    
    $
    (116
    )
    
    $
    (406
    )
    
    $
    (2,124
    )
    
    $
    (3,378
    )Net income (loss) per share:BasicContinuing operations
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.14
    )Discontinued operations
    
    $
    (0.01
    )
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.01
    )Total basic net income (loss) per share
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.15
    )DilutedContinuing operations
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.14
    )Discontinued operations
    
    $
    (0.01
    )
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.01
    )Total diluted net income (loss) per share
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.15
    )Weighted average common shares outstanding:Basic
    
    
    28,139
    
    
    
    24,709
    
    
    
    27,901
    
    
    
    22,143Diluted
    
    
    29,779
    
    
    
    24,709
    
    
    
    27,901
    
    
    
    22,143
 See accompanying notes to unaudited condensed consolidated financial statements. - 4 -




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MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(unaudited) Nine months endedSeptember 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (2,124
    )
    
    $
    (2,913
    )Less loss from discontinued operation
    
    
    466
    
    
    
    253Loss from continuing operations
    
    
    (1,658
    )
    
    
    (2,660
    )Adjustments to reconcile net loss to net cash used in operating activities:Provision for accounts receivable
    
    
    148
    
    
    
    425Depreciation and amortization
    
    
    1,502
    
    
    
    1,161Amortization of deferred compensation
    
    
    105
    
    
    
    90Non-cash compensation
    
    
    
    
    
    
    68Loss on disposal of fixed assets
    
    
    15
    
    
    
    29Changes in operating assets and liabilities, net of
acquisition activities:Accounts receivable
    
    
    (3,942
    )
    
    
    (6,118
    )Inventories
    
    
    488
    
    
    
    (4,286
    )Prepaid expenses and other assets
    
    
    (1,378
    )
    
    
    (830
    )Accounts payable
    
    
    4,142
    
    
    
    4,538Accrued expenses and other current liabilities
    
    
    (33
    )
    
    
    (263
    )Net cash used in operating activities
    
    
    (611
    )
    
    
    (7,846
    )Cash flows from investing activities, net of acquisition activities:Purchase of property and equipment
    
    
    (846
    )
    
    
    (586
    )Proceeds from sale of handheld software product line
    
    
    388
    
    
    
    Net cash used in investing activities
    
    
    (458
    )
    
    
    (586
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    (125
    )
    
    
    (82
    )Net proceeds from issuance of convertible preferred stock
    
    
    
    
    
    
    1,185Net proceeds from issuance of common stock, exercise of options
and warrants, and repayment of stock subscription notes receivable
    
    
    1,093
    
    
    
    15,567Dividends paid on convertible preferred stock
    
    
    
    
    
    
    (20
    )Net cash provided by financing activities
    
    
    968
    
    
    
    16,650Effects of exchange rate changes on cash and cash equivalents
    
    
    8
    
    
    
    74Net cash provided by discontinued operations
    
    
    10
    
    
    
    55Net increase (decrease) in cash and cash equivalents
    
    
    (83
    )
    
    
    8,347Cash and cash equivalents, beginning of period
    
    
    11,024
    
    
    
    3,166Cash and cash equivalents, end of period
    
    $
    10,941
    
    
    $
    11,513
 See accompanying notes to unaudited condensed consolidated financial statements. - 5 -




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MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (1) Basis of Presentation The accompanying condensed consolidated financial statements include the
accounts of Mobility Electronics, Inc. (Mobility or the Company) which was
formerly known as Electronics Accessory Specialists International, Inc., and
its wholly-owned subsidiaries, Magma, Inc. (Magma), Mobility Idaho, Inc.
(Idaho) which was formerly known as Portsmith, Inc., Mobility 2001 Limited,
Mobility Texas Inc. (Texas) which was formerly known as Cutting Edge
Software, Inc., and iGo Direct Corporation (iGo). All significant
intercompany balances and transactions have been eliminated in the accompanying
condensed consolidated financial statements. The accompanying condensed consolidated financial statements are unaudited
and have been prepared in accordance with accounting principles generally
accepted in the United States of America, pursuant to rules and regulations of
the Securities and Exchange Commission (the SEC). In the opinion of
management, the accompanying condensed consolidated financial statements
include normal recurring adjustments that are necessary for a fair presentation
of the results for the interim periods presented. Certain information and
footnote disclosures have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read
in conjunction with the Companys audited consolidated financial statements and
notes thereto for the fiscal year ended December 31, 2003 included in the
Companys Form 10-K, filed with the SEC. The results of operations for the
three and nine months ended September 30, 2004 are not necessarily indicative
of results to be expected for the full year or any other period. The preparation of the condensed consolidated 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. Certain amounts included in the 2003 condensed consolidated financial
statements have been reclassified to conform to the 2004 financial statement
presentation. 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 in Item 2, Managements
Discussion and Analysis of Financial Condition and Results of Operations. (2) Stock-based Compensation 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 to
estimate fair value of the option at grant date. Under Statement 123, deferred
compensation is recorded for the excess of the fair value of the stock on the
date of the option grant. The deferred compensation is amortized over the
vesting period of the option. - 6 -




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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): Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Net loss attributable to common stockholders:As reported
    
    $
    (116
    )
    
    $
    (406
    )
    
    $
    (2,124
    )
    
    $
    (3,378
    )Total stock-based employee compensation expense
determined under fair-value-based method for all
rewards, net of tax of $0 for all periods
    
    
    (346
    )
    
    
    (149
    )
    
    
    (966
    )
    
    
    (405
    )Pro forma
    
    $
    (462
    )
    
    $
    (555
    )
    
    $
    (3,090
    )
    
    $
    (3,783
    )Net loss per share  basic and diluted:As reported
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.15
    )Pro forma
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.11
    )
    
    $
    (0.17
    )
 The value of stock-based employee compensation expense for the three and
nine months ended September 30, 2004 and 2003 was determined using the
Black-Scholes method with the following assumptions: September 30,2004
    
    2003Expected life (years)
    
    
    3.0
    
    
    
    2.5Risk-free interest rate
    
    
    3.0
    %
    
    
    3.0
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    100.0
    %
    
    
    100.0
    %
 (3) Inventories Inventories consist of the following (amounts in thousands): September 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    2,696
    
    
    $
    2,198Finished goods
    
    
    5,056
    
    
    
    6,042$
    7,752
    
    
    $
    8,240
 (4) Goodwill The changes in the carrying amount of goodwill are as follows (amounts in
thousands): Reported balance at December 31, 2003
    
