UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2004

OR

For the transition period from                     to                    

Commission file number: 0-30907

MOBILITY ELECTRONICS, INC.

Delaware
(State or Other Jurisdiction of Incorporation)

(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.

MOBILITY ELECTRONICS, INC.
FORM 10-Q

TABLE OF CONTENTS

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS:

MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to unaudited condensed consolidated financial statements.

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MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to unaudited condensed consolidated financial statements.

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MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to unaudited condensed consolidated financial statements.

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MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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.

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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):

     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:

(3) Inventories

     Inventories consist of the following (amounts in thousands):

(4) Goodwill

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

(5) Intangible Assets

     Intangible assets consist of the following at March 31, 2004 and December 31, 2003 (amounts in thousands):

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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):

     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

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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):

(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

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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).

(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.

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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.

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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

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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.

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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:

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:

     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:

     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

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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:

     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:

     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:

     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.

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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):

     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.

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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:

			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.

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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:

     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-

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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

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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.

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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.

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EXHIBIT INDEX

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     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.

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