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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q  (Mark One)x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR  o 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES x      NO o At August 4, 2004, there were 28,111,951 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 INFORMATION
    
    
    3Item 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets
as of June 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2004
and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows
for the Three and Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20PART II:
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    20Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    21Item 3.
    
    Defaults Upon Senior Securities
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    21Item 5.
    
    Other Information
    
    
    22Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    22SIGNATURES
    
    
    23INDEX TO EXHIBITS
    
    
    24Exhibit 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)
 June 30,
2004
    
    December 31,
2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,398
    
    
    $
    11,024Accounts receivable, net
    
    
    16,683
    
    
    
    11,438Inventories
    
    
    7,895
    
    
    
    8,240Prepaid expenses and other current assets
    
    
    216
    
    
    
    311Total current assets
    
    
    35,192
    
    
    
    31,013Property and equipment, net
    
    
    2,174
    
    
    
    2,155Goodwill
    
    
    13,655
    
    
    
    12,961Intangible assets, net
    
    
    3,970
    
    
    
    3,858Other assets
    
    
    153
    
    
    
    276Total assets
    
    $
    55,144
    
    
    $
    50,263LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    12,503
    
    
    $
    6,531Accrued expenses and other current liabilities
    
    
    1,831
    
    
    
    1,613Current installments of long-term debt
    
    
    421
    
    
    
    521Total current liabilities
    
    
    14,755
    
    
    
    8,665Long-term debt, less current portion
    
    
    501
    
    
    
    526Total liabilities
    
    
    15,256
    
    
    
    9,191Stockholders equity:Convertible preferred stock
    
    
    3
    
    
    
    3Common stock
    
    
    281
    
    
    
    276Additional paid-in capital
    
    
    146,551
    
    
    
    145,194Accumulated deficit
    
    
    (106,069
    )
    
    
    (104,062
    )Stock subscription notes and deferred compensation
    
    
    (1,030
    )
    
    
    (487
    )Accumulated other comprehensive income
    
    
    152
    
    
    
    148Total stockholders equity
    
    
    39,888
    
    
    
    41,072Total liabilities and stockholders equity
    
    $
    55,144
    
    
    $
    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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    17,061
    
    
    $
    13,119
    
    
    $
    31,572
    
    
    $
    25,090Cost of revenue
    
    
    12,467
    
    
    
    8,490
    
    
    
    22,040
    
    
    
    16,271Gross profit
    
    
    4,594
    
    
    
    4,629
    
    
    
    9,532
    
    
    
    8,819Operating expenses:Marketing and sales
    
    
    1,566
    
    
    
    1,820
    
    
    
    3,325
    
    
    
    3,721Research and development
    
    
    1,457
    
    
    
    1,248
    
    
    
    2,999
    
    
    
    2,247General and administrative
    
    
    2,757
    
    
    
    2,980
    
    
    
    5,169
    
    
    
    5,390Total operating expenses
    
    
    5,780
    
    
    
    6,048
    
    
    
    11,493
    
    
    
    11,358Loss from operations
    
    
    (1,186
    )
    
    
    (1,419
    )
    
    
    (1,961
    )
    
    
    (2,539
    )Other income (expense):Interest income (expense), net
    
    
    (46
    )
    
    
    (1
    )
    
    
    (66
    )
    
    
    11Other income, net
    
    
    (2
    )
    
    
    (11
    )
    
    
    20
    
    
    
    21Net loss
    
    
    (1,234
    )
    
    
    (1,431
    )
    
    
    (2,007
    )
    
    
    (2,507
    )Beneficial conversion value of convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (445
    )Preferred stock dividend
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )Net loss attributable to common stockholders
    
    $
    (1,234
    )
    
    $
    (1,451
    )
    
    $
    (2,007
    )
    
    $
    (2,972
    )Net loss per share  basic and diluted:
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    (0.14
    )Weighted average common shares outstanding:Basic and diluted
    
    
    27,912
    
    
    
    21,344
    
    
    
    27,782
    
    
    
    20,860
 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) Six months endedJune 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (2,007
    )
    
    $
    (2,507
    )Adjustments to reconcile net loss to net cash used
in operating activities:Provision for accounts receivable
    
    
    118
    
    
    
    275Depreciation and amortization
    
    
    1,196
    
    
    
    849Amortization of deferred compensation
    
    
    26
    
    
    
    90Non-cash compensation
    
    
    
    
    
    
    68Loss on disposal of fixed assets
    
    
    
    
    
    
    20Changes in operating assets and liabilities, net of
acquisition activities:Accounts receivable
    
    
    (5,363
    )
    
    
    (5,481
    )Inventories
    
    
    345
    
    
    
    (2,055
    )Prepaid expenses and other assets
    
    
    (1,216
    )
    