    $
    12,961Miscellaneous direct acquisition costs
    
    
    875Adjustment to iGo opening balance sheet to
reflect changes in the fair market value of
current assets recorded on the date of
acquisition
    
    
    (92
    )Sale of Mobility Texas assets
    
    
    (1,958
    )Reported balance at September 30, 2004
    
    $
    11,786
 (5) Intangible Assets Intangible assets consist of the following at September 30, 2004 and
December 31, 2003 (amounts in thousands): September 30, 2004
    
    December 31, 2003Average
    
    Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetLife
    
    Intangible
    
    Accumulated
    
    Intangible
    
    Intangible
    
    Accumulated
    
    Intangible(Years)
    
    Assets
    
    Amortization
    
    Assets
    
    Assets
    
    Amortization
    
    AssetsAmortized intangible
assets:License fees
    
    
    4
    
    
    $
    2,258
    
    
    $
    (778
    )
    
    $
    1,480
    
    
    $
    2,208
    
    
    $
    (522
    )
    
    $
    1,686Patents and trademarks
    
    
    3
    
    
    
    1,750
    
    
    
    (928
    )
    
    
    822
    
    
    
    1,220
    
    
    
    (699
    )
    
    
    521Non-compete agreements
    
    
    2
    
    
    
    75
    
    
    
    (75
    )
    
    
    
    
    
    
    159
    
    
    
    (115
    )
    
    
    44Software
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    803
    
    
    
    (202
    )
    
    
    601Trade names
    
    
    10
    
    
    
    378
    
    
    
    (79
    )
    
    
    299
    
    
    
    378
    
    
    
    (50
    )
    
    
    328Customer list
    
    
    10
    
    
    
    662
    
    
    
    (180
    )
    
    
    482
    
    
    
    705
    
    
    
    (27
    )
    
    
    678Total
    
    
    
    
    
    $
    5,123
    
    
    $
    (2,040
    )
    
    $
    3,083
    
    
    $
    5,473
    
    
    $
    (1,615
    )
    
    $
    3,858
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Aggregate amortization expense for identifiable intangible assets totaled
$278,000 and $904,000 for the three and nine months ended September 30, 2004,
respectively. Aggregate amortization expense for identifiable intangible
assets totaled $177,000 and $490,000 for the three and nine months ended
September 30, 2003, respectively. During the quarter ended September 30, 2004 the Company sold the following
intangible assets related to the handheld software product line (amounts in
thousands): September 30, 2004Gross
    
    
    
    
    
    NetIntangible
    
    Accumulated
    
    IntangibleAssets
    
    Amortization
    
    AssetsSoftware
    
    $
    1,100
    
    
    $
    (409
    )
    
    $
    691Non-compete agreements
    
    
    84
    
    
    
    (61
    )
    
    
    23Patents and trademarks
    
    
    64
    
    
    
    
    
    
    
    64Customer list
    
    
    43
    
    
    
    (9
    )
    
    
    34Total
    
    $
    1,291
    
    
    $
    (479
    )
    
    $
    812
 (6) Line of Credit In October 2002, the Company entered into a $10,000,000 line of credit
with a bank. The line bears interest at prime (4.75% at September 30, 2004),
interest only payments are due monthly, with final payment of interest and
principal due on July 31, 2006. The line of credit is secured by all assets of
the Company. The Company had no outstanding balance against the line of credit
at September 30, 2004 and 2003. The Company had a $1.5 million letter of
credit, secured by the line of credit, outstanding at September 30, 2004. The
line of credit is subject to financial covenants. The Company is currently in
compliance with the covenants. At September 30, 2004, the Company had
borrowing base capacity of $7,312,000. (7) Long-Term Debt and Other Non-current Liabilities Long-term debt and other non-current liabilities consist of the following
(amounts in thousands): September 30,
    
    December 31,2004
    
    2003Estimate of Invision earn-out
    
    $
    799
    
    
    $
    847Liability for license fee
    
    
    75
    
    
    
    200874
    
    
    
    1,047Less current portion
    
    
    373
    
    
    
    521Long-term debt, less current portion
    
    $
    501
    
    
    $
    526
 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. The
Company made actual earn-out payments of $48,000 during the nine months ended
September 30, 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. In January 2004, the
Company made a $125,000 installment payment. Future installments are payable
as follows: $25,000 on January 15, 2005, which has been recorded as a current
liability, $25,000 on January 15, 2006, and $25,000 on January 15, 2007. (8) Stockholders Equity (a) Convertible Preferred Stock 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 - 8 -




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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 September 30,
2004. At September 30, 2004 and December 31, 2003, there were 15,000,000
shares of Series C preferred stock authorized and 270,541 and 329,866 issued
and outstanding, respectively. During the period from December 31, 2003
through September 30, 2004, 59,325 shares of Series C preferred stock were
converted into 64,561 shares of common stock at an average rate of 1-to-1.0883. 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 during 2003, and no Series E Warrants were
outstanding at December 31, 2003. As of September 30, 2004, there were 46,999
Series F Warrants outstanding and exercisable for 46,999 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 September 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 September 6, 2003. No shares of Series E and Series F preferred
stock were outstanding at December 31, 2003. (b) Common Stock Holders of shares of common stock are entitled to one vote per share on
all matters submitted to a vote of the Companys stockholders. There is no
right to cumulative voting for the election of directors. Holders of shares of
common stock are entitled to receive dividends, if and when declared by the
board of directors out of funds legally available therefore, after payment of
dividends required to be paid on any outstanding shares of preferred stock.
Upon liquidation, holders of shares of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to the
liquidation preferences of any outstanding shares of preferred stock. Holders
of shares of common stock have no conversion, redemption or preemptive rights.
At September 30, 2004 and December 31, 2003, there were 90,000,000 shares of
common stock authorized and 28,251,570 and 27,610,996 issued and outstanding,
respectively. (9) Discontinued Operations During the quarter ended September 30, 2004, the Company sold
substantially all assets of its Texas subsidiary, which developed and marketed
a handheld software product line, for $3,477,500 million plus assumed
liabilities of $467,000. The Company received $387,500 in cash, $200,000 held
in a short-term escrow fund, $415,000 in a short-term receivable and - 9 -




