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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 March 31, 2004 OR [   ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to Commission file number: 0-30907 MOBILITY ELECTRONICS, INC. (Exact Name of Registrant as Specified in its Charter)
 Delaware
(State or Other Jurisdiction of Incorporation) 0-30907
(Commission File Number)
    
    86-0843914
(IRS Employer Identification No.)17800 N. Perimeter Dr., Suite 200, Scottsdale, Arizona
(Address of Principal Executive Offices)
    
    85255
(Zip Code)
 (480) 596-0061
(Registrants telephone number, including area code) Not applicable
(Former Name or Former Address, if Changed Since Last Report) Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES   [X]           NO   [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES   [X]           NO   [   ] At May 3, 2004, there were 27,823,057 shares of the Registrants Common Stock
outstanding.




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MOBILITY ELECTRONICS, INC.
FORM 10-Q TABLE OF CONTENTS PAGE NO.PART I:      FINANCIAL INFORMATIONItem 1.      Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
as of March 31, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2004
and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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
    
    
    18Item 4.      Controls and Procedures
    
    
    18PART II: OTHER INFORMATIONItem 1.      Legal Proceedings
    
    
    18Item 2.      Changes in Securities and Use of Proceeds
    
    
    19Item 3.      Defaults Upon Senior Securities
    
    
    19Item 4.      Submission of Matters to a Vote of Security Holders
    
    
    19Item 5.      Other Information
    
    
    19Item 6.      Exhibits and Reports on Form 8-K
    
    
    20SIGNATURES
    
    
    21INDEX TO EXHIBITS
    
    
    22EX-10.1EX-10.2Ex-10.3Ex-31.1Ex-31.2EX-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)
 March 31,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,554
    
    
    $
    11,024Accounts receivable, net
    
    
    12,618
    
    
    
    11,438Inventories
    
    
    9,113
    
    
    
    8,240Prepaid expenses and other current assets
    
    
    300
    
    
    
    311Total current assets
    
    
    32,585
    
    
    
    31,013Property and equipment, net
    
    
    2,222
    
    
    
    2,155Goodwill, net
    
    
    13,377
    
    
    
    12,961Intangible assets, net
    
    
    4,075
    
    
    
    3,858Other assets
    
    
    241
    
    
    
    276Total assets
    
    $
    52,500
    
    
    $
    50,263LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,074
    
    
    $
    6,531Accrued expenses and other current liabilities
    
    
    1,947
    
    
    
    1,613Current installments of long-term debt
    
    
    421
    
    
    
    521Total current liabilities
    
    
    11,442
    
    
    
    8,665Long-term debt, less current portion
    
    
    501
    
    
    
    526Total liabilities
    
    
    11,943
    
    
    
    9,191Stockholders equity:Convertible preferred stock
    
    
    3
    
    
    
    3Common stock
    
    
    278
    
    
    
    276Additional paid-in capital
    
    
    145,418
    
    
    
    145,194Accumulated deficit
    
    
    (104,834
    )
    
    
    (104,062
    )Stock subscription notes receivable
    
    
    (468
    )
    
    
    (487
    )Accumulated other comprehensive income
    
    
    160
    
    
    
    148Total stockholders equity
    
    
    40,557
    
    
    
    41,072Total liabilities and stockholders equity
    
    $
    52,500
    
    
    $
    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 EndedMarch 31,2004
    
    2003Revenue
    
    $
    14,511
    
    
    $
    11,971Cost of revenue
    
    
    9,573
    
    
    
    7,781Gross profit
    
    
    4,938
    
    
    
    4,190Operating expenses:Marketing and sales
    
    
    1,759
    
    
    
    1,901Research and development
    
    
    1,542
    
    
    
    999General and administrative
    
    
    2,412
    
    
    
    2,410Total operating expenses
    
    
    5,713
    
    
    
    5,310Loss from operations
    
    
    (775
    )
    
    
    (1,120
    )Other income (expense):Interest income (expense), net
    
    
    (20
    )
    
    
    12Other income, net
    
    
    22
    
    
    
    32Net loss
    
    
    (773
    )
    
    
    (1,076
    )Beneficial conversion value of convertible preferred stock
    
    
    
    
    
    
    (445
    )Net loss attributable to common stockholders
    
    $
    (773
    )
    
    $
    (1,521
    )Net loss per share  basic and diluted:
    
    $
    (0.03
    )
    
    $
    (0.07
    )Weighted average common shares outstanding:Basic and diluted
    
    
    27,651
    
    
    
    20,375
 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)
 Three months endedMarch 31,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (773
    )
    
