##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-30907
 MOBILITY ELECTRONICS, INC.
 (Exact Name of Registrant as Specified in its Charter)
 Delaware
(State or Other Jurisdiction of Incorporation)
 0-30907
    
    86-0843914(Commission File Number)
    
    (IRS Employer Identification No.)17800 N. Perimeter Dr., Suite 200, Scottsdale, Arizona
    
    85255(Address of Principal Executive Offices)
    
    (Zip Code)
 (480) 596-0061
(Registrants telephone number, including area code)
 Not applicable
(Former Name, Former Address, and Former Fiscal Year if Changed Since Last Report)
  þ o
  o þ o
  o þ




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##### 



MOBILITY ELECTRONICS, INC.
FORM 10-Q
 TABLE OF CONTENTS
 PAGE NO.PART I: FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
as of September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations
for the Three and Nine months Ended September 30, 2006
and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows
for the Nine months Ended September 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    28Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    29INDEX TO EXHIBITS
    
    
    30EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS  (In thousands)
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,380
    
    
    $
    13,637Short-term investments
    
    
    10,071
    
    
    
    20,286Accounts receivable, net
    
    
    24,006
    
    
    
    18,778Inventories
    
    
    15,942
    
    
    
    13,373Prepaid expenses and other current assets
    
    
    417
    
    
    
    565Total current assets
    
    
    60,816
    
    
    
    66,639Property and equipment, net
    
    
    3,137
    
    
    
    2,410Goodwill
    
    
    3,912
    
    
    
    10,570Intangible assets, net
    
    
    3,151
    
    
    
    2,720Notes receivable and other assets
    
    
    2,093
    
    
    
    1,571Total assets
    
    $
    73,109
    
    
    $
    83,910LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    13,953
    
    
    $
    17,606Accrued expenses and other current liabilities
    
    
    3,685
    
    
    
    2,694Current portion of litigation settlement liability
    
    
    
    
    
    
    3,000Current portion of non-current liabilities
    
    
    178
    
    
    
    437Total current liabilities
    
    
    17,816
    
    
    
    23,737Non-current portion of litigation settlement liability
    
    
    
    
    
    
    799Other non-current liabilities, less current portion
    
    
    
    
    
    
    25Total liabilities
    
    
    17,816
    
    
    
    24,561Stockholders equity:Common stock
    
    
    317
    
    
    
    308Additional paid-in capital
    
    
    166,181
    
    
    
    160,622Accumulated deficit
    
    
    (111,387
    )
    
    
    (101,685
    )Accumulated other comprehensive income
    
    
    182
    
    
    
    104Total stockholders equity
    
    
    55,293
    
    
    
    59,349Total liabilities and stockholders equity
    
    $
    73,109
    
    
    $
    83,910
  3




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##### Table of Contents



MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except per share amounts)  (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    24,170
    
    
    $
    23,104
    
    
    $
    73,155
    
    
    $
    61,889Cost of revenue
    
    
    17,246
    
    
    
    15,679
    
    
    
    51,708
    
    
    
    42,576Gross profit
    
    
    6,924
    
    
    
    7,425
    
    
    
    21,447
    
    
    
    19,313Operating expenses:Sales and marketing
    
    
    3,742
    
    
    
    1,921
    
    
    
    8,027
    
    
    
    5,819Research and development
    
    
    1,936
    
    
    
    1,813
    
    
    
    5,706
    
    
    
    4,727General and administrative
    
    
    3,230
    
    
    
    4,090
    
    
    
    10,045
    
    
    
    10,199Asset impairment
    
    
    8,073
    
    
    
    
    
    
    
    8,073
    
    
    
    Total operating expenses
    
    
    16,981
    
    
    
    7,824
    
    
    
    31,851
    
    
    
    20,745Loss from operations
    
    
    (10,057
    )
    
    
    (399
    )
    
    
    (10,404
    )
    
    
    (1,432
    )Other income (expense):Interest income (expense), net
    
    
    313
    
    
    
    263
    
    
    
    930
    
    
    
    483Litigation settlement expense
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    Gain on disposal of assets and other income
(expense), net
    
    
    1
    
    
    
    (6
    )
    
    
    22
    
    
    
    11,632Income (loss) before provision for income tax
    
    
    (9,743
    )
    
    
    (142
    )
    
    
    (9,702
    )
    
    
    10,683Provision for income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    285Net income (loss)
    
    $
    (9,743
    )
    
    $
    (142
    )
    
    $
    (9,702
    )
    
    $
    10,398Net income (loss) per share:Basic
    
    $
    (0.31
    )
    
    $
    (0.00
    )
    
    $
    (0.31
    )
    