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$2,475,000 million in notes receivable in exchange for assets with a book
value of $3,235,000 million. In connection with this sale of assets, the
Company has recorded a deferred gain of $600,000 as a reduction of the notes
receivable. Recognition of the gain will occur when collectibility of notes
receivable is reasonably assured. The results of operations from the handheld software product line have
been presented in the condensed consolidated statements of operations as
discontinued operations. Following is a summary of the discontinued operations
related to the Companys Texas subsidiary that were sold in 2004 (amounts in
thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    186
    
    
    $
    288
    
    
    $
    1,063
    
    
    $
    786Cost of revenue
    
    
    14
    
    
    
    89
    
    
    
    319
    
    
    
    207Gross profit
    
    
    172
    
    
    
    199
    
    
    
    744
    
    
    
    579Selling, general and administrative expenses
    
    
    468
    
    
    
    291
    
    
    
    1,210
    
    
    
    832Total discontinued operations
    
    $
    (296
    )
    
    $
    (92
    )
    
    $
    (466
    )
    
    $
    (253
    )
 - 10 -




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(10) Net Income (Loss) per Share The computation of basic and diluted net loss per share follows (in
thousands, except per share amounts): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Basic net income (loss) per share computation:Numerator:Income (loss) from continuing operations
    
    $
    180
    
    
    $
    (314
    )
    
    $
    (1,658
    )
    
    $
    (2,660
    )Discontinued operations
    
    
    (296
    )
    
    
    (92
    )
    
    
    (466
    )
    
    
    (253
    )Net loss
    
    
    (116
    )
    
    
    (406
    )
    
    
    (2,124
    )
    
    
    (2,913
    )Beneficial conversion value of convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (445
    )Preferred stock dividend
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    (20
    )Net loss attributable to common stockholders
    
    $
    (116
    )
    
    $
    (406
    )
    
    $
    (2,124
    )
    
    $
    (3,378
    )Denominator:Weighted average number of common shares outstanding
    
    
    28,139
    
    
    
    24,709
    
    
    
    27,901
    
    
    
    22,143Basic net income (loss) per share:Continuing operations
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.14
    )Discontinued operations
    
    $
    (0.01
    )
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.01
    )Total basic net income (loss) per share
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.15
    )Diluted net income (loss) per share computation:Numerator:Income (loss) from continuing operations
    
    $
    180
    
    
    $
    (314
    )
    
    $
    (1,658
    )
    
    $
    (2,660
    )Discontinued operations
    
    
    (296
    )
    
    
    (92
    )
    
    
    (466
    )
    
    
    (253
    )Net loss
    
    
    (116
    )
    
    
    (406
    )
    
    
    (2,124
    )
    
    
    (2,913
    )Beneficial conversion value of convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (445
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )Net loss attributable to common stockholders
    
    $
    (116
    )
    
    $
    (406
    )
    
    $
    (2,124
    )
    
    $
    (3,378
    )Denominator:Weighted average number of common shares outstanding
    
    
    28,139
    
    
    
    24,709
    
    
    
    27,901
    
    
    
    22,143Effect of dilutive stock options, warrants, and restricted stock units
    
    
    1,346
    
    
    
    
    
    
    
    
    
    
    
    Effect of common shares issuable upon conversion of preferred shares
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    29,779
    
    
    
    24,709
    
    
    
    27,901
    
    
    
    22,143Stock options, warrants and restricted stock units not included in
dilutive net income (loss) per share since antidilutive
    
    
    
    
    
    
    2,625
    
    
    
    2,299
    
    
    
    2,625Convertible preferred stock not included in dilutive net income (loss)
per share since antidilutive
    
    
    
    
    
    
    449
    
    
    
    271
    
    
    
    449Diluted net income (loss) per share:Continuing operations
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.14
    )Discontinued operations
    
    $
    (0.01
    )
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.01
    )Total diluted net income (loss) per share
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.15
    )
 (11) 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. - 11 -




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The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends
and other information. Three customers accounted for 26%, 16%, and 11% of net sales for the nine
months ended September 30, 2004. Four customers accounted for 15%, 13%, 12%
and 11% of net sales for the nine months ended September 30, 2003. Three customers accounts receivable balances accounted for 29%, 20% and
10% of net accounts receivable at September 30, 2004. Four customers accounts
receivable balances accounted for 22%, 14%, 12% and 11% of net accounts
receivable at December 31, 2003. Allowance for doubtful accounts was $549,000 and $424,000 at September 30,
2004 and December 31, 2003, respectively. Allowance for sales returns was
$147,000 and $124,000 at September 30, 2004 and December 31, 2003,
respectively. Export sales were approximately 17% and 14% of the Companys net sales for
the nine months ended September 30, 2004 and 2003, 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 (amounts in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Power products
    
    $
    13,100
    
    
    $
    8,183
    
    
    $
    34,124
    
    
    $
    19,486Handheld hardware products
    
    
    3,042
    
    
    
    912
    
    
    
    7,445
    
    
    
    7,832Expansion and docking products
    
    
    1,647
    
    
    
    1,436
    
    
    
    5,053
    
    
    
    5,221Accessories and other products
    
    
    1,019
    
    
    
    1,696
    
    
    
    2,424
    
    
    
    3,973Technology transfer fees
    
    
    151
    
    
    
    580
    
    
    
    608
    
    
    
    886Total revenues
    
    $
    18,959
    
    
    $
    12,807
    
    
    $
    49,654
    
    
    $
    37,398
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003United States
    
    $
    16,071
    
    
    $
    11,292
    
    
    $
    41,078
    
    
    $
    32,288Europe
    
    
    1,246
    
    
    
    1,283
    
    
    
    6,014
    
    
    
    4,500All other
    
    
    1,642
    
    
    
    232
    
    
    
    2,562
    
    
    
    610$
    18,959
    
    
    $
    12,807
    
    
    $
    49,654
    
    
    $
    37,398
 (12) Contingencies 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 Mobility Idaho, Inc. (formerly 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 plaintiffs in the
Carnahan suit to intervene in the lawsuit and these 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 disputed that the
Company appropriately calculated and paid the earn-out consideration called for
by the Portsmith merger agreement. The court issued an order on April 15, 2004
granting the Companys motion for partial summary judgment on this pricing
issue, which means that the court agreed that the Company had properly
calculated the pricing of the shares issued by the Company in the Portsmith
merger. The plaintiffs have filed a motion requesting that the court
reconsider its order granting the Companys motion for - 12 -