    $
    (1,076
    )Adjustments to reconcile net loss to net cash used
in operating activities:Provision for accounts receivable
    
    
    73
    
    
    
    50Depreciation and amortization
    
    
    562
    
    
    
    425Amortization of deferred compensation
    
    
    
    
    
    
    56Non-cash compensation
    
    
    
    
    
    
    68Changes in operating assets and liabilities, net of
acquisition activities:Accounts receivable
    
    
    (1,253
    )
    
    
    (2,085
    )Inventories
    
    
    (873
    )
    
    
    (679
    )Prepaid expenses and other assets
    
    
    (897
    )
    
    
    (213
    )Accounts payable
    
    
    2,543
    
    
    
    287Accrued expenses and other current liabilities
    
    
    334
    
    
    
    6Net cash used in operating activities
    
    
    (284
    )
    
    
    (3,161
    )Cash flows from investing activities, net of acquisition activities:Purchase of property and equipment
    
    
    (319
    )
    
    
    (147
    )Net cash used in investing activities
    
    
    (319
    )
    
    
    (147
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    (125
    )
    
    
    (82
    )Net proceeds from issuance of convertible preferred stock
    
    
    
    
    
    
    1,191Net proceeds from issuance of common stock, exercise of options
and warrants, and repayment of stock subscription notes receivable
    
    
    245
    
    
    
    Net cash provided by financing activities
    
    
    120
    
    
    
    1,109Effects of exchange rate changes on cash and cash equivalents
    
    
    13
    
    
    
    28Net decrease in cash and cash equivalents
    
    
    (470
    )
    
    
    (2,171
    )Cash and cash equivalents, beginning of period
    
    
    11,024
    
    
    
    3,166Cash and cash equivalents, end of period
    
    $
    10,554
    
    
    $
    995
 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 months ended March 31, 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 that were
not developed for use in valuing employee stock options. Under Statement 123,
deferred compensation is recorded for the excess of the fair value of the stock
on the date of the option grant, over the exercise price of the option. The
deferred compensation is amortized over the vesting period of the option. - 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 March 31,2004
    
    2003Net loss applicable to common stockholders:As reported
    
    $
    (773
    )
    
    $
    (1,521
    )Total stock-based employee compensation expense
determined under fair-value-based method for all
rewards, net of tax
    
    
    (284
    )
    
    
    (123
    )Pro forma
    
    $
    (1,057
    )
    
    $
    (1,644
    )Net loss per share  basic and diluted:As reported
    
    $
    (0.03
    )
    
    $
    (0.07
    )Pro forma
    
    $
    (0.04
    )
    
    $
    (0.08
    )
 The value of stock-based employee compensation expense for the three
months ended March 31, 2004 and 2003 was determined using the Black-Scholes
method with the following assumptions: March 31,2004
    
    2003Expected life (years)
    
    
    2.5
    
    
    
    2.5Risk-free interest rate
    
    
    2.25
    %
    
    
    3.0
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    100.0
    %
    
    
    100.0
    %
 (3) Inventories Inventories consist of the following (amounts in thousands): March 31,
    
    December 31,2004
    
    2003Raw materials
    
    $
    2,174
    
    
    $
    2,198Finished goods
    
    
    6,939
    
    
    
    6,042$
    9,113
    
    
    $
    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
    
    
    416Reported balance at March 31, 2004
    
    $
    13,377
 (5) Intangible Assets Intangible assets consist of the following at March 31, 2004 and December
31, 2003 (amounts in thousands): March 31, 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
    
    
    $
    (618
    )
    
    $
    1,640
    
    
    $
    2,208
    
    
    $
    (522
    )
    
    $
    1,686Patents and trademarks
    
    
    3
    
    
    
    1,400
    
    
    
    (778
    )
    
    
    622
    
    
    
    1,220
    
    
    
    (699
    )
    
    
    521Non-compete agreements
    
    
    2
    
    
    
    159
    
    
    
    (122
    )
    
    
    37
    
    
    
    159
    
    
    
    (115
    )
    
    
    44Software
    
    
    5
    
    
    
    1,100
    
    
    
    (265
    )
    
    
    835
    
    
    
    803
    
    
    
    (202
    )
    
    
    601Trade names
    
    
    10
    
    
    
    378
    
    
    
    (60
    )
    
    
    318
    
    
    
    378
    
    
    
    (50
    )
    
    
    328Customer list
    
    
    10
    
    
    
    705
    
    
    
    (82
    )
    
    
    623
    
    
    
    705
    
    
    
    (27
    )
    
    
    678Total
    
    
    