    $
    0.35Diluted
    
    $
    (0.31
    )
    
    $
    (0.00
    )
    
    $
    (0.31
    )
    
    $
    0.33Weighted average common shares outstanding:Basic
    
    
    31,651
    
    
    
    30,358
    
    
    
    31,290
    
    
    
    29,746Diluted
    
    
    31,651
    
    
    
    30,358
    
    
    
    31,290
    
    
    
    31,762
  4




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##### Table of Contents



MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)  (unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (9,702
    )
    
    $
    10,398Adjustments to reconcile net loss to net cash used in
operating activities:Provision for accounts receivable and sales returns and credits
    
    
    500
    
    
    
    390Depreciation and amortization
    
    
    1,612
    
    
    
    1,541Stock compensation expense
    
    
    1,424
    
    
    
    1,111Impairment of goodwill
    
    
    6,895
    
    
    
    Impairment of intangible assets
    
    
    690
    
    
    
    Impairment of property and equipment
    
    
    488
    
    
    
    Impairment of tooling equipment
    
    
    31
    
    
    
    82Gain on disposal of assets
    
    
    
    
    
    
    (11,638
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,941
    )
    
    
    (3,151
    )Inventories
    
    
    (2,163
    )
    
    
    (2,835
    )Prepaid expenses and other assets
    
    
    912
    
    
    
    (876
    )Accounts payable
    
    
    (4,733
    )
    
    
    2,634Accrued expenses and other current liabilities
    
    
    (2,190
    )
    
    
    542Net cash used in operating activities
    
    
    (11,177
    )
    
    
    (1,802
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (1,335
    )
    
    
    (1,081
    )Proceeds from sale of intangible assets
    
    
    
    
    
    
    11,692Purchase of investments
    
    
    (1,700
    )
    
    
    (20,968
    )Sale of investments
    
    
    10,249
    
    
    
    Net cash provided by (used in) investing activities
    
    
    7,214
    
    
    
    (10,357
    )Cash flows from financing activities:Payment of non-current liabilities
    
    
    (25
    )
    
    
    (25
    )Net proceeds from issuance of common stock
    
    
    100
    
    
    
    10,228Proceeds from exercise of options, warrants, and repayment of
stock subscription notes receivable
    
    
    587
    
    
    
    1,507Net cash provided by financing activities
    
    
    662
    
    
    
    11,710Effects of exchange rate changes on cash and cash equivalents
    
    
    44
    
    
    
    (59
    )Net decrease in cash and cash equivalents
    
    
    (3,257
    )
    
    
    (508
    )Cash and cash equivalents, beginning of period
    
    
    13,637
    
    
    
    12,768Cash and cash equivalents, end of period
    
    $
    10,380
    
    
    $
    12,260
  5




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##### Table of Contents



MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (1) Basis of Presentation
     (2) Stock-based Compensation
    6




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##### Table of Contents



Three Months
    
    
    Nine monthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005Net income (loss):As reported
    
    $
    (142
    )
    
    $
    10,398Total stock-based employee compensation expense
determined under fair-value-based method for all
rewards, net of tax of $0 for all periods
    
    
    (45
    )
    
    
    (1,913
    )Pro forma
    
    $
    (187
    )
    
    $
    8,485Net income per share  basic:As reported
    
    $
    (0.00
    )
    
    $
    0.35Pro forma
    
    $
    (0.01
    )
    
    $
    0.29Net income per share  diluted:As reported
    
    $
    (0.00
    )
    
    $
    0.33Pro forma
    
    $
    (0.01
    )
    
    $
    0.27
 ( a ) Stock Options
    WeightedAverageExerciseNumber
    
    
    PriceOutstanding, December 31, 2005
    
    
    1,182,746
    
    
    $
    4.92Granted
    
    
    
    
    
    
    Canceled
    
    
    (78,486
    )
    
    
    7.45Exercised
    
    
    (327,172
    )
    
    
    1.81Outstanding, September 30, 2006
    
    
    777,088
    
    
    $
    5.97
 7




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##### Table of Contents



Weighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    AggregateOptions
    
    
    Remaining
    
    
    Exercise
    
    
    Options
    
    
    Exercise
    
    
    IntrinsicRange of Exercise Prices
    
    Outstanding
    
    
    Contractual Life
    
    
    Price
    
    
    Exercisable
    
    
    Price
    
    
    Value$0.79-$1.78
    
    
    229,754
    
    
    
    2.11
    
    
    $
    1.28
    
    
    
    220,912
    
    
    $
    1.26$1.79-$8.03
    
    
    211,334
    
    
    
    2.69
    
    
    
    6.06
    
    
    
    211,334
    
    
    