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partial summary judgment on the pricing issue. The court held a hearing
on this motion on October 27, 2004, but has not yet issued its ruling. The
remaining claims are still pending and the Company intends to vigorously defend
against the claims as well as pursue its own claims against the plaintiffs and
intervenors. The Company and two of its executive officers have been named as
defendants in lawsuits filed between February and April of 2004 and
subsequently amended and consolidated in the United States District Court for
the District of Arizona. The consolidated lawsuit asserts 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 complaint generally alleges that various public statements made by
defendants were false and misleading when made, 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 complaint seeks to proceed on
behalf of the alleged class described above, seeks monetary damages in an
unspecified amount and seeks recovery of plaintiffs costs and attorneys fees.
The Company filed a motion to dismiss this lawsuit on September 7, 2004, and is
currently awaiting a response from the plaintiffs. The Company intends to
vigorously defend itself against these claims. Certain former officers of iGo Corporation are seeking potential
indemnification claims against the Companys wholly owned subsidiary, iGo
Direct Corporation, relating to a Securities and Exchange Commission matter
involving such individuals (but not involving the Company) that relates to
matters that arose prior to the Companys acquisition of iGo Corporation in
September 2002. The Company is pursuing coverage under iGos directors and
officers liability insurance policy as it relates to this potential iGo
indemnification matter. In the event this coverage is not received, iGo may be
responsible for costs and expenses associated with this matter. 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. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 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 our actual
results, performance or achievements, 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 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 markets acceptance of our products and technology;
    
    the timing of substantial customer orders;
    
    the availability of qualified personnel;
    
    the performance of suppliers and subcontractors;
    
    the timely achievement of anticipated milestones;
    
    the scope and breadth of our patent portfolio; 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. - 13 -




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Overview 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 more effective use of these mobile electronic
devices and the ability to access information more readily. Our products
include power, handheld, expansion and docking and accessory products. We sell our products to OEMs, private-label resellers, distributors,
resellers, retailers and end-users. We have 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 63% of revenue for the nine months ended September 30, 2004 and
43% of revenue for the nine months ended September 30, 2003. Sales through
retailers and distributors accounted for approximately 26% of revenue for the
nine months ended September 30, 2004 and 46% of revenue for the nine months
ended September 30, 2003. 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 Dell, IBM, Ingram Micro,
Kensington, Motorola, RadioShack, Symbol and Targus. 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 MP3 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 mobile
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 family of power adapter products. In particular, we have collaborated
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 incorporates our patented tip technology and the
combination AC/DC adapter also allows users to simultaneously charge an
ancillary device with our optional DualPowerTM accessory. We are also
collaborating with Motorola to develop and market a similar family of power
products. 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. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires management to make a number of estimates and judgments that affect the
reported amounts of assets, liabilities, 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 - 14 -




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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 26% for the nine
months ended September 30, 2004 and 46% of revenue for the nine months ended
September 30, 2003. 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 results of operations. For those reasons, we believe that the accounting
estimate related to product returns and price protection is a critical
accounting estimate. 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. We test
goodwill for impairment on an annual basis as of December 31. 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. As a result of our acquisitions of Portsmith, Cutting Edge Software and
iGo during 2002, we have recorded additional goodwill of approximately $13.9
million as of September 30, 2004. Goodwill was reduced by approximately $2.0
million as a result of the sale of the assets of Cutting Edge Software during
2004. 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. - 15 -




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##### Table of Contents



Results of Operations The following table presents certain selected consolidated financial data
for the periods indicated expressed as a percentage of total revenue: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(unaudited)
    
    (unaudited)2004
    
    2003
    
    2004
    
    2003Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue
    
    
    69.1
    %
    
    
    63.8
    %
    
    
    70.2
    %
    
    
    65.0
    %Gross profit
    
    
    30.9
    %
    
    
    36.2
    %
    
    
    29.8
    %
    
    
    35.0
    %Operating expenses:Sales and marketing
    
    
    9.4
    %
    
    
    12.7
    %
    
    
    9.9
    %
    
    
    13.6
    %Research and development
    
    
    6.4
    %
    
    
    9.1
    %
    
    
    7.9
    %
    
    
    8.6
    %General and administrative
    
    
    14.0
    %
    
    
    16.6
    %
    
    
    15.2
    %
    
    
    19.9
    %Total operating expenses
    
    
    29.8
    %
    
    
    38.4
    %
    
    
    33.0
    %
    
    
    42.1
    %Income (loss) from continuing operations
    
    
    1.1
    %
    
    
    -2.2
    %
    
    
    -3.2
    %
    
    
    -7.1
    %Other income (expense):Interest, net
    
    
    -0.1
    %
    
    
    -0.3
    %
    
    
    -0.2
    %
    
    
    -0.1
    %Other, net
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.1
    %Income (loss) from continuing operations
    
    
    1.0
    %
    
    
    -2.5
    %
    
    
    -3.4
    %
    
    
    -7.1
    %Loss from discontinued operations
    
    
    -1.6
    %
    
    
    -0.7
    %
    
    
    -0.9
    %
    
    
    -0.7
    %Net loss
    
    
    -0.6
    %
    
    
    -3.2
    %
    
    
    -4.3
    %
    
    
    -7.8
    %
 Comparison of Three Months Ended September 30, 2004 and 2003 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: Increase
    
    Percentage changefrom same period in
    
    from the same periodQ3 2004
    
    Q3 2003
    
    the prior year
    
    in the prior yearRevenue
    
    $
    18,959
    
    
    $
    12,807
    
    
    $
    6,152
    
    
    
    48.0
    %
 The increase in revenue is primarily due to continued sales growth of our
family of combination AC/DC, AC only and DC only universal power adapters
during the three months ended September 30, 2004. As a result, sales of power
products increased by $4.9 million, or 60.1%, to $13.1 million during the three
months ended September 30, 2004 as compared to $8.2 million for the three
months ended September 30, 2003. Sales of handheld hardware products increased
by $2.1 million, or 233.6%, to $3.0 million during the three months ended
September 30, 2004 as compared to $912,000 for the three months ended September
30, 2003. These increases are offset by decreases of $1.1 million in sales of
accessories and technology transfer fees during the three months ended
September 30, 2004 compared to the same period in the prior year. Cost of revenue, gross profit and gross margin.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.
Gross profit is the difference between revenue and cost of revenue. Gross
margin is gross profit stated as a percentage of revenue. The following table
summarizes the year-over-year comparison of our cost of revenue, gross profit
and gross margin for the periods indicated: Increase (decrease)
    