    
    
    $
    6,000
    
    
    $
    (1,925
    )
    
    $
    4,075
    
    
    $
    5,473
    
    
    $
    (1,615
    )
    
    $
    3,858
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Aggregate amortization expense for identifiable intangible assets totaled
$310,000 and $148,000 for the three months ended March 31, 2004 and 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 March 31,
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 March 31, 2004 and 2003. The line of credit is subject to financial
covenants. The Company is currently in compliance with the covenants. (7) Long-Term Debt and Other Non-current Liabilities Long-term debt and other non-current liabilities consist of the following
(amounts in thousands): March 31,
    
    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 March 31, 2004. At March 31, 2004 and December 31, 2003,
there were 15,000,000 shares of Series C preferred stock authorized and 297,541
and 329,866 issued and outstanding, respectively. During the period from
December 31, 2003 through March 31, 2004, 32,325 shares of Series C preferred
stock were converted into 35,178 shares of common stock at an average rate of
1-to-1.0883. The Company may not pay any cash dividends on its common stock while any
Series C preferred stock remains outstanding without the consent of the Series
C preferred stockholders. Holders of Series C preferred stock are entitled to
vote on all matters submitted for a vote of the holders of common stock.
Holders will be entitled to one vote for each share of common stock into which
one share of Series C preferred stock could then be converted. In the event of
liquidation or dissolution, the holders of Series C preferred stock will be
entitled to receive the amount they paid for their stock, plus accrued and
unpaid dividends out of the Companys assets legally available for such
payments prior to the holders of securities junior to the Series C preferred
stock receiving payments. In January 2003, the Company issued and sold 865,051 shares of newly
designated Series E preferred stock, par value $0.01 per share (Series E
Stock), at a purchase price of $0.7225 per share, and 729,407 shares of newly
designated Series F - 8 -




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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 March 31, 2004, there were 232,233
Series F Warrants outstanding and exercisable for 232,233 shares of common
stock. At the date of issuance of the Series E and Series F shares, a non-cash
beneficial conversion adjustment of $445,000, which represents a 15% discount
to the fair value of the common stock at the date of issuance of the Series E
shares and an estimate of the fair value of the Series E and Series F Warrants
using the Black-Scholes model, was recorded in the 2003 consolidated financial
statements as an increase and decrease to additional paid-in capital. The
beneficial conversion adjustment resulted in an increase to net loss
attributable to common stockholders of $445,000, or $0.02 per common share.
The beneficial conversion adjustment was recorded upon the issuance of the
Series E and Series F convertible preferred stock, as the Series E and Series F
shares were immediately convertible upon issuance. The following assumptions were used to determine the Black-Scholes value
of the Series E and Series F Warrants: (1) expected life of 3 years, (2)
risk-free interest rate of 3.0%, (3) dividend yield of 0%, and (4) volatility
of 100%. As the closing price of the Companys common stock was greater than or
equal to $2.00 per share for ten consecutive trading days on June 6, 2003, all
issued and outstanding shares of Series E and Series F preferred stock
automatically converted into 1,594,458 shares of common stock at a conversion
rate of 1-to-1. Dividends on Series E and F preferred stock of $20,000 were
accrued at June 6, 2003. No shares of Series E and Series F preferred stock
were outstanding at December 31, 2003. (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 March 31, 2004 and December 31, 2003, there were 90,000,000 shares of common
stock authorized and 27,754,268 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 endedMarch 31,2004
    
    2003Net loss
    
    $
    (773
    )
    
    $
    (1,076
    )Beneficial conversion value of convertible
preferred stock
    
    
    
    
    
    
    (445
    )Net loss attributable to common stockholders
    
    $
    (773
    )
    
    $
    (1,521
    )Weighted average common shares outstanding  basic
and diluted
    
    
    27,651
    
    
    
    20,375Net loss per share - basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.07
    )Stock options and warrants not included in diluted
EPS since antidilutive
    
    
    2,505
    
    
    
    3,490Convertible preferred stock not included in diluted
EPS since antidilutive
    
    
    298
    
    
    
    2,145
 (10) Concentration of Credit Risk, Significant Customers and Business Segments Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash with high credit quality financial
institutions and generally limits the amount of credit exposure to the amount
of FDIC coverage. However, periodically during the year, the Company maintains - 9 -




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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 30%, 11%, and 10% of net sales for the three
months ended March 31, 2004. Three customers accounted for 22%, 15%, and 10% of
net sales for the three months ended March 31, 2003. Two customers accounts receivable balances accounted for 34% and 11% at
March 31, 2004. Four customers accounts receivable balances accounted for
22%, 14%, 12% and 11% of net accounts receivable at December 31, 2003. Export sales were approximately 22% and 16% of the Companys net sales for
the three months ended March 31, 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 EndedMarch 31,2004
    
    2003Power products
    
    $
    8,851
    
    
    $
    5,197Handheld hardware products
    
    
    2,186
    
    
    
    3,109Handheld software products
    
    
    469
    
    
    
    222Expansion and docking products
    
    
    1,958
    
    
    
    2,153Accessories and other products
    
    
    908
    
    
    
    1,237Technology transfer fees
    
    
    139
    
    
    
    53Total revenues
    
    $
    14,511
    
    
    $
    11,971
 Three Months EndedMarch 31,2004
    
    2003United States
    
    $
    11,248
    
    
    $
    10,068Europe
    
    
    2,962
    
    
    
    1,709All other
    
    
    301
    
    
    
    194$
    14,511
    
    
    $
    11,971
 (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.), our
wholly-owned subsidiary, and his wife, but additional plaintiffs were added,
and several of our officers and directors were added as defendants. In their
current pleading, the plaintiffs are alleging breach of the Portsmith merger
agreement and Mr. Lundts employment agreement, wrongful termination of Mr.
Lundt, fraudulent misrepresentation, securities fraud, breach of an alleged
covenant of good faith and fair dealing, civil conspiracy, and are seeking
monetary damages and/or rescission of the Portsmith merger agreement. On
February 11, 2004, the court permitted the 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 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. - 10 -




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On February 10, 2004, February 20, 2004, March 25, 2004 and April 22,
2004, stockholder class-action lawsuits were filed by various plaintiffs
against the Company, Charles Mollo and Joan Brubacher in the United States
District Court for the District of Arizona. These lawsuits assert the same
claims for securities fraud under Sections 10(b), 20(a) and Rule 10b-5 of the
Securities Exchange Act of 1934, on behalf of a purported class of persons who
purchased the Companys publicly traded securities between September 2, 2003
and January 5, 2004. The complaints generally allege that various public
statements made by or on behalf of the Company were false or misleading when
made, that the individual defendants were allegedly aware of material
non-public information at the time that they engaged in transactions in the
Companys common stock and that members of the purported stockholder class
suffered damages when the market price of the Companys common stock declined
following disclosure of the information that allegedly had not been previously
disclosed. The complaints seek to proceed on behalf of the alleged class
described above, seek monetary damages in an unspecified amount and seek
recovery of plaintiffs costs and attorneys fees. On May 4, 2004, the first
three complaints referenced above were consolidated and a lead plaintiff and
lead counsel were appointed by the court. The Company has not yet responded to
these complaints. The Company intends to vigorously defend itself against
these claims. Certain former officers of iGo Corporation are 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 in September 2002.
We are reviewing potential coverage under iGos directors and
officers liability insurance policy for this potential iGo
indemnification 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 the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that could
cause or contribute to such differences include those set forth in other
reports that we file with the Securities and Exchange Commission. Additional
factors that could cause actual results to differ materially from those
expressed in these forward-looking statements include, among others, the
following:  
    
    the loss of, and failure to replace, any significant customers;
    
    the timing and success of new product introductions;
    
    product developments, introductions and the pricing of competitors;
    
    the markets acceptance of our products and technology;
    
    the timing of substantial customer orders;
    
    the availability of qualified personnel;
    
    the performance of suppliers and subcontractors;
    
    the timely achievement of anticipated milestones;
    
    the scope and breadth of our patent portfolio; and
    
    market demand and industry and general economic or business conditions. In light of these risks and uncertainties, there can be no assurance that
the forward-looking statements contained in this report will prove to be
accurate. We undertake no obligation to publicly update or revise any
forward-looking statements, or any facts, events, or circumstances after the
date hereof that may bear upon forward-looking statements. - 11 -




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Overview Increased functionality and the ability to access and manage information
remotely are driving the proliferation of mobile electronic devices and
applications. The popularity of these devices is benefiting from reductions in
size, weight and cost and improvements in functionality, storage capacity and
reliability. Each of these devices needs to be powered and connected when in
the home, the office, or on the road, and can be accessorized, representing an
opportunity for one or more of our products. We use our proprietary technology to design and develop products that make
mobile electronic devices more efficient and cost effective, thus enabling
professionals and consumers higher use of these mobile electronic devices and
the ability to access information more readily. Our products include power,
handheld and expansion and docking products. We sell our products to OEMs, private-label resellers, distributors,
resellers, retailers and end-users. We 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 68% of revenue for the three months ended March 31, 2004 and 51% of revenue
for the three months ended March 31, 2003. Sales through retailers and
distributors accounted for approximately 16% of revenue for the three months
ended March 31, 2004 and 33% of revenue for the three months ended March 31,
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. 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 - 12 -