    6.06$8.04-$9.00
    
    
    112,500
    
    
    
    3.70
    
    
    
    8.51
    
    
    
    112,500
    
    
    
    8.51$9.01-$11.95
    
    
    223,500
    
    
    
    3.22
    
    
    
    9.45
    
    
    
    223,500
    
    
    
    9.45$0.79-$11.95
    
    
    777,088
    
    
    $
    2.82
    
    
    $
    5.98
    
    
    
    768,246
    
    
    $
    6.02
    
    
    $
    1,100,085
   ( b ) Restricted Stock Units
    2004 Directors Plan
    
    
    2004 Omnibus PlanWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageValue per
    
    
    
    
    
    
    Value perNumber
    
    
    Share
    
    
    Number
    
    
    ShareOutstanding, December 31, 2005
    
    
    141,900
    
    
    $
    8.51
    
    
    
    766,917
    
    
    $
    7.53Granted
    
    
    37,200
    
    
    
    7.15
    
    
    
    343,619
    
    
    
    7.84Canceled
    
    
    
    
    
    
    
    
    
    
    (175,999
    )
    
    
    7.67Released to common stock
    
    
    (14,700
    )
    
    
    8.54
    
    
    
    (18,074
    )
    
    
    7.37Released for settlement of taxes
    
    
    
    
    
    
    
    
    
    
    (6,845
    )
    
    
    7.37Outstanding, September 30, 2006
    
    
    164,400
    
    
    $
    8.20
    
    
    
    909,618
    
    
    $
    8.12
  ( c ) Employee Stock Purchase Plan
  8




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##### Table of Contents



(3) Acquisition
    Purchase price:Common stock
    
    $
    2,500Costs of acquisition
    
    
    92$
    2,592Assets acquired and liabilities assumed:Current assets
    
    $
    1,238Property and equipment
    
    
    830Other amortizable assets
    
    
    1,450Goodwill
    
    
    237Current liabilities
    
    
    (1,163
    )$
    2,592
  (4) Investments
    September 30, 2006
    
    
    December 31, 2005Net
    
    
    
    
    
    
    
    
    
    
    NetUnrealized
    
    
    
    
    
    
    
    
    
    
    UnrealizedHolding
    
    
    Aggregate
    
    
    
    
    
    
    HoldingAmortized
    
    
    Gains
    
    
    Fair
    
    
    Amortized
    
    
    Gains
    
    
    AggregateCost
    
    
    (Losses)
    
    
    Value
    
    
    Cost
    
    
    (Losses)
    
    
    Fair ValueU.S. corporate securities:Commercial paper
    
    $
    3,928
    
    
    $
    
    
    
    $
    3,928
    
    
    $
    6,831
    
    
    $
    (3
    )
    
    $
    6,828Corporate notes and bonds
    
    
    2,381
    
    
    
    3
    
    
    
    2,384
    
    
    
    8,295
    
    
    
    (21
    )
    
    
    8,274Bankers acceptance
    
    
    1,900
    
    
    
    (1
    )
    
    
    1,899
    
    
    
    1,801
    
    
    
    
    
    
    
    1,801Asset backed securities  fixed
    
    
    640
    
    
    
    1
    
    
    
    641
    
    
    
    900
    
    
    
    
    
    
    
    9008,849
    
    
    
    3
    
    
    
    8,852
    
    
    
    17,827
    
    
    
    (24
    )
    
    
    17,803U.S. government securities
    
    
    2,916
    
    
    
    4
    
    
    
    2,920
    
    
    
    2,486
    
    
    
    (3
    )
    
    
    2,483$
    11,765
    
    
    $
    7
    
    
    $
    11,772
    
    
    $
    20,313
    
    
    $
    (27
    )
    
    $
    20,286
 9




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##### Table of Contents



(5) Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    4,807
    
    
    $
    2,946Finished goods
    
    
    11,135
    
    
    
    10,427$
    15,942
    
    
    $
    13,373
 (6) Asset Impairment
  (7) Goodwill
  High Power
    
    
    ConnectivityGroup
    
    
    Group
    
    
    TotalReported balance at December 31, 2005
    
    $
    3,578
    
    
    $
    6,992
    
    
    $
    10,570Acquisition of Think Outside
    
    
    
    
    
    
    237
    
    
    
    237Reclassification
    
    
    97
    
    
    
    (97
    )
    
    
    Impairment
    
    
    
    
    
    
    (6,895
    )
    
    
    (6,895
    )Reported balance at September 30, 2006
    
    $
    3,675
    
    
    $
    237
    
    
    $
    3,912
  (8) Intangible Assets
  September 30, 2006
    
    
    December 31, 2005Average
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetLife
    