    
    (121
    )Accounts payable
    
    
    5,972
    
    
    
    3,131Accrued expenses and other current liabilities
    
    
    218
    
    
    
    (170
    )Net cash used in operating activities
    
    
    (711
    )
    
    
    (5,901
    )Cash flows from investing activities, net of acquisition activities:Purchase of property and equipment
    
    
    (588
    )
    
    
    (396
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    4Net cash used in investing activities
    
    
    (588
    )
    
    
    (392
    )Cash flows from financing activities:Proceeds from net borrowing on line of credit
    
    
    
    
    
    
    2,208Repayment of long-term debt
    
    
    (125
    )
    
    
    (82
    )Net proceeds from issuance of convertible preferred stock
    
    
    
    
    
    
    1,183Net proceeds from issuance of common stock, exercise of options
and warrants, and repayment of stock subscription notes receivable
    
    
    793
    
    
    
    598Dividends paid on convertible preferred stock
    
    
    
    
    
    
    (20
    )Net cash provided by financing activities
    
    
    668
    
    
    
    3,887Effects of exchange rate changes on cash and cash equivalents
    
    
    5
    
    
    
    35Net decrease in cash and cash equivalents
    
    
    (626
    )
    
    
    (2,371
    )Cash and cash equivalents, beginning of period
    
    
    11,024
    
    
    
    3,166Cash and cash equivalents, end of period
    
    $
    10,398
    
    
    $
    795
 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 six months ended June 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 June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net loss applicable to common stockholders:As reported
    
    $
    (1,234
    )
    
    $
    (1,451
    )
    
    $
    (2,007
    )
    
    $
    (2,972
    )Total stock-based employee compensation expense
determined under fair-value-based method for all
rewards, net of tax
    
    
    (314
    )
    
    
    (116
    )
    
    
    (620
    )
    
    
    (232
    )Pro forma
    
    $
    (1,548
    )
    
    $
    (1,567
    )
    
    $
    (2,627
    )
    
    $
    (3,204
    )Net loss per share  basic and diluted:As reported
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    (0.14
    )Pro forma
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    (0.09
    )
    
    $
    (0.15
    )
 The value of stock-based employee compensation expense for the three and
six months ended June 30, 2004 and 2003 was determined using the Black-Scholes
method with the following assumptions: June 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): June 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    2,417
    
    
    $
    2,198Finished goods
    
    
    5,478
    
    
    
    6,042$
    7,895
    
    
    $
    8,240
 (4) Goodwill The changes in the carrying amount of goodwill follows (amounts in
thousands): Reported balance at December 31, 2003
    
    $
    12,961Miscellaneous direct acquisition costs
    
    
    786Adjustment to iGo opening balance sheet to
reflect changes in the fair market value of
current assets recorded on the date of
acquisition
    
    
    (92
    )Reported balance at June 30, 2004
    
    $
    13,655
 (5) Intangible Assets Intangible assets consist of the following at June 30, 2004 and December
31, 2003 (amounts in thousands): June 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
    
    
    $
    (713
    )
    
    $
    1,545
    
    
    $
    2,208
    
    
    $
    (522
    )
    
    $
    1,686Patents and trademarks
    
    
    3
    
    
    
    1,611
    
    
    
    (858
    )
    
    
    753
    
    
    
    1,220
    
    
    
    (699
    )
    
    
    521Non-compete agreements
    
    
    2
    
    
    
    159
    
    
    
    (128
    )
    
    
    31
    
    
    
    159
    
    
    
    (115
    )
    
    
    44Software
    
    
    5
    
    
    
    1,100
    
    
    
    (337
    )
    
    
    763
    
    
    
    803
    
    
    
    (202
    )
    
    
    601Trade names
    
    
    10
    
    
    
    378
    
    
    
    (69
    )
    
    
    309
    
    
    
    378
    
    
    
    (50
    )
    
    
    328Customer list
    
    
    10
    
    
    
    705
    
    
    
    (136
    )
    
    
    569
    
    
    
    705
    
    
    
    (27
    )
    
    
    678Total
    
    
    
    
    
    $
    6,211
    
    
    $
    (2,241
    )
    
    $
    3,970
    
    
    $
    5,473
    
    
    $
    (1,615
    )
    
    $
    3,858
 - 7 -




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Aggregate amortization expense for identifiable intangible assets totaled
$316,000 and $626,000 for the three and six months ended June 30, 2004,
respectively. Aggregate amortization expense for identifiable intangible
assets totaled $165,000 and $313,000 for the three and six months ended June
30, 2003, respectively. (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 plus 2.0% (6.0% at June 30,
2004), interest only payments are due monthly, with final payment of interest
and principal due on July 31, 2004. The line of credit is secured by all assets
of the Company. The Company had no outstanding balance against the line of
credit at June 30, 2004 and 2003. The Company had a $1.5 million letter of
credit, secured by the line of credit, outstanding at June 30, 2004. The line
of credit is subject to financial covenants. The Company is currently in
compliance with the covenants. Effective July 31, 2004, the Company entered
into an amended line of credit with the bank based on terms substantially
similar to those in place on June 30, 2004. (7) Long-Term Debt and Other Non-current Liabilities Long-term debt and other non-current liabilities consist of the following
(amounts in thousands): June 30,
    
    December 31,2004
    
    2003Estimate of Invision earn-out
    
    $
    847
    
    
    $
    847Liability for license fee
    
    
    75
    
    
    
    200922
    
    
    
    1,047Less current portion
    
    
    421
    
    
    
    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. 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 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 June 30, 2004. At June 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 June 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. - 8 -




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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 June 30, 2004, there were 102,293
Series F Warrants outstanding and exercisable for 102,293 shares of common
stock. At the date of issuance of the Series E and Series F shares, a non-cash
beneficial conversion adjustment of $445,000, which represents a 15% discount
to the fair value of the common stock at the date of issuance of the Series E
shares and an estimate of the fair value of the Series E and Series F Warrants
using the Black-Scholes model, was recorded in the 2003 consolidated financial
statements as an increase and decrease to additional paid-in capital. The
beneficial conversion adjustment resulted in an increase to net loss
attributable to common stockholders of $445,000, or $0.02 per common share.
The beneficial conversion adjustment was recorded upon the issuance of the
Series E and Series F convertible preferred stock, as the Series E and Series F
shares were immediately convertible upon issuance. The following assumptions were used to determine the Black-Scholes value
of the Series E and Series F Warrants: (1) expected life of 3 years, (2)
risk-free interest rate of 3.0%, (3) dividend yield of 0%, and (4) volatility
of 100%. As the closing price of the Companys common stock was greater than or
equal to $2.00 per share for ten consecutive trading days on June 6, 2003, all
issued and outstanding shares of Series E and Series F preferred stock
automatically converted into 1,594,458 shares of common stock at a conversion
rate of 1-to-1. Dividends on Series E and F preferred stock of $20,000 were
accrued at June 6, 2003. No shares of Series E and Series F preferred stock
were outstanding at December 31, 2003. (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 June 30, 2004 and December 31, 2003, there were 90,000,000 shares of common
stock authorized and 28,103,248 and 27,610,996 issued and outstanding,
respectively. (9) Net Loss per Share The computation of basic and diluted net loss per share follows (in
thousands, except per share amounts): Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    
    (1,234
    )
    
    
    (1,431
    )
    
    
    (2,007
    )
    
    
    (2,507
    )Beneficial conversion value of convertible
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (445
    )Preferred stock dividend
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )Net loss attributable to common stockholders
    
    $
    (1,234
    )
    
    $
    (1,451
    )
    
    $
    (2,007
    )
    
    $
    (2,972
    )Weighted average common shares outstanding  basic
and diluted
    
    
    27,912
    
    
    
    21,344
    
    
    
    27,782
    
    
    
    20,860Net loss per share  basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    (0.14
    )Stock options, warrants and restricted stock units
not included in diluted EPS since antidilutive
    
    
    2,337
    
    
    
    3,251
    
    
    
    2,337
    
    
    
    3,251Convertible preferred stock not included in diluted
EPS since antidilutive
    
    
    271
    
    
    
    541
    
    
    
    271
    
    
    
    541
 (10) Concentration of Credit Risk, Significant Customers and Business Segments - 9 -




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Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash with high credit quality financial
institutions and generally limits the amount of credit exposure to the amount
of FDIC coverage. However, periodically during the year, the Company maintains
cash in financial institutions in excess of the FDIC insurance coverage limit
of $100,000. The Company performs ongoing credit evaluations of its customers
financial condition but does not typically require collateral to support
customer receivables. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends and other information. Three customers accounted for 27%, 14%, and 10% of net sales for the six
months ended June 30, 2004. Two customers each accounted for 14% and a third
customer accounted for 11% of net sales for the six months ended June 30, 2003. Two customers accounts receivable balances accounted for 38% and 23% of
net accounts receivable at June 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 $536,000 and $424,000 at June 30, 2004
and December 31, 2003, respectively. Allowance for sales returns was $211,000
and $124,000 at June 30, 2004 and December 31, 2003, respectively. Export sales were approximately 18% and 14% of the Companys net sales for
the six months ended June 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 (in thousands). Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Power products
    
    $
    12,173
    
    
    $
    6,106
    
    
    $
    21,024
    
    
    $
    11,303Handheld hardware products
    
    
    2,217
    
    
    
    3,811
    
    
    
    4,403
    
    
    
    6,920Handheld software products
    
    
    411
    
    
    
    281
    
    
    
    880
    
    
    
    503Expansion and docking products
    
    
    1,448
    
    
    
    1,632
    
    
    
    3,406
    
    
    
    3,785Accessories and other products
    
    
    494
    
    
    
    1,036
    
    
    
    1,402
    
    
    
    2,273Technology transfer fees
    
    
    318
    
    
    
    253
    
    
    
    457
    
    
    
    306Total revenues
    
    $
    17,061
    
    
    $
    13,119
    
    
    $
    31,572
    
    
    $
    25,090
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003United States
    
    $
    14,635
    
    
    $
    11,428
    
    
    $
    25,883
    
    
    $
    21,496Europe
    
    
    1,807
    
    
    
    1,508
    
    
    
    4,769
    
    
    
    3,217All other
    
    
    619
    
    
    
    183
    
    
    
    920
    
    
    
    377$
    17,061
    
    
    $
    13,119
    
    
    $
    31,572
    
    
    $
    25,090
 (11) 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, - 10 -




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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 partial summary judgment
on the pricing issue and a hearing has been set for August 30, 2004 before the
court. 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 has not yet responded to this complaint. 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. - 11 -




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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. 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 higher 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 61% of revenue for the six months ended June 30, 2004 and 43% of
revenue for the six months ended June 30, 2003. Sales through retailers and
distributors accounted for approximately 25% of revenue for the six months
ended June 30, 2004 and 43% of revenue for the six months ended June 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 are collaborating
with RadioShack to develop and market a line of power adapters, including
cigarette lighter adapters, mobile AC adapters, and low power universal AC/DC
adapters, specifically designed for the low power mobile electronics device
market. Each of these devices will incorporate our patented tip technology and
the combination AC/DC adapter will also allow users to simultaneously charge an
ancillary device with our optional PPS accessory. 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. - 12 -




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On an on-going basis, we evaluate our estimates, including those related
to bad debt expense, warranty obligations and contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements: Revenue Recognition.Revenue from product sales is recognized upon
shipments and transfers of ownership from us or our contract manufacturers to
the customers. Allowances for sales returns and credits are provided for in the
same period the related sales are recorded. Should the actual return or sales
credit rates differ from our estimates, revisions to the estimated allowance
for sales returns and credits may be required. Our recognition of revenue from product sales to distributors, resellers
and retailers, or the distribution channel, is affected by agreements we have
giving certain customers rights to return up to 20% of their prior quarters
purchases, provided that they place a new order for equal or greater dollar
value of the amount returned. We also have agreements with certain customers
that allow them to receive credit for subsequent price reductions, or price
protection. At the time we recognize revenue, upon shipment and transfer of
ownership, we reduce our measurements of those sales and the related cost of
sales by our estimates of future returns and price protection by recording an
allowance for sales returns in the amount of the difference between the sales
price and the cost of goods sold as a reduction of accounts receivable. Gross
sales to the distribution channel accounted for approximately 25% for the six
months ended June 30, 2004 and 43% of revenue for the six months ended June 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. As a result of our acquisitions of Portsmith, Cutting Edge Software and
iGo during 2002, we have recorded additional goodwill of approximately $13.7
million as of June 30, 2004. In accordance with SFAS No. 142, we evaluated the
newly acquired goodwill for impairment and determined that the recorded
goodwill was not impaired as of December 31, 2003. The impairment evaluation process is based on both a discounted future
cash flow approach and a market comparable approach. The discounted cash flow
approach uses our estimates of future market growth rates, market share,
revenue and costs, as well as appropriate discount rates. If we fail to achieve
our assumed revenue growth rates or assumed gross margin, - 13 -




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we may incur charges for impairment of goodwill in the future. For these
reasons, we believe that the accounting estimate related to goodwill impairment
is a critical accounting estimate. Results of Operations The following table presents certain selected consolidated financial data
for the periods indicated expressed as a percentage of total revenue: Three months ended
    
    Six months endedJune 30,
    
    June 30,(unaudited)
    
    (unaudited)2004
    
    2003
    
    2004
    
    2003Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue
    
    
    73.1
    %
    
    
    64.7
    %
    
    
    69.8
    %
    
    
    64.9
    %Gross profit
    
    
    26.9
    %
    
    
    35.3
    %
    
    
    30.2
    %
    
    
    35.1
    %Operating expenses:Sales and marketing
    
    
    9.2
    %
    
    
    13.9
    %
    
    
    10.5
    %
    
    
    14.8
    %Research and development
    
    
    8.5
    %
    
    
    9.5
    %
    
    
    9.5
    %
    
    
    9.0
    %General and administrative
    
    
    16.2
    %
    
    
    22.7
    %
    
    
    16.4
    %
    
    
    21.5
    %Total operating expenses
    
    
    33.9
    %
    
    
    46.1
    %
    
    
    36.4
    %
    
    
    45.3
    %Loss from operations
    
    
    -7.0
    %
    
    
    -10.8
    %
    
    
    -6.2
    %
    
    
    -10.2
    %Other income (expense):Interest, net
    
    
    -0.2
    %
    
    
    0.0
    %
    
    
    -0.2
    %
    
    
    0.0
    %Other, net
    
    
    0.0
    %
    
    
    -0.1
    %
    
    
    0.0
    %
    
    
    0.1
    %Net loss
    
    
    -7.2
    %
    
    
    -10.9
    %
    
    
    -6.4
    %
    
    
    -10.1
    %Beneficial conversion value of convertible preferred stock
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    -1.8
    %Net loss attributable to common stockholders
    
    
    -7.2
    %
    
    
    -10.9
    %
    
    
    -6.4
    %
    
    
    -11.9
    %
 Comparison of Three Months Ended June 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
    
    from the same periodQ2 2004
    
    Q2 2003
    
    in the prior year
    
    in the prior yearRevenue
    
    $
    17,061
    
    
    $
    13,119
    
    
    $
    3,942
    
    
    
    30.0
    %
 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 June 30, 2004. As a result, sales of power
products increased by $6.1 million, or 99.4%, to $12.2 million during the three
months ended June 30, 2004 as compared to $6.1 million for the three months
ended June 30, 2003. This increase is offset by a decrease of $1.6 million in
sales of handheld hardware products and a decrease of $540,000 in sales of
accessories during the three months ended June 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 change fromfrom same period in
    
    the same period in theQ2 2004
    
    Q2 2003
    
    the prior year
    
    prior yearCost of revenue
    
    $
    12,467
    
    
    $
    8,490
    
    
    $
    3,977
    
    
    
    46.8
    %Gross profit
    
    $
    4,594
    
    
    $
    4,629
    
    
    $
    (35
    )
    
    
    (0.8
    )%Gross margin
    
    
    26.9
    %
    
    
    35.3
    %
    
    
    (8.4
    )%
    
    
    (23.8
    )%
 - 14 -




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The increase in cost of revenue was due primarily to the 30.0% volume
increase in revenue, as well as to shifts in customer mix, product mix and
inventory write-downs for the three months ended June 30, 2004 as compared to
the three months ended June 30, 2003. Cost of revenue as a percentage of
revenue increased to 73.1% for the three months ended June 30, 2004 from 64.7%
for the three months ended June 30, 2003, resulting in decreased gross margin.
The decrease in gross profit and corresponding 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 56% and 36% of revenue
for the three months ended June 30, 2004 and 2003, respectively. Sales through
retailers and distributors accounted for 32% and 52% of revenue for the three
months ended June 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 three months ended June 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
three months ended June 30, 2004, we recorded an adjustment to cost of revenue
in the amount of $772,000, compared to a $70,000 adjustment during the three
months ended June 30, 2003, as a result of reduced marketability of certain of
our inventory. Sales and marketing.Sales and marketing expenses generally consist of
salaries, commissions and other personnel related costs of our sales, marketing
and support personnel, advertising, public relations, promotions, printed media
and travel. The following table summarizes the year-over-year comparison of our
sales and marketing expenses for the periods indicated: Decrease
    
    Percentage changefrom same period
    
    from the same periodQ2 2004
    
    Q2 2003
    
    in the prior year
    
    in the prior yearSales and marketing
    
    $
    1,566
    
    
    $
    1,820
    
    
    $
    254
    
    
    
    14.0
    %
 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 9.2% for the
three months ended June 30, 2004 from 13.9% for the three months ended June 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
    
    from the same periodQ2 2004
    
    Q2 2003
    
    in the prior year
    
    in the prior yearResearch and development
    
    $
    1,457
    
    
    $
    1,248
    
    
    $
    209
    
    
    
    16.7
    %
 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 June 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. 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: Decrease
    
    Percentage changefrom same period
    
    from the same periodQ2 2004
    
    Q2 2003
    
    in the prior year
    
    in the prior yearGeneral and administrative
    
    $
    2,757
    
    
    $
    2,980
    
    
    $
    223
    
    
    
    7.5
    %
 The decrease in general and administrative expenses primarily resulted
from reduction in general and administrative expenses associated with our Idaho
and Texas subsidiaries, which we more fully integrated in 2004. General and
administrative expenses as a percentage of revenue decreased to 16.2% for the
three months ended June 30, 2004 from 22.7% for the three months ended June 30,
2003. - 15 -




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Income taxes.We have incurred losses from inception to date; therefore,
no provision for income taxes was required for the three months ended June 30,
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 the three months
ended June 30, 2004. Comparison of Six Months Ended June 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: Six months
    
    Six months
    
    Increase
    
    Percentage changeended
    
    ended
    
    from same period in
    
    from the same periodJune 30, 2004
    
    June 30, 2003
    
    the prior year
    
    in the prior yearRevenue
    
    $
    31,572
    
    
    $
    25,090
    
    
    $
    6,482
    
    
    
    25.8
    %
 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 six months ended June 30, 2004. As a result, sales of power
products increased by $9.7 million, or 86.0%, to $21.0 million during the six
months ended June 30, 2004 as compared to $11.3 million for the six months
ended June 30, 2003. This increase is offset by a decrease of $2.5 million in
sales of handheld hardware products and a decrease of $900,000 in sales of
accessories during the six months ended June 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: Six months
    
    Six months
    
    Increase (decrease)
    
    Percentage changeended
    
    ended
    
    from same period in
    
    from the sameJune 30, 2004
    
    June 30, 2003
    
    the prior year
    
    period in the prior yearCost of revenue
    
    $
    22,040
    
    
    $
    16,271
    
    
    $
    5,769
    
    
    
    35.5
    %Gross profit
    
    $
    9,532
    
    
    $
    8,819
    
    
    $
    713
    
    
    
    8.1
    %Gross margin
    
    
    30.2
    %
    
    
    35.1
    %
    
    
    (4.9
    )%
    
    
    (14.0
    )%
 The increase in cost of revenue was due primarily to the 25.8% volume
increase in revenue, as well as to shifts in customer mix, product mix and
inventory write-downs for the six months ended June 30, 2004 as compared to the
six months ended June 30, 2003. Cost of revenue as a percentage of revenue
increased to 69.8% for the six months ended June 30, 2004 from 64.9% for the
six months ended June 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 61% and 43% of revenue for the six months ended June 30, 2004 and
2003, respectively. Sales through retailers and distributors accounted for 25%
and 43% of revenue for the six months ended June 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 six months ended June 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 six months ended
June 30, 2004, we recorded an adjustment to cost of revenue in the amount of
$813,000, compared to a $158,000 adjustment during the six months ended June
30, 2003, as a result of reduced marketability of certain of our inventory. Sales and marketing.Sales and marketing expenses generally consist of
salaries, commissions and other personnel related costs of our sales, marketing
and support personnel, advertising, public relations, promotions, printed media
and travel. The following table summarizes the year-over-year comparison of our
sales and marketing expenses for the periods indicated: Six months
    
    Six months
    
    Decrease
    
    Percentage changeended
    
    ended
    
    from same period in
    
    from the sameJune 30, 2004
    
    June 30, 2003
    
    the prior year
    
    period in the prior yearSales and marketing
    
    $
    3,325
    
    
    $
    3,721
    
    
    $
    396
    
    
    
    10.6
    %
 -16-




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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 10.5% for the
six months ended June 30, 2004 from 14.8% for the six months ended June 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: Six months
    
    Six months
    
    Increase
    
    Percentage changeended
    
    ended
    
    from same period in
    
    from the sameJune 30, 2004
    
    June 30, 2003
    
    the prior year
    
    period in the prior yearResearch and development
    
    $
    2,999
    
    
    $
    2,247
    
    
    $
    752
    
    
    
    33.5
    %
 The increase in research and development expenses primarily resulted from
the continued development of our family of power adapter products.
Specifically, during the six months ended June 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. 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: Six months
    
    Six months
    
    Decrease
    
    Percentage changeended
    
    ended
    
    from same period in
    
    from the sameJune 30, 2004
    
    June 30, 2003
    
    the prior year
    
    period in the prior yearGeneral and
administrative
    
    $
    5,169
    
    
    $
    5,390
    
    
    $
    221
    
    
    
    4.1
    %
 The decrease in general and administrative expenses primarily resulted
from reduction in general and administrative expenses associated with our Idaho
and Texas subsidiaries, which we more fully integrated in 2004. General and
administrative expenses as a percentage of revenue decreased to 16.4% for the
six months ended June 30, 2004 from 21.5% for the six months ended June 30,
2003. Income taxes.We have incurred losses from inception to date; therefore,
no provision for income taxes was required for the six months ended June 30,
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 the six months ended
June 30, 2004. Operating Outlook In the third quarter of 2004, we expect at least modest growth in revenue
over the second quarter of 2004, driven primarily by an increase in sales of
power products, including the roll out of a variety of new products, such as a
higher power version of the popular Juice power adapter. Gross margin is
expected to be between 32% and 33%, which reflects the impact of sales of Dell
power adapters at lower gross margins expected in the third quarter resulting
from costs incurred to modify a connector on inventory of these adapters.
Operating expenses in the third quarter are expected to be in the low- to
mid-$6 million dollar range due to increases primarily in research and
development expenses related to the many product development programs we are
undertaking to support customer requirements. For 2004, we continue to anticipate full year revenue of $80 million, a
53% increase from 2003, with revenues trending progressively higher each
quarter. By the fourth quarter of 2004, we expect to achieve quarterly earnings
per diluted share in the range of $0.08 to $0.12. This is based on the
expectation that gross margins in the fourth quarter will be approximately 35%
to 37% and operating expenses will increase to approximately $6.5 million,
although they are expected to trend down as a percentage of revenue in the
fourth quarter of 2004. Key future milestones include:  
    
    The sales ramp of consumer electronics power products through RadioShack;
    
    The launch of new consumer electronics power products in non- RadioShack channels;
    
    The sales ramp of portable computer power products in
international markets, including the introduction of products in
Asia; -17-




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
    
    Launch in late 2004 or early 2005 of new power products currently being developed for Motorola;
    
    Growth in sales through the Dell channel; and
    
    New product roll-out of extensions to the power product
line offering different price points and functionality. 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): Six Months Ended June 30,2004
    
    2003Net cash used in operating activities
    
    $
    (711
    )
    
    $
    (5,901
    )Net cash used in investing activities
    
    
    (588
    )
    
    
    (392
    )Net cash provided by financing activities
    
    
    668

    
    
    
    3,887Foreign currency exchange impact on cash flow
    
    
    5
    
    
    
    35Decrease in cash and cash equivalents
    
    $
    (626
    )
    
    $
    (2,371
    )Cash and cash equivalents at beginning of period
    
    $
    11,024
    
    
    $
    3,166Cash and cash equivalents at end of period
    
    $
    10,398
    
    
    $
    795
 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 six months ended June 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 25.8% increase in revenues
for the six months ended June 30, 2004 as compared to June 30, 2003.
Cash used to fund growth in accounts receivable was offset by growth
in accounts payable and accrued expenses. In 2004, we expect to
generate positive cash flow from operating activities from expected
operating income, offset partially by cash used to fund further
working capital needs. Our consolidated cash flow operating metrics
are as follows: Six Months Ended June 30,2004
    
    2003Days outstanding in ending accounts receivable (DSOs)
    
    
    95
    
    
    
    82Inventory turns
    
    
    6
    
    
    
    4
  The decline in DSOs during the six months ended June 30, 2004 compared
to the six months ended June 30, 2003, is primarily due to the sale of
cigarette lighter adapters, intelligent tips and our DualPower product
to RadioShack. These products are manufactured by RadioShack utilizing
our technology, and then sold both to RadioShack and other customers by
us. For those products sold to RadioShack, we recognize only the gross
margin on such sales as revenue. However, we record an account
payable to RadioShack for the full manufacturing cost of the products,
as well as an account receivable for the full amount of the resale
price of the products. We anticipate this trend in DSOs to continue
during 2004 as we continue to source product from and
sell product to RadioShack, but recognize the associated revenue on a
net basis while recording related accounts receivable and accounts
payable on a gross basis. Inventory turns for the six months ended
June 30, 2004 improved to 6 turns compared to 5 turns for the six
months ended June 30, 2003. The improvement in inventory -18-




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turns is
primarily due to inventory write-downs taken during the six months
ended June 30, 2004. We expect inventory turns to continue to improve
during 2004.
    
    Net cash used in investing activities.For the six months
ended June 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 six months ended June 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 June 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 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 June 30, 2004. We had no
outstanding balance against this line of credit as of June 30, 2004. Under the
terms of the line, we can borrow up to 80% of eligible accounts receivable. At
June 30, 2004, our net borrowing base capacity was $5.6 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 June 30, 2004, in thousands: Payment due by period2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    More than 5 yearsOperating lease obligations
    
    $
    418
    
    
    $
    644
    
    
    $
    521
    
    
    $
    503
    
    
    $
    384
    
    
    $
    Purchase obligations
    
    
    11,658
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    396
    
    
    
    308
    
    
    
    193
    
    
    
    25
    
    
    
    
    
    
    
    Totals
    
    $
    12,472
    
    
    $
    952
    
    
    $
    714
    
    
    $
    528
    
    
    $
    384
    
    
    $
    
 Off-Balance Sheet Arrangements.We have no off-balance sheet financing
arrangements. Acquisitions.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. 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. Liquidity Outlook.Based on our projections for 2004, we believe that our
existing cash and cash equivalents will be sufficient to meet our working
capital and capital expenditure requirements for at least the next 12 months.
If we require additional capital resources to grow our business internally or
to acquire complementary technologies and businesses at any time in the future,
we may use our line of credit or seek to sell additional equity or debt
securities. The sale of additional equity
or convertible debt securities would result in more dilution to our
stockholders. In addition, additional capital resources may not be available
to us in amounts or on terms that are acceptable to us. -19-




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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 June 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
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 and a hearing has been set for August 30, 2004 before the
court. 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 -20-




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##### Table of Contents



unspecified amount and seeks recovery of plaintiffs costs and
attorneys fees. The Company has not yet responded to this complaint. 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,
2003, 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. On
July 27, 2004, the Company entered into a settlement and license agreement with
SPS, pursuant to which the companies agreed to develop new products, and
subsequently dismissed SPS from both the ITC and federal district court
actions. These complaints against the remaining defendants allege 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 ITC complaint, seeks a
permanent exclusion order and cease and desist order excluding all products
manufactured and/or distributed by Formosa and Micro Innovations that infringe
these patents from entry into the United States, as well as an order
instructing removal and/or recall from shelves, distribution, and circulation
of all catalogues containing the infringing devices. The Company, through the
complaint filed with the United States District Court for the Eastern District
of Texas, seeks to enjoin Formosa, Micro Innovations, Sakar International and
Worldwide Marketing 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 these actions. 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: The annual meeting of stockholders was held on May 26, 2004, at which
meeting stockholders were asked to consider and vote upon the following:  1.
    
    Jerre L. Stead and Larry M. Carr were re-elected to the board of
directors, to serve until the 2007 annual meeting. The terms of Jeffrey
R. Harris, William O. Hunt, Charles R. Mollo and Robert W. Shaner, who
was elected at the annual meeting by the board of directors, continued
after the meeting.2.
    
    The Mobility Electronics, Inc. Omnibus Long-Term Incentive Plan was
approved.3.
    
    The Mobility Electronics, Inc. Non-Employee Director Long-Term
Incentive Plan was approved.4.
    
    The selection of KPMG LLP as independent auditor for the year ending
December 31, 2004 was ratified. The number of shares cast for, against or withheld, as well as the number
of abstentions and broker non-votes, on each matter considered at the meeting,
were as follows: Shares
    
    Shares
    
    
    
    
    
    Abstention/Voted
    
    Voted
    
    Shares
    
    BrokerFor
    
    Against
    
    Withheld
    
    Non-Votes1.
    
    Election of Directors:Jerre L. Stead
    
    
    23,572,357
    
    
    
    
    
    
    
    1,933,180
    
    
    
    Larry M. Carr
    
    
    24,771,197
    
    
    
    
    
    
    
    734,340
    
    
    
    2.
    
    Approval of the
Omnibus Long-Term
Incentive Plan
    
    
    12,106,412
    
    
    
    2,915,955
    
    
    
    
    
    
    
    10,483,1703.
    
    Approval of the
Non-Employee Director
Long-Term Incentive Plan
    
    
    12,164,859
    
    
    
    2,856,765
    
    
    
    
    
    
    
    10,483,9133.
    
    Ratification of KPMG
LLP as independent
auditor
    
    
    25,164,333
    
    
    
    327,878
    
    
    
    
    
    
    
    13,326
 -21-




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##### Table of Contents



ITEM 5. OTHER INFORMATION: None 
 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
June 30, 2004:  
    
    Form 8-K dated April 29, 2004 furnishing under
Items 7 and 12, our press release, dated April 29, 2004,
announcing our results of operations for the quarter ended
March 31, 2004. -22-




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##### Table of Contents



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: August 9, 2004
    
    By:
    
    /s/ Charles R. MolloCharles R. MolloPresident, Chief Executive Officer
and Chairman of the Board(Principal Executive Officer)By:
    
    /s/ Joan W. BrubacherJoan W. BrubacherExecutive Vice President and Chief Financial Officer
and Authorized Officer of Registrant(Principal Financial and Accounting Officer)
 -23-




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    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
    
    Lockup Agreement by and between Mobility Electronics, Inc. and Jeff Musa dated August 20, 2002 (4)4.7
    
    Form of Series E Preferred Stock and Warrant Purchase Agreement (8)**4.8
    
    Form of Series F Preferred Stock and Warrant Purchase Agreement (8)**4.9
    
    Form of Warrant issued to purchasers of Series E Stock (8)4.10
    
    Form of Warrant issued to purchasers of Series F Stock (8)4.11
    
    Registration Rights Agreement by and between Jeff Musa and the Company (Exhibit H on the Agreement and
Plan of Merger by and among Cutting Edge Software, Inc., Jeff Musa, the Company and CES Acquisition, Inc.,
dated August 20, 2002) (10)
 -24-




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##### Table of Contents



ExhibitNumber
    
    Description of Document4.12
    
    Rights Agreement between the Company and Computershare Trust Company, dated June 11, 2003 (9)4.13
    
    Form of Common Stock Purchase Agreement relating to private placement completed August 29, 2003.**(11)4.14
    
    Form of Warrant to Purchase Common Stock of the Company issued to Silicon Valley Bank on September 3,
2003.(12)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. -25-