    Percentage changefrom same period in
    
    from the same periodQ3 2004
    
    Q3 2003
    
    the prior year
    
    in the prior yearCost of revenue
    
    $
    13,102
    
    
    $
    8,173
    
    
    $
    4,929
    
    
    
    60.3
    %Gross profit
    
    $
    5,857
    
    
    $
    4,634
    
    
    $
    1,223
    
    
    
    26.4
    %Gross margin
    
    
    30.9
    %
    
    
    36.2
    %
    
    
    (5.3
    )%
    
    
    (14.6
    )%
 - 16 -




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##### Table of Contents



The increase in cost of revenue was due primarily to the 48.0% volume
increase in revenue, as well as to shifts in customer mix, product mix and
costs associated with the rework of power adapters manufactured for Dell for
the three months ended September 30, 2004 as compared to the three months ended
September 30, 2003. Cost of revenue as a percentage of revenue increased to
69.1% for the three months ended September 30, 2004 from 63.8% for the three
months ended September 30, 2003, resulting in decreased gross margin. The
decrease in gross profit and corresponding gross margin is primarily
attributable to two factors. The first factor is a shift in customer mix. OEM
and private label reseller customers accounted for 63% and 41% of revenue for
the three months ended September 30, 2004 and 2003, respectively. Sales
through retailers and distributors accounted for 27% and 51% of revenue for the
three months ended September 30, 2004 and 2003, respectively. Sales to OEMs
and private label resellers typically occur at lower price points than sales of
comparable product to retailers and distributors. The second factor is a shift
in product mix. During the three months ended September 30, 2004, we continued
our roll-out of low-wattage power products designed specifically for mobile
electronic devices. Sales of a portion of these products typically occur at
lower price points than sales of higher-wattage power products. Sales and marketing.Sales and marketing expenses generally consist of
salaries, commissions and other personnel related costs of our sales, marketing
and support personnel, advertising, public relations, promotions, printed media
and travel. The following table summarizes the year-over-year comparison of our
sales and marketing expenses for the periods indicated: Increase
    
    Percentage changefrom same period in
    
    from the same periodQ3 2004
    
    Q3 2003
    
    the prior year
    
    in the prior yearSales and marketing
    
    $
    1,777
    
    
    $
    1,623
    
    
    $
    154
    
    
    
    9.5
    %
 The increase in sales and marketing expenses primarily resulted from costs
associated with recruiting and relocation of sales and marketing personnel. As
a percentage of revenue, sales and marketing expenses decreased to 9.4% for the
three months ended September 30, 2004 from 12.7% for the three months ended
September 30, 2003. 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: Increase
    
    Percentage changefrom same period in
    
    from the same periodQ3 2004
    
    Q3 2003
    
    the prior year
    
    in the prior yearResearch and development
    
    $
    1,214
    
    
    $
    1,164
    
    
    $
    50
    
    
    
    4.3
    %
 The increase in research and development expenses primarily resulted from
the continued development of our family of power adapter products.
Specifically, during the three months ended September 30, 2004, we increased
internal staffing of engineers to position us for continued research and
development efforts, resulting in a net increase of personnel related expenses.
This increase was partially offset by a reduction in non-recurring engineering
expenses during the three months ended September 30, 2004 compared to the same
period in the prior year, although we expect to continue to incur non-recurring
engineering related expenses in future periods. As a percentage of revenue,
research and development expenses decreased to 6.4% for the three months ended
September 30, 2004 from 9.1% for the three months ended September 30, 2003. 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: Increase
    
    Percentage changefrom same period in
    
    from the same periodQ3 2004
    
    Q3 2003
    
    the prior year
    
    in the prior yearGeneral and administrative
    
    $
    2,653
    
    
    $
    2,131
    
    
    $
    522
    
    
    
    24.5
    %
 The increase in general and administrative expenses primarily resulted
from legal expenses, principally in connection with the defense of our
intellectual property, our defense against a securities class action lawsuit,
increased expense for amortization of intangibles, primarily patents and
trademarks, directors fees, and professional fees related to compliance with
Sarbanes-Oxley legislation. General and administrative expenses as a
percentage of revenue decreased to 14.0% for the three months ended September
30, 2004 from 16.6% for the three months ended September 30, 2003. Income taxes.We have incurred losses from inception to date; therefore,
no provision for income taxes was required for the three months ended September
30, 2004 and 2003. Based on historical operating losses and projections for
future taxable - 17 -




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##### Table of Contents



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 either of the three
months ended September 30, 2004 or September 30, 2003. Comparison of Nine Months Ended September 30, 2004 and 2003 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: Nine months
    
    Nine monthsended
    
    ended
    
    Increase
    
    Percentage changeSeptember
    
    September 30,
    
    from same period
    
    from the same period30, 2004
    
    2003
    
    in the prior year
    
    in the prior yearRevenue
    
    $
    49,654
    
    
    $
    37,398
    
    
    $
    12,256
    
    
    
    32.8
    %
 The increase in revenue is primarily due to continued sales growth of our
family of combination AC/DC, AC only and DC only universal power adapters
during the nine months ended September 30, 2004. As a result, sales of power
products increased by $14.6 million, or 75.1%, to $34.1 million during the nine
months ended September 30, 2004 as compared to $19.5 million for the nine
months ended September 30, 2003. This increase is offset by a combined
decrease of $2.4 million in sales of handheld hardware products, docking and
expansion products, accessories and technology transfer fees during the nine
months ended September 30, 2004 compared to the same period in the prior year. Cost of revenue, gross profit and gross margin.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.
Gross profit is the difference between revenue and cost of revenue. Gross
margin is gross profit stated as a percentage of revenue. The following table
summarizes the year-over-year comparison of our cost of revenue, gross profit
and gross margin for the periods indicated: Nine months
    
    Nine monthsended
    
    ended
    
    Increase (decrease)
    
    Percentage change fromSeptember
    
    September
    
    from same period in
    
    the same period in the30, 2004
    
    30, 2003
    
    the prior year
    
    prior yearCost of revenue
    
    $
    34,838
    
    
    $
    24,325
    
    
    $
    10,513
    
    
    
    43.2
    %Gross profit
    
    $
    14,816
    
    
    $
    13,073
    
    
    $
    1,743
    
    
    
    13.3
    %Gross margin
    
    
    29.8
    %
    
    
    35.0
    %
    
    
    (5.2
    )%
    
    
    (14.9
    )%
 The increase in cost of revenue was due primarily to the 32.8% volume
increase in revenue, as well as to shifts in customer mix, product mix and
inventory write-downs for the nine months ended September 30, 2004 as compared
to the nine months ended September 30, 2003. Cost of revenue as a percentage
of revenue increased to 70.2% for the nine months ended September 30, 2004 from
65.0% for the nine months ended September 30, 2003, resulting in decreased
gross margin. The decrease in gross margin is primarily attributable to three
factors. The first factor is a shift in customer mix. OEM and private label
reseller customers accounted for 63% and 43% of revenue for the nine months
ended September 30, 2004 and 2003, respectively. Sales through retailers and
distributors accounted for 26% and 46% of revenue for the nine months ended
September 30, 2004 and 2003, respectively. Sales to OEMs and private label
resellers typically occur at lower price points than sales of comparable
product to retailers and distributors. The second factor is a shift in product
mix. For the first time, during the nine months ended September 30, 2004, we
commenced sales of low-wattage power products designed specifically for mobile
electronic devices. Sales of a portion of these products typically occur at
lower price points than sales of higher-wattage power products. The third
factor impacting increased cost of revenue and corresponding lower gross profit
and gross margin is the impact of write-downs to the value of older inventory,
primarily in our handheld products and laptop computer batteries. During the
nine months ended September 30, 2004, we recorded an adjustment to cost of
revenue in the amount of $929,000, compared to an $80,000 adjustment during the
nine months ended September 30, 2003, as a result of reduced marketability of
certain of our inventory. - 18 -




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##### Table of Contents



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: Nine months
    
    Nine monthsended
    
    ended
    
    Decrease
    
    Percentage changeSeptember
    
    September 30,
    
    from same period
    
    from the same period30, 2004
    
    2003
    
    in the prior year
    
    in the prior yearSales and marketing
    
    $
    4,901
    
    
    $
    5,083
    
    
    $
    182
    
    
    
    3.6
    %
 The 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 9.9% for the
nine months ended September 30, 2004 from 13.6% for the nine months ended
September 30, 2003. 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: Nine months
    
    Nine monthsended
    
    ended
    
    Increase
    
    Percentage changeSeptember
    
    September 30,
    
    from same period
    
    from the same period30, 2004
    
    2003
    
    in the prior year
    
    in the prior yearResearch and development
    
    $
    3,926
    
    
    $
    3,226
    
    
    $
    700
    
    
    
    21.7
    %
 The increase in research and development expenses primarily resulted from
the continued development of our family of power adapter products.
Specifically, during the nine months ended September 30, 2004, we invested in
research and development on 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. We
also invested in research and development of new higher-power adapters
specifically designed for portable computers. 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: Nine months
    
    Nine monthsended
    
    ended
    
    Increase
    
    Percentage changeSeptember
    
    September
    
    from same period
    
    from the same period30, 2004
    
    30, 2003
    
    in the prior year
    
    in the prior yearGeneral and
administrative
    
    $
    7,568
    
    
    $
    7,426
    
    
    $
    142
    
    
    
    1.9
    %
 The increase in general and administrative expenses primarily resulted
from increased expense for amortization of intangibles, primarily patents and
trademarks, directors fees, and professional fees related to compliance with
Sarbanes-Oxley legislation. These increases are offset by decreases in a
combination of other general and administrative expenses. General and
administrative expenses as a percentage of revenue decreased to 15.2% for the
nine months ended September 30, 2004 from 19.9% for the nine months ended
September 30, 2003. Income taxes.We have incurred losses from inception to date; therefore,
no provision for income taxes was required for the nine months ended September
30, 2004 and 2003. 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 either of
the nine months ended September 30, 2004 or September 30, 2003. Operating Outlook In the fourth quarter of 2004, we expect total revenue to range between
$21 million and $26 million, and diluted earnings per share to range between
$0.04 and $0.10. Specifically, revenue from sales of our power products is
expected to increase approximately 17%  50% over the third quarter of 2004,
primarily as a result of the following:  
    
    Increased Targus and RadioShack portable computer power adapter
product rollout and penetration, including their launch of new products
and expansion in additional retail outlets and in international markets; - 19 -




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##### Table of Contents




    
    The expanded market coverage provided by the introduction of
EverywherePowerTM 7500, our new higher power AC/DC combination power
adapter for portable computers;
    
    Continued increases in sales of consumer electronics power adapters
through RadioShack, particularly during the holiday season;
    
    Launch of new consumer electronics power adapters with Motorola and in new distribution channels; and
    
    Continued ramp-up of portable computer power adapter sales through our computer OEM channels. Gross margin in the fourth quarter is expected to increase to
approximately 33% to 35%, driven primarily by higher sales volumes, a greater
mix of high margin consumer electronics power adapters, and the absence of
costs associated with the rework of Dell inventory. Operating expenses are
expected to be approximately $6.0 million and trend down as a percentage of
revenue. 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. 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 capitalized
and 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. Liquidity and Capital Resources The following table sets forth for the period presented certain
consolidated cash flow information (in thousands): Nine Months Ended September 30,2004
    
    2003Net cash used in operating activities
    
    $
    (611
    )
    
    $
    (7,846
    )Net cash used in investing activities
    
    
    (458
    )
    
    
    (586
    )Net cash provided by financing activities
    
    
    968
    
    
    
    16,650Foreign currency exchange impact on cash flow
    
    
    8
    
    
    
    74Net cash provided by discontinued operations
    
    
    10
    
    
    
    55Increase (decrease) in cash and cash equivalents
    
    $
    (83
    )
    
    $
    8,347Cash and cash equivalents at beginning of period
    
    $
    11,024
    
    
    $
    3,166Cash and cash equivalents at end of period
    
    $
    10,941
    
    
    $
    11,513
 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 nine months ended September 30, 2004
primarily to fund operating losses and working capital necessary to
support our growing revenue base. Specifically, cash was used to
fund accounts receivable growth that resulted from our 32.8% increase
in revenues for the nine months ended September 30, 2004 as compared
to September 30, 2003. Cash used to fund growth in accounts
receivable was offset by growth in accounts payable. In 2004, we
expect to generate positive cash flow from operating activities as we
expect our operating results to be at or near breakeven with non-cash
items and changes in working capital to have a relatively neutral
effect on cash flows. Our consolidated cash flow operating metrics
are as follows: - 20 -




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##### Table of Contents



September 30,2004
    
    2003Days outstanding in ending accounts receivable (DSOs)
    
    
    83
    
    
    
    95Inventory turns
    
    
    6
    
    
    
    4
  The improvement in DSOs at September 30, 2004 compared to September 30,
2003, is primarily due to the shift in customer mix towards OEMs and
private-label resellers, as these customers tend to regularly pay
within stated credit terms. We expect DSOs to continue to improve
during 2004 and into 2005. Inventory turns at September 30, 2004
improved to 6 turns compared to 4 turns at September 30, 2003. The
improvement in inventory turns is primarily due to increased sales
during the nine months ended September 30, 2004 without a corresponding
increase in inventory. We expect inventory turns to continue to
improve during 2004 and into 2005.
    
    Net cash used in investing activities.For the nine months
ended September 30, 2004, 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 provided by financing activities.Net cash provided
by financing activities for the nine months ended September 30, 2004
was primarily from net proceeds from the exercises of stock options
and warrants. 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 September 30, 2004, we had approximately $97 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 currently cannot be
determined. Financing Facilities.In July 2004, we amended our $10.0 million bank
line of credit. The line bears interest at prime, interest only payments are
due monthly, with final payment of interest and principal due on July 31, 2006.
The line of credit is secured by all of our assets and subject to financial
covenants, with which we were in compliance as of September 30, 2004. We had no
outstanding balance against this line of credit as of September 30, 2004. Under
the terms of the line, we can borrow up to 80% of eligible accounts receivable.
At September 30, 2004, our net borrowing base capacity was $7.3 million. 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 September 30, 2004, in thousands: Payment due by period2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    More than 5 yearsOperating lease obligations
    
    $
    199
    
    
    $
    605
    
    
    $
    521
    
    
    $
    503
    
    
    $
    384
    
    
    $
    Inventory Purchase obligations
    
    
    15,968
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    50
    
    
    
    606
    
    
    
    193
    
    
    
    25
    
    
    
    
    
    
    
    Totals
    
    $
    16,217
    
    
    $
    1,211
    
    
    $
    714
    
    
    $
    528
    
    
    $
    384
    
    
    $
    
 Off-Balance Sheet Arrangements.We have no off-balance sheet financing arrangements. Acquisitions and dispositions.In the past we have made acquisitions of
other companies to complement our product offerings and expand our revenue
base. In September 2002 we acquired iGo Corporation through one of our wholly
owned subsidiaries, iGo Direct Corporation. Certain former officers of iGo
Corporation are now seeking potential indemnification claims against iGo Direct
Corporation relating to a Securities and Exchange Commission matter involving
such individuals (but not involving us) that relates to matters that arose
prior to our acquisition of iGo Corporation. We are pursuing coverage under
iGos directors and officers liability insurance policy for this potential
iGo indemnification matter. In the event this coverage is not received, iGo
may be responsible for costs and expenses associated with this matter. During the nine months ended September 30, 2004, we sold the assets of our
Texas subsidiary for approximately $1.0 million in cash and current
receivables, and approximately $2.5 million in notes receivable. - 21 -




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Our future strategy includes the possible acquisition of other businesses
to continue 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. Our future strategy may also
include the possible disposition of assets that are not considered integral to
our business, which would likely result in the generation of cash. Liquidity Outlook.Based on our projections, 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. In addition, additional capital resources may
not be available to us in amounts or on terms that are acceptable to us. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks in the ordinary course of our
business. These risks result primarily from changes in foreign currency
exchange rates and interest rates. In addition, our international operations
are subject to risks related to differing economic conditions, changes in
political climate, differing tax structures and other regulations and
restrictions. To date we have not utilized derivative financial instruments or
derivative commodity instruments. We do not expect to employ these or other
strategies to hedge market risk in the foreseeable future. We invest our cash
in money market funds, 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 September 30, 2004. 
 ITEM 4. CONTROLS AND PROCEDURES 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. 
 PART II: OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS: 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 Mobility Idaho, Inc. (formerly 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 plaintiffs in the
Carnahan suit to intervene in the lawsuit and these 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 disputed that the
Company appropriately calculated and paid the earn-out consideration called for
by the Portsmith merger agreement. The court issued an order on April 15, 2004
granting the Companys motion for partial summary judgment on this pricing
issue, which means that the court agreed that the Company had properly
calculated the pricing of the shares issued by the Company in the Portsmith - 22 -




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merger. The plaintiffs have filed a motion requesting that the court
reconsider its order granting the Companys motion for partial summary judgment
on the pricing issue. The court held a hearing on this motion on October 27,
2004, but has not yet issued its ruling. The remaining claims are still
pending and the Company intends to vigorously defend against the claims as well
as pursue its own claims against the plaintiffs and intervenors. The Company and two of its executive officers have been named as
defendants in lawsuits filed between February and April of 2004 and
subsequently amended and consolidated in the United States District Court for
the District of Arizona. The consolidated lawsuit asserts 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 complaint generally alleges that various public statements made by
defendants were false and misleading when made, 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 complaint seeks to proceed on
behalf of the alleged class described above, seeks monetary damages in an
unspecified amount and seeks recovery of plaintiffs costs and attorneys fees.
The Company filed a motion to dismiss this lawsuit on September 7, 2004, and is
currently awaiting a response from the plaintiffs. The Company intends to
vigorously defend itself against these claims. On May 7, 2004, the Company filed separate complaints with the
International Trade Commission (the ITC) in Washington, DC and the United
States District Court for the Eastern District of Texas against Formosa
Electronic Industries, Inc., Micro Innovations Corp. and SPS, Inc. On July 13,
2004, the Company filed an amended complaint with the United States District
Court for the Eastern District of Texas to add Sakar International Inc. and
Worldwide Marketing Ltd. as parties to the federal district court action. With
the exception of Formosa, the Company subsequently reached favorable
settlements with each of the other defendants and dismissed them from both the
ITC and federal district court actions. In addition, the Company subsequently
and voluntarily terminated its ITC action against Formosa and is instead
aggressively pursuing all of its claims against Formosa through the federal
district court action in the United States District Court for the Eastern
District of Texas. The Companys complaint against Formosa alleges
infringement of one or more of U.S. Patent Nos. 5,347,211, 6,064,177,
6,650,560, and 6,700,808 owned by the Company. The Company, through the
federal district court action, seeks to enjoin Formosa from further
infringement of these patents and compensatory and treble damages for willful
infringement of these patents. The Company intends to vigorously pursue its
claims in this action. On August 26, 2004, the Company and iGo Direct Corporation, the Companys
wholly owned subsidiary, filed a complaint against Twin City Fire Insurance Co.
in the United States District Court for the District of Nevada. The complaint
alleges breach of contract in connection with Twin Citys refusal to reimburse
iGo, under director and liability insurance policies issued to iGo by Twin
City, for fees and expenses incurred in connection with the defense of certain
former officers of iGo relating to a Securities and Exchange Commission matter
that arose prior to the Companys acquisition of iGo Corporation in September
2002. Twin City filed an answer to this complaint on September 20, 2004. The
court has not yet set a date for trial. The Company and iGo intend to
vigorously pursue their claims in this action. We are from time to time involved in various legal proceedings other than
those set forth above incidental to the conduct of our business. We believe
that the outcome of all such pending legal proceedings will not in the
aggregate have a material adverse effect on our business, financial condition,
results of operations or liquidity. 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None 
 ITEM 5. OTHER INFORMATION: None - 23 -




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: The Exhibit Index and required Exhibits are immediately following the
Signatures to this Form 10-Q are filed as part of, or hereby
incorporated by reference into, this Form 10-Q. (b) Reports on Form 8-K: We filed the following reports on Form 8-K during the quarter ended
September 30, 2004:  
    
    Form 8-K dated July 29, 2004 furnishing under Items
7 and 12, our press release, dated July 29, 2004, announcing
our results of operations for the three and six months ended
June 30, 2004. - 24 -




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MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. MOBILITY ELECTRONICS, INC.Dated: November 5, 2004
    
    By:
    
    /s/ Charles R. MolloCharles R. MolloPresident, Chief Executive Officerand Chairman of the Board(Principal Executive Officer)By:
    
    /s/ Joan W. BrubacherJoan W. BrubacherExecutive Vice President and Chief Financial Officerand Authorized Officer of Registrant(Principal Financial and Accounting Officer)
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EXHIBIT INDEX Exhibit Number
    
    Description of Document2.1
    
    Agreement and Plan of Merger dated October 2, 2000, by and among the Company, Mesa Ridge Technologies,
Inc. d/b/a MAGMA and the stockholders of MAGMA (1)***2.2
    
    Agreement and Plan of Merger dated as of February 20, 2002, by and among Portsmith, Inc., certain holders
of the outstanding capital stock of Portsmith, Mobility Electronics, Inc. and Mobility Europe Holdings,
Inc. (2)***2.3
    
    Agreement and Plan of Merger dated March 23, 2002, by and among Mobility Electronics, Inc., iGo
Corporation and IGOC Acquisition (2)***2.4
    
    Agreement and Plan of Merger by and among Cutting Edge Software, Inc., Jeff Musa, Mobility Electronics,
Inc. and CES Acquisition, Inc. dated August 20, 2002 (3)***2.5
    
    Agreement and Plan of Merger among Cutting Edge Software, Inc. and CES II Acquisition, Inc. dated August
21, 2002 (4)***3.1
    
    Certificate of Incorporation of the Company (5)3.2
    
    Articles of Amendment to the Certificate of Incorporation of the Company dated as of June 17, 1997 (6)3.3
    
    Articles of Amendment to the Certificate of Incorporation of the Company dated as of September 10, 1997 (5)3.4
    
    Articles of Amendment to the Certificate of Incorporation of the Company dated as of July 20, 1998 (5)3.5
    
    Articles of Amendment to the Certificate of Incorporation of the Company dated as of February 3, 2000 (5)3.6
    
    Articles of Amendment to the Certificate of Incorporation of the Company dated as of June 30, 2000 (6)3.7
    
    Certificate of Designations, Preferences, Rights and Limitations of Series C Preferred Stock (5)3.8
    
    Certificate of the Designations, Preferences, Rights and Limitations of Series D Preferred Stock (7)3.9
    
    Certificate of the Designations, Preferences, Rights and Limitations of Series E Preferred Stock of
Mobility Electronics, Inc. (8)3.10
    
    Certificate of the Designations, Preferences, Rights and Limitations of Series F Preferred Stock of
Mobility Electronics, Inc. (8)3.11
    
    Certificate of Designations, Preferences, Rights and Limitations of Series G Junior Participating
Preferred Stock of Mobility Electronics, Inc. (9)3.12
    
    Amended and Restated Bylaws of the Company (5)4.1
    
    Specimen of Common Stock Certificate (10)4.2
    
    Form of Warrant to Purchase Shares of common stock of the Company used with the Series C Preferred Stock
Private Placements (6)**4.3
    
    Form of Series C Preferred Stock Purchase Agreement used in 1998 and 1999 Private Placements (5)**4.4
    
    Form of Series C Preferred Stock and Warrant Purchase Agreement used in 1999 and 2000 Private Placements
(5)**4.5
    
    Form of Warrant to Purchase common stock of the Company issued to certain holders in connection with the
Contribution and Indemnification Agreement by and among Janice L. Breeze, Jeffrey S. Doss, Charles S.
Mollo, Cameron Wilson, the Company and certain Stockholders of the Company, dated November 2, 1999 (7)**4.6
    
    Form of Series E Preferred Stock and Warrant Purchase Agreement (8)**4.7
    
    Form of Series F Preferred Stock and Warrant Purchase Agreement (8)**4.8
    
    Form of Warrant issued to purchasers of Series E Stock (8)4.9
    
    Form of Warrant issued to purchasers of Series F Stock (8)4.10
    
    Rights Agreement between the Company and Computershare Trust Company, dated June 11, 2003 (9)4.11
    
    Form of Common Stock Purchase Agreement relating to private placement completed August 29, 2003.**(11)4.12
    
    Form of Warrant to Purchase Common Stock of the Company issued to Silicon Valley Bank on September 3,
2003.(12)
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Exhibit Number
    
    Description of Document10.1
    
    Amendment to Loan Documents by and between Silicon Valley Bank, the Company and certain of its
subsidiaries, dated as of July 31, 2004.*10.2
    
    Third Amendment to Lease Agreement by and between the Company and Mountain Valley Community Church,
effective as of October 6, 2004.*31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
   *
    
    Filed herewith**
    
    Each of these agreements is identical in all material respects except for
the Purchasers.(1)
    
    Previously filed as an exhibit to 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. 333-116182
dated June 4, 2004.(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. 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. - 27 -