    
    Intangible
    
    
    Accumulated
    
    
    Intangible
    
    
    Intangible
    
    
    Accumulated
    
    
    Intangible(Years)
    
    
    Assets
    
    
    Amortization
    
    
    Assets
    
    
    Assets
    
    
    Amortization
    
    
    AssetsAmortized intangible assets:License fees
    
    
    7
    
    
    $
    934
    
    
    $
    (550
    )
    
    $
    384
    
    
    $
    1,947
    
    
    $
    (743
    )
    
    $
    1,204Patents and trademarks
    
    
    5
    
    
    
    3,000
    
    
    
    (1,253
    )
    
    
    1,747
    
    
    
    2,018
    
    
    
    (968
    )
    
    
    1,050Trade names
    
    
    10
    
    
    
    429
    
    
    
    (156
    )
    
    
    273
    
    
    
    378
    
    
    
    (126
    )
    
    
    252Customer intangibles
    
    
    5
    
    
    
    813
    
    
    
    (66
    )
    
    
    747
    
    
    
    662
    
    
    
    (448
    )
    
    
    214Total
    
    
    
    
    
    $
    5,176
    
    
    $
    (2,025
    )
    
    $
    3,151
    
    
    $
    5,005
    
    
    $
    (2,285
    )
    
    $
    2,720
  10




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##### Table of Contents



(9) Line of Credit
  (10) Non-current Liabilities
  September 30,
    
    
    December 31,2006
    
    
    2005Estimate of Invision earn-out
    
    $
    153
    
    
    $
    412Liability for license fee
    
    
    25
    
    
    
    50178
    
    
    
    462Less current portion
    
    
    178
    
    
    
    437Non-current liabilities, less current portion
    
    $
    
    
    
    $
    25
   (11) Stockholders Equity
    11




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##### Table of Contents



(12) Net Income (Loss) per Share
  Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic net income (loss) per share computation:Numerator:Net income (loss)
    
    $
    (9,743
    )
    
    $
    (142
    )
    
    $
    (9,702
    )
    
    $
    10,398Denominator:Weighted average number of common shares outstanding
    
    
    31,683
    
    
    
    30,358
    
    
    
    31,290
    
    
    
    29,746Basic net income (loss) per share:
    
    $
    (0.31
    )
    
    $
    (0.00
    )
    
    $
    (0.31
    )
    
    $
    0.35Diluted net income (loss) per share computation:Numerator:Net income (loss)
    
    $
    (9,743
    )
    
    $
    (142
    )
    
    $
    (9,702
    )
    
    $
    10,398Denominator:Weighted average number of common shares outstanding
    
    
    31,683
    
    
    
    30,358
    
    
    
    31,290
    
    
    
    29,746Effect of dilutive stock options, warrants, and
restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,874Dilutive effect of preferred shares if converted to
common shares at the beginning of the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14231,683
    
    
    
    30,358
    
    
    
    31,290
    
    
    
    31,762Diluted net income (loss) per share:
    
    $
    (0.31
    )
    
    $
    (0.00
    )
    
    $
    (0.31
    )
    
    $
    0.33Stock options not included in dilutive net income (loss)
per share since antidilutive
    
    
    484
    
    
    
    39
    
    
    
    388
    
    
    
    282Warrants not included in dilutive net income (loss) per
share since antidilutive
    
    
    1,195
    
    
    
    
    
    
    
    1,195
    
    
    
    
 (13) Business Segments, Concentration of Credit Risk and Significant Customers
  12




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##### Table of Contents



Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:High-Power Group
    
    $
    14,638
    
    
    $
    17,162
    
    
    $
    44,969
    
    
    $
    45,170Low-Power Group
    
    
    4,795
    
    
    
    1,875
    
    
    
    11,306
    
    
    
    3,016Connectivity Group
    
    
    4,737
    
    
    
    4,067
    
    
    
    16,880
    
    
    
    13,703$
    24,170
    
    
    $
    23,104
    
    
    $
    73,155
    
    
    $
    61,889
 Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating income (loss):High-Power Group
    
    $
    3,412
    
    
    $
    4,229
    
    
    $
    9,115
    
    
    $
    8,773Low-Power Group
    
    
    (1,220
    )
    
    
    (715
    )
    
    
    (1,465
    )
    
    
    (1,314
    )Connectivity Group
    
    
    (9,019
    )
    
    
    177
    
    
    
    (8,009
    )
    
    
    1,308Corporate
    
    
    (3,230
    )
    
    
    (4,090
    )
    
    
    (10,045
    )
    
    
    (10,199
    )$
    (10,057
    )
    
    $
    (399
    )
    
    $
    (10,404
    )
    