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of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements: Revenue Recognition.Revenue from product sales is recognized upon
shipments and transfers of ownership from us or our contract manufacturers to
the customers. Allowances for sales returns and credits are provided for in the
same period the related sales are recorded. Should the actual return or sales
credit rates differ from our estimates, revisions to the estimated allowance
for sales returns and credits may be required. Our recognition of revenue from product sales to distributors, resellers
and retailers, or the distribution channel, is affected by agreements we have
giving certain customers rights to return up to 20% of their prior quarters
purchases, provided that they place a new order for equal or greater dollar
value of the amount returned. We also have agreements with certain customers
that allow them to receive credit for subsequent price reductions, or price
protection. At the time we recognize revenue, upon shipment and transfer of
ownership, we reduce our measurements of those sales and the related cost of
sales by our estimates of future returns and price protection by recording an
allowance for sales returns in the amount of the difference between the sales
price and the cost of goods sold as a reduction of accounts receivable. Gross
sales to the distribution channel accounted for approximately 16% for the three
months ended March 31, 2004 and 33% of revenue for the three months ended March
31, 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. As a result of our acquisitions of Portsmith, Cutting Edge Software and
iGo during 2002, we have recorded additional goodwill of approximately $13.4
million as of March 31, 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, 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. - 13 -




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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 endedMarch 31,(unaudited)2004
    
    2003Revenue
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue
    
    
    66.0
    %
    
    
    65.0
    %Gross profit
    
    
    34.0
    %
    
    
    35.0
    %Operating expenses:Sales and marketing
    
    
    12.1
    %
    
    
    15.9
    %Research and development
    
    
    10.6
    %
    
    
    8.3
    %General and administrative
    
    
    16.6
    %
    
    
    20.1
    %Total operating expenses
    
    
    39.3
    %
    
    
    44.3
    %Loss from operations
    
    
    -5.3
    %
    
    
    -9.3
    %Other income (expense):Interest, net
    
    
    -0.1
    %
    
    
    0.1
    %Other, net
    
    
    0.1
    %
    
    
    0.2
    %Net loss
    
    
    -5.3
    %
    
    
    -9.0
    %Beneficial conversion value of convertible preferred stock
    
    
    0.0
    %
    
    
    -3.7
    %Net loss attributable to common stockholders
    
    
    -5.3
    %
    
    
    -12.7
    %
 Comparison of Three Months Ended March 31, 2004 and 2003 Revenue.Revenue generally consists of sales of products, net of returns
and allowances. To date, our revenues have come predominantly from power
adapters, handheld products, expansion and docking products, and accessories.
The following table summarizes the year-over-year comparison of our revenue for
the periods indicated: Increase
    
    Percentage changefrom same period in
    
    from the same periodQ1 2004
    
    Q1 2003
    
    the prior year
    
    in the prior yearRevenue
    
    $
    14,511
    
    
    $
    11,971
    
    
    $
    2,540
    
    
    
    21.2
    %
 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 March 31, 2004. As a result, sales of power
products increased by $3.7 million, or 70.3%, to $8.9 million during the three
months ended March 31, 2004 as compared to $5.2 million for the three months
ended March 31, 2003. This increase is partially offset by a decrease of
$900,000 in sales of handheld hardware products during the three months ended
March 31, 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 theQ1 2004
    
    Q1 2003
    
    the prior year
    
    prior yearCost of revenue
    
    $
    9,573
    
    
    $
    7,781
    
    
    $
    1,792
    
    
    
    23.0
    %Gross profit
    
    $
    4,938
    
    
    $
    4,190
    
    
    $
    748
    
    
    
    17.9
    %Gross margin
    
    
    34.0
    %
    
    
    35.0
    %
    
    
    (1.0
    )%
    
    
    (2.9
    )%
 The increase in cost of revenue was due primarily to the 21.2% volume
increase in revenue. Cost of revenue as a percentage of revenue increased to
66.0% for the three months ended March 31, 2004 from 65.0% for the three months
ended - 14 -




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March 31, 2003, resulting in decreased gross margin for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003. The
decrease in gross margin is primarily attributable to a shift in customer mix
during the first quarter of 2004. OEM and private label reseller customers
accounted for 68% and 51% of revenue for the three months ended March 31, 2004
and 2003, respectively. Sales through retailers and distributors accounted for
16% and 33% of revenue for the three months ended March 31, 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. 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 in
    
    from the same periodQ1 2004
    
    Q1 2003
    
    the prior year
    
    in the prior yearSales and marketing
    
    $
    1,759
    
    
    $
    1,901
    
    
    $
    142
    
    
    
    7.5
    %
 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 12.1% for the
three months ended March 31, 2004 from 15.9% for the three months ended March
31, 2003. Research and development.Research and development expenses consist
primarily of salaries and personnel-related costs, outside consulting, lab
costs and travel related costs of our product development group. The following
table summarizes the year-over-year comparison of our research and development
expenses for the periods indicated: Increase
    
    Percentage changefrom same period in
    
    from the same periodQ1 2004
    
    Q1 2003
    
    the prior year
    
    in the prior yearResearch and development
    
    $
    1,542
    
    
    $
    999
    
    
    $
    543
    
    
    
    54.3
    %
 The increase in research and development expenses primarily resulted from
the continued development of our family of power adapter products.
Specifically, during the three months ended March 31, 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: Increase
    
    Percentage changefrom same period in
    
    from the same periodQ1 2004
    
    Q1 2003
    
    the prior year
    
    in the prior yearGeneral and administrative
    
    $
    2,412
    
    
    $
    2,410
    
    
    $
    2
    
    
    
    0.1
    %
 General and administrative expenses were consistent for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003.
General and administrative expenses as a percentage of revenue decreased to
16.6% for the three months ended March 31, 2004 from 20.1% for the three months
ended March 31, 2003. Income taxes.We have incurred losses from inception to date; therefore,
no provision for income taxes was required for the three months ended March 31,
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 March 31, 2004. Operating Outlook In the second quarter of 2004, we expect modest sequential quarterly
revenue growth, driven primarily by the continued increase in sales of power
products through the Dell and Targus channels. Gross margin is expected to
remain relatively stable in the second quarter of 2004. Operating expenses are
expected to increase during the second quarter of 2004 due to an increase in
legal fees relating to the defense of the recent class action lawsuit filed
against us and the patent infringement litigation we have commenced
against Formosa and others; however, any continuing costs of defense in the class
action matter are
expected to be offset in future periods by proceeds from our directors and
officers liability insurance policy. - 15 -




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For the 2004 year, we continue to anticipate revenues of at least $80
million, or at least a 53% increase from 2003, with both revenues and
profitability trending progressively higher each quarter. We expect our gross
margin percentage to increase in the second half of the year to between 37% and
38% as we begin to sell power adapters designed for use with lower-power mobile
electronic devices to RadioShack. Revenue relating to the sales of these
products to RadioShack will be recognized on a net basis resulting in a gross
margin of 100% as RadioShack will be our contract manufacturer and a customer
for these products. As a result, we will only recognize revenue equal to the
mark-up on the resale of these products to RadioShack, with no associated cost
of goods sold. We believe that operating expenses will increase steadily
throughout the year to a fourth quarter level of $6.0 to $6.5 million, although
we anticipate that they will trend down as a percentage of revenue in the
second half of 2004. We do not expect to record any income tax expense or
benefit related to net operating loss carryforwards during 2004. Key future milestones include:  
    
    Targus liquidation of power products from previous suppliers
through the second quarter of 2004, which is expected to increase our
sales through Targus in subsequent quarters.
    
    The launch of portable computer power products in new international
markets, including Asia and Australia, by Targus and Kensington.
    
    The launch of sales of cigarette lighter adapters, mobile AC
adapters, and low-power universal AC/DC adapters, specifically
designed for the low-power mobile electronics device market through
RadioShack in July 2004.
    
    The launch of sales of cigarette lighter adapters, mobile AC
adapters, and low-power universal AC/DC adapters, specifically
designed for the low-power mobile electronics device market through
non-RadioShack channels during the third and fourth quarters of 2004.
    
    Modest growth in sales of handheld hardware and software
products and expansion and docking products. 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): Three Months Ended March 31,2004
    
    2003Net cash used in operating activities
    
    $
    (284
    )
    
    $
    (3,161
    )Net cash used in investing activities
    
    
    (319
    )
    
    
    (147
    )Net cash provided by financing activities
    
    
    120
    
    
    
    1,109Foreign currency exchange impact on cash flow
    
    
    13
    
    
    
    28Decrease in cash and cash equivalents
    
    $
    (470
    )
    
    $
    (2,171
    )Cash and cash equivalents at beginning of period
    
    $
    11,024
    
    
    $
    3,166Cash and cash equivalents at end of period
    
    $
    10,554
    
    
    $
    995
 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. - 16 -




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
    
    Net cash used in operating activities.Cash was used in
operating activities for the three months ended March 31, 2004
primarily to fund operating losses and working capital necessary to
support our growing revenue base. Specifically, cash was used to
fund accounts receivable and inventory growth that resulted from our
21.2% increase in revenues for the three months ended March 31, 2004
as compared to March 31, 2003. Cash used to fund growth in accounts
receivable and inventory 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: Three Months Ended March 31,2004
    
    2003Days outstanding in ending accounts receivable (DSOs)
    
    
    78
    
    
    
    86Inventory turns
    
    
    4
    
    
    
    4
  The improvement in DSOs during the three months ended March 31, 2004
compared to the three months ended March 31, 2003, is primarily as a
result of a shift in customer mix. We anticipate further improvement
in DSOs during 2004 as we continue to leverage our key OEM,
private-label reseller and retail customer relationships. Inventory
turns for the three months ended March 31, 2004 were consistent with
the three months ended March 31, 2003. We expect inventory turns to
improve during 2004.
    
    Net cash used in investing activities.For the three months
ended March 31, 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 three months ended March 31, 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 March 31, 2004, we had approximately $95 million of federal, foreign
and state net operating loss carryforwards which expire at various dates. We
anticipate that the sale of common stock in our initial public offering coupled
with prior sales of common stock will cause an annual limitation on the use of
our net operating loss carryforwards pursuant to the change in ownership
provisions of Section 382 of the Internal Revenue Code of 1986, as amended.
This limitation is expected to have a material effect on the timing of our
ability to use the net operating loss carryforward in the future. Additionally,
our ability to use the net operating loss carryforward is dependent upon our
level of future profitability, which cannot be determined. Financing Facilities.In October 2002, we entered into a $10.0 million
bank line of credit. The line bears interest at prime plus 2.0%, which was 6.0%
as of March 31, 2004, interest only payments due monthly, with final payment of
interest and principal due on July 31, 2004. The line of credit is secured by
all of our assets and subject to financial covenants, with which we were in
compliance as of March 31, 2004. We had no outstanding balance against this
line of credit as of March 31, 2004. Under the terms of the line, we can borrow
up to 80% of eligible accounts receivable. At March 31, 2004, our net borrowing
base capacity was $6.6 million. During 2004, we expect to negotiate a new line
of credit with terms that are substantially similar to our existing line of
credit. - 17 -




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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 March 31, 2004, in thousands: Payment due by period2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    More than 5 yearsOperating lease obligations
    
    $
    628
    
    
    $
    644
    
    
    $
    521
    
    
    $
    503
    
    
    $
    384
    
    
    $
    Purchase obligations
    
    
    6,183
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    396
    
    
    
    308
    
    
    
    193
    
    
    
    25
    
    
    
    
    
    
    
    Totals
    
    $
    7,207
    
    
    $
    952
    
    
    $
    714
    
    
    $
    528
    
    
    $
    384
    
    
    $
    
 Off-Balance Sheet Arrangements.We have no off-balance sheet financing
arrangements. Acquisitions.Certain former officers of iGo Corporation are 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 in September 2002.
We are reviewing potential coverage under iGos directors and
officers liability insurance policy for this potential iGo
indemnification matter. Our strategy includes the possible acquisition of other
businesses to expand or complement our operations. The magnitude, timing and
nature of any future acquisitions will depend on a number of factors, including
the availability of suitable acquisition candidates, the negotiation of
acceptable terms, our financial capabilities and general economic and business
conditions. Financing of future acquisitions would result in the utilization
of cash, incurrence of additional debt, or both. Liquidity Outlook.Based on our projections for 2004, we believe that our
existing cash and cash equivalents will be sufficient to meet our working
capital and capital expenditure requirements for at least the next 12 months.
If we require additional capital resources to grow our business internally or
to acquire complementary technologies and businesses at any time in the future,
we may use our line of credit or seek to sell additional equity or debt
securities. The sale of additional equity or convertible debt securities would
result in more dilution to our stockholders. However, upon the expiration of
our existing line of credit arrangement on July 31, 2004, financing
arrangements may not be available to us, or may be available in amounts or on
terms that are not acceptable to us. 
 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 March 31, 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- - 18 -




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0302562D. This lawsuit initially was commenced on April 2, 2003, by Holmes
Lundt, former President and CEO of Mobility Idaho, Inc. (formerly Portsmith,
Inc.), our wholly-owned subsidiary, and his wife, but additional plaintiffs
were added, and several of our officers and directors were added as defendants.
In their current pleading, the plaintiffs are alleging breach of the Portsmith
merger agreement and Mr. Lundts employment agreement, wrongful termination of
Mr. Lundt, fraudulent misrepresentation, securities fraud, breach of an alleged
covenant of good faith and fair dealing, civil conspiracy, and are seeking
monetary damages and/or rescission of the Portsmith merger agreement. On
February 11, 2004, the court permitted the 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 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. On February 10, 2004, February 20, 2004, March 25, 2004 and April 22,
2004, stockholder class-action lawsuits were filed by various plaintiffs
against the Company, Charles Mollo and Joan Brubacher in the United States
District Court for the District of Arizona. These lawsuits assert the same
claims for securities fraud under Sections 10(b), 20(a) and Rule 10b-5 of the
Securities Exchange Act of 1934, on behalf of a purported class of persons who
purchased our publicly traded securities between September 2, 2003 and January
5, 2004. The complaints generally allege that various public statements made by
or on behalf of the Company were false or misleading when made, that the
individual defendants were allegedly aware of material non-public information
at the time that they engaged in transactions in the Companys common stock and
that members of the purported stockholder class suffered damages when the
market price of the Companys common stock declined following disclosure of the
information that allegedly had not been previously disclosed. The complaints
seek to proceed on behalf of the alleged class described above, seek monetary
damages in an unspecified amount and seek recovery of plaintiffs costs and
attorneys fees. On May 4, 2004, the first three complaints
referenced above were consolidated and a lead plaintiff and lead
counsel were appointed by the court. The Company has not yet
responded to these complaints. The Company intends to vigorously defend 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. These
complaints 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, Micro
Innovations and SPS 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 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
and SPS 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: None 
 ITEM 5. OTHER INFORMATION: None - 19 -




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:  (a)
    
    Exhibits: The Exhibit Index and required Exhibits are immediately following the
Signatures to this Form 10-Q are filed as part of, or hereby
incorporated by reference into, this Form 10-Q.  (b)
    
    Reports on Form 8-K: We filed the following reports on Form 8-K during the quarter ended
March 31, 2004:  
    
    Form 8-K dated February 5, 2004 furnishing under
Items 7 and 12, our press release, dated February 5, 2004,
announcing our results of operations for the fiscal year and
quarter ended December 31, 2003. - 20 -




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MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. MOBILITY ELECTRONICS, INC.Dated:  May 10, 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)
 - 21 -




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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 March 31, 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 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)
 - 22 -




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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)10.1
    
    Amended and Restated Employment
Agreement between Charles R. Mollo and the Company, dated
April 14, 2004.*10.2
    
    Amended and Restated Employment
Agreement between Joan W. Brubacher and the Company, dated
April 14, 2004.*10.3
    
    Amended and Restated Employment Agreement between Timothy S. Jeffries and the Company, dated April 14,
2004.*31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
   *
    
    Filed herewith**
    
    Each of these agreements is identical in all material respects except for
the Purchasers.
    
    Management or compensatory plan or agreement.(1)
    
    Previously filed as an exhibit to Current Report on Form 8-K dated
October 17, 2000.(2)
    
    Previously filed as an exhibit to Form 10-K for the year ended December
31, 2001.(3)
    
    Previously filed as an exhibit to Registration Statement No. 333-99845 on
Form S-3 dated September 19, 2002.(4)
    
    Previously filed as an exhibit to Form 10-K for the year ended December
31, 2002.(5)
    
    Previously filed as an exhibit to Registration Statement No. 333-30264
dated February 11, 2000.(6)
    
    Previously filed as an exhibit to Amendment No. 2 to Registration
Statement No. 333-30264 on Form S-1 dated
May 4, 2000.(7)
    
    Previously filed as an exhibit to Amendment No. 1 to Registration
Statement No. 333-30264 on Form S-1 dated March 28, 2000.(8)
    
    Previously filed as an exhibit to Current Report on Form 8-K filed on
January 14, 2003.(9)
    
    Previously filed as an exhibit to Current Report on Form 8-K filed on
June 19, 2003.(10)
    
    Previously filed as an exhibit to Amendment No. 3 to Registration
Statement No. 333-30264 on Form S-1 dated May 18, 2000.(11)
    
    Previously filed as an exhibit to Registration Statement No. 333-108623
on Form S-3 filed on September 9, 2003.(12)
    
    Previously filed as an exhibit to Form 10-Q for the quarter ended
September 30, 2003. 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. - 23 -