    $
    (1,432
    )
  September 30,
    
    
    December 31,2006
    
    
    2005Assets:High-Power Group
    
    $
    29,955
    
    
    $
    33,193Low-Power Group
    
    
    7,798
    
    
    
    287Connectivity Group
    
    
    13,052
    
    
    
    14,961Corporate
    
    
    22,304
    
    
    
    35,469$
    73,109
    
    
    $
    83,910
   Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005High-power mobile electronic power products
    
    $
    14,330
    
    
    $
    14,782
    
    
    $
    43,214
    
    
    $
    39,595Low-power mobile electronic power products
    
    
    4,792
    
    
    
    3,555
    
    
    
    11,406
    
    
    
    6,219Handheld products
    
    
    1,895
    
    
    
    2,499
    
    
    
    10,913
    
    
    
    8,869Expansion and docking products
    
    
    1,300
    
    
    
    1,579
    
    
    
    4,268
    
    
    
    4,917Portable keyboard products
    
    
    1,554
    
    
    
    
    
    
    
    1,721
    
    
    
    Accessories and other products
    
    
    299
    
    
    
    689
    
    
    
    1,633
    
    
    
    2,289Total revenues
    
    $
    24,170
    
    
    $
    23,104
    
    
    $
    73,155
    
    
    $
    61,889
 Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005North America (principally United States)
    
    $
    22,639
    
    
    $
    19,946
    
    
    $
    64,637
    
    
    $
    52,948Europe
    
    
    1,221
    
    
    
    1,402
    
    
    
    4,440
    
    
    
    4,076Asia Pacific
    
    
    297
    
    
    
    1,752
    
    
    
    4,006
    
    
    
    4,861All other
    
    
    13
    
    
    
    4
    
    
    
    72
    
    
    
    4$
    24,170
    
    
    $
    23,104
    
    
    $
    73,155
    
    
    $
    61,889
 Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005OEM and private-label-resellers
    
    
    63
    %
    
    
    58
    %
    
    
    63
    %
    
    
    61
    %Retailers and distributors
    
    
    32
    %
    
    
    26
    %
    
    
    30
    %
    
    
    23
    %Other
    
    
    5
    %
    
    
    16
    %
    
    
    7
    %
    
    
    16
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 13




---



##### Table of Contents



Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005High-power mobile electronic power products
    
    
    38
    %
    
    
    36
    %
    
    
    38
    %
    
    
    36
    %Low-power mobile electronic power products
    
    
    38
    %
    
    
    46
    %
    
    
    44
    %
    
    
    47
    %Handheld products
    
    
    32
    %
    
    
    37
    %
    
    
    36
    %
    
    
    36
    %Expansion and docking products
    
    
    60
    %
    
    
    60
    %
    
    
    58
    %
    
    
    60
    %Portable keyboard products
    
    
    43
    %
    
    
    
    
    
    
    45
    %
    
    
    Accessories and other products
    
    
    49
    %
    
    
    48
    %
    
    
    48
    %
    
    
    47
    %
      (14) Contingencies
    
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  14




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##### Table of Contents




    
    the loss of, and failure to replace, any significant customers;
    
    the ineffectiveness of our sales and marketing strategy;
    
    the inability to create broad consumer awareness and acceptance for our products and technology;
    
    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 ability to expand and protect our proprietary rights and intellectual property;
    
    the timing of substantial customer orders;
    
    the availability of qualified personnel;
    
    the performance of suppliers and subcontractors; and
    
    the successful resolution of pending and unanticipated litigation matters;
    
    market demand and industry and general economic or business conditions.
  Overview
   High-Power Group.
 Low-Power Group.
 15




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##### Table of Contents



Connectivity Group. ®
    Critical Accounting Policies and Estimates
   16




---



##### Table of Contents



Revenue Recognition.
    Inventory Valuation.
 Goodwill and Long-Lived Asset Valuation.
  17




---



##### Table of Contents



Deferred Tax Valuation Allowance.
 Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue
    
    
    71.4
    %
    
    
    67.9
    %
    
    
    70.7
    %
    
    
    68.8
    %Gross profit
    
    
    28.6
    %
    
    
    32.1
    %
    
    
    29.3
    %
    
    
    31.2
    %Operating expenses:Sales and marketing
    
    
    15.5
    %
    
    
    8.3
    %
    
    
    11.0
    %
    
    
    9.4
    %Research and development
    
    
    8.0
    %
    
    
    7.8
    %
    
    
    7.8
    %
    
    
    7.6
    %General and administrative
    
    
    13.4
    %
    
    
    17.7
    %
    
    
    13.7
    %
    
    
    16.5
    %Asset impairment
    
    
    33.4
    %
    
    
    0.0
    %
    
    
    11.0
    %
    
    
    0.0
    %Total operating expenses
    
    
    70.3
    %
    
    
    33.9
    %
    
    
    43.5
    %
    
    
    33.5
    %Loss from operations
    
    
    (41.6
    %)
    
    
    (1.7
    %)
    
    
    (14.2
    %)
    
    
    (2.3
    %)Other income (expense):Interest income (expense), net
    
    
    1.3
    %
    
    
    1.1
    %
    
    
    1.3
    %
    
    
    0.8
    %Litigation settlement expense
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    (0.3
    %)
    
    
    0.0
    %Gain on disposal of assets and other income
(expense), net
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    18.8
    %Income (loss) before provision for income tax
    
    
    (40.3
    %)
    
    
    (0.6
    %)
    
    
    (13.3
    %)
    
    
    17.3
    %Provision for income tax
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.5
    %Net income (loss)
    
    
    (40.3
    %)
    
    
    (0.6
    %)
    
    
    (13.3
    %)
    
    
    16.8
    %
 Comparison of Three Months Ended September 30, 2006 and 2005
 Revenue .
 Three Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    Increase (decrease)
    
    
    Percentage changeSeptember 30,
    
    
    September 30,
    
    
    from same period
    
    
    from the same period2006
    
    
    2005
    
    
    in the prior year
    
    
    in the prior yearHigh-Power Group
    
    $
    14,638
    
    
    $
    17,162
    
    
    $
    (2,524
    )
    
    
    (14.7
    )%Low-Power Group
    
    
    4,795
    
    
    
    1,875
    
    
    
    2,920
    
    
    
    155.7
    %Connectivity Group
    
    
    4,737
    
    
    
    4,067
    
    
    
    670
    
    
    
    16.5
    %Total Revenue
    
    $
    24,170
    
    
    $
    23,104
    
    
    $
    1,066
    
    
    
    4.6
    %
 High-Power Group.
 18




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##### Table of Contents



Low-Power Group.
 Connectivity Group.
 Cost of revenue, gross profit and gross margin .
 Three Months
    
    Three MonthsEnded
    
    Ended
    
    Increase (decrease)
    
    Percentage changeSeptember 30,
    
    September 30,
    
    from same period
    
    from the same period2006
    
    2005
    
    in the prior year
    
    in the prior yearCost of revenue
    
    $
    17,246
    
    
    $
    15,679
    
    
    $
    1,567
    
    
    
    10.0
    %Gross profit
    
    $
    6,924
    
    
    $
    7,425
    
    
    $
    (501
    )
    
    
    (6.7
    )%Gross margin
    
    
    28.6
    %
    
    
    32.1
    %
    
    
    (3.5
    )%
    
    
    (10.9
    )%
  19




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Sales and marketing .
 Three Months
    
    Three MonthsEnded
    
    Ended
    
    Increase
    
    Percentage changeSeptember 30,
    
    September 30,
    
    from same period in the
    
    from the same period2006
    
    2005
    
    prior year
    
    in the prior yearSales and marketing
    
    $
    3,742
    
    
    $
    1,921
    
    
    $
    1,821
    
    
    
    94.8
    %
  Research and development .
 Three Months
    
    Three MonthsEnded
    
    Ended
    
    Increase from
    
    Percentage change fromSeptember
    
    September 30,
    
    same period
    
    the same period in the30, 2006
    
    2005
    
    in the prior year
    
    prior yearResearch and development
    
    $
    1,936
    
    
    $
    1,813
    
    
    $
    123
    
    
    
    6.8
    %
  General and administrative.
 Three Months
    
    Three MonthsEnded
    
    Ended
    
    Decrease
    
    Percentage changeSeptember 30,
    
    September 30,
    
    from same period
    
    from the same period2006
    
    2005
    
    in the prior year
    
    in the prior yearGeneral and administrative
    
    $
    3,230
    
    
    $
    4,090
    
    
    $
    (860
    )
    
    
    (21.0
    )%
  Asset impairment.
 20




---



##### Table of Contents



Interest income (expense) net.
 Three Months
    
    Three MonthsEnded
    
    Ended
    
    Increase
    
    Percentage changeSeptember 30,
    
    September 30,
    
    from same period
    
    from the same period2006
    
    2005
    
    in the prior year
    
    in the prior yearInterest income
    
    $
    320
    
    
    $
    286
    
    
    $
    34
    
    
    
    11.9
    %Interest expense
    
    
    7
    
    
    
    23
    
    
    
    (16
    )
    
    
    69.6
    %Net interest income (expense)
    
    $
    313
    
    
    $
    263
    
    
    $
    50
    
    
    
    19.0
    %
 Comparison of Nine months Ended September 30, 2006 and 2005
 Revenue .
 Nine months
    
    
    Nine months
    
    
    Increase
    
    
    Percentage changeEnded
    
    
    Ended
    
    
    (decrease)
    
    
    from the sameSeptember 30,
    
    
    September 30,
    
    
    from same period
    
    
    period in the prior2006
    
    
    2005
    
    
    in the prior year
    
    
    yearHigh-Power Group
    
    $
    44,969
    
    
    $
    45,170
    
    
    $
    (201
    )
    
    
    (0.4
    )%Low-Power Group
    
    
    11,306
    
    
    
    3,016
    
    
    
    8,290
    
    
    
    274.9
    %Connectivity Group
    
    
    16,880
    
    
    
    13,703
    
    
    
    3,177
    
    
    
    23.2
    %Total Revenue
    
    $
    73,155
    
    
    $
    61,889
    
    
    $
    11,266
    
    
    
    18.2
    %
 High-Power Group.
 Low-Power Group.
 Connectivity Group.
 21




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##### Table of Contents



Cost of revenue, gross profit and gross margin .
 Nine months
    
    Nine months
    
    IncreaseEnded
    
    Ended
    
    (decrease) from
    
    Percentage change fromSeptember 30,
    
    September 30,
    
    same period in the
    
    the same period in the2006
    
    2005
    
    prior year
    
    prior yearCost of revenue
    
    $
    51,708
    
    
    $
    42,576
    
    
    $
    9,132
    
    
    
    21.4
    %Gross profit
    
    $
    21,447
    
    
    $
    19,313
    
    
    $
    2,134
    
    
    
    11.0
    %Gross margin
    
    
    29.3
    %
    
    
    31.2
    %
    
    
    (1.9
    )%
    
    
    (6.1
    )%
  Sales and marketing .
 Nine months
    
    Nine monthsEnded
    
    Ended
    
    Increase
    
    Percentage changeSeptember 30,
    
    September 30,
    
    from same period
    
    from the same period2006
    
    2005
    
    in the prior year
    
    in the prior yearSales and marketing
    
    $
    8,027
    
    
    $
    5,819
    
    
    $
    2,208
    
    
    
    37.9
    %
  Research and development .
 Nine months
    
    Nine monthsEnded
    
    Ended
    
    Increase
    
    Percentage changeSeptember 30,
    
    September 30,
    
    from same period
    
    from the same period2006
    
    2005
    
    in the prior year
    
    in the prior yearResearch and development
    
    $
    5,706
    
    
    $
    4,727
    
    
    $
    979
    
    
    
    20.7
    %
  General and administrative.
 22




---



##### Table of Contents



Nine months
    
    Nine monthsEnded
    
    Ended
    
    Decrease
    
    Percentage changeSeptember 30,
    
    September 30,
    
    from same period
    
    from the same period2006
    
    2005
    
    in the prior year
    
    in the prior yearGeneral and administrative
    
    $
    10,045
    
    
    $
    10,199
    
    
    $
    (154
    )
    
    
    (1.5
    )%
  Asset impairment.
 Interest income (expense) net.
 Nine months
    
    Nine monthsEnded
    
    Ended
    
    Increase (decrease)
    
    Percentage changeSeptember 30,
    
    September 30,
    
    from same period
    
    from the same period2006
    
    2005
    
    in the prior year
    
    in the prior yearInterest income
    
    $
    983
    
    
    $
    553
    
    
    $
    430
    
    
    
    77.8
    %Interest expense
    
    
    53
    
    
    
    70
    
    
    
    (17
    )
    
    
    (24.3
    )%Net interest income (expense)
    
    $
    930
    
    
    $
    483
    
    
    $
    447
    
    
    
    92.5
    %
 Other income (expense) net .
 Income taxes .
 Operating Outlook
  
    
    Strengthening our internal sales force, highlighted by the addition of a new sales
executive who was previously the General Manager for Motorolas Companion Products
division, and who has extensive experience developing programs with the wireless carriers
and distributors that we are targeting;
 23




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##### Table of Contents




    
    Launching a national advertising campaign to build general awareness for the iGo®
product offering and brand name. The campaign will reach end-users through print
advertisements in major national newspapers, commercials on national radio programs, and
participation in various customer merchandising, display and flier programs;
    
    Investing in product development to continually introduce more advanced versions of both
our high-power and low-power adapters;
    
    Leveraging our developing relationships in the wireless carrier market to continue
expanding the distribution for our new folding keyboard product linea; and
    
    Evaluating strategic alternatives to best reorganize our Connectivity business to more
effectively capitalize on the assets we have in this segment.
   Liquidity and Capital Resources
  Nine months Ended September 30,2006
    
    
    2005Net cash used in operating activities
    
    $
    (11,177
    )
    
    $
    (1,802
    )Net cash provided by (used in) investing activities
    
    
    7,214
    
    
    
    (10,357
    )Net cash provided by financing activities
    
    
    662
    
    
    
    11,710Foreign currency exchange impact on cash flow
    
    
    44
    
    
    
    (59
    )Decrease in cash and cash equivalents
    
    $
    (3,257
    )
    
    $
    (508
    )Cash and cash equivalents at beginning of period
    
    $
    13,637
    
    
    $
    12,768Cash and cash equivalents at end of period
    
    $
    10,380
    
    
    $
    12,260
 Cash and Cash Flow
 24




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##### Table of Contents




    
    Net cash used in operating activities.Cash was used in operating activities for the
nine months ended September 30, 2006 primarily to fund working capital necessary to
support our growing revenue base. Specifically, cash was used to pay suppliers for
inventory growth, accounts receivable growth, and we used $3.0 million in connection with
the settlement of the Portsmith litigation during the nine months ended September 30,
2006. Later in 2006, we expect to continue to use cash in operating activities as we
expect incur operating losses, with non-cash items and changes in working capital to have
a relatively neutral effect on cash flows. Our consolidated cash flow operating metrics
are as follows:
 September 30, 2006
    
    September 30, 2005Days outstanding in ending accounts receivable (DSOs)
    
    
    90
    
    
    
    86Inventory turns
    
    
    4
    
    
    
    6
 The increase in DSOs at September 30, 2006 compared to September 30, 2005, is
primarily due to the timing of payments received from our large private-label reseller
customer, Targus. We expect DSOs to improve during the fourth quarter of 2006 as we
expect to improve collections from Targus. The decline in inventory turns is primarily
due to investment in low-power and connectivity inventories in anticipation of revenue in
2007. We expect to manage inventory growth during the fourth quarter of 2006 and into
2007 and we expect inventory turns to improve as we increase sales volumes in 2007.
    
    Net cash provided by investing activities.For the nine months ended September 30,
2006, net cash was provided by investing activities as we generated proceeds from the
sale of investments of $8.5 million, partially offset by the purchase of property and
equipment. We anticipate future investment in capital equipment, primarily for tooling
equipment to be used in the production of new products.
    
    Net cash provided by financing activities.Net cash provided by financing
activities for the nine months ended September 30, 2006 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.
  Financing Facilities.
 Contractual Obligations.
 Payment due by period2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    More than 5 yearsOperating lease obligations
    
    $
    251
    
    
    $
    942
    
    
    $
    490
    
    
    $
    19
    
    
    $
    
    
    
    $
    Inventory Purchase obligations
    
    
    17,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totals
    
    $
    17,433
    
    
    $
    967
    
    
    $
    490
    
    
    $
    19
    
    
    $
    
    
    
    $
    
 Off-Balance Sheet Arrangements.
 Acquisitions and dispositions.
 25




---



##### Table of Contents



Liquidity Outlook.
 Recent Accounting Pronouncements
    26




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control Over Financial Reporting
 
 PART II: OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  27




---



##### Table of Contents



ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
  28




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##### Table of Contents



MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
 
 SIGNATURES
  MOBILITY ELECTRONICS, INC.Dated: November 8, 2006
    
    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 Officer)By:
    
    /s/ Darryl S. BakerDarryl S. BakerVice President, Chief Accounting Officer and Controller
 29




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document4.1
    
    Amendment No. 1 to Rights Agreement dated as of August 4, 2006, by and between Mobility
Electronics, Inc. and Computershare Trust Company, Inc. (1)10.1
    
    Employment Agreement, dated July 17, 2006, by and between Mobility Electronics, Inc. and Jonathan
Downer. (2)10.2
    
    Mobility Electronics, Inc. Omnibus Long-Term Incentive Plan Restricted Stock Unit Award Agreement,
dated July 17, 2006, by and between Mobility Electronics, Inc. and Jonathan Downer. (2)10.3
    
    Credit Agreement dated as of July 27, 2006, between Mobility Electronics, Inc. and JPMorgan Chase
Bank, N.A. (3)10.4
    
    Form of Pledge and Security Agreement dated as of July 27, 2006, between JPMorgan Chase Bank, N.A.
and each of Mobility California, Inc., Mobility Idaho, Inc., Mobility Texas, Inc. and iGo Direct
Corporation. (3)10.5
    
    Form of Continuing Guarantee dated July 27, 2006 by each of Mobility California, Inc., Mobility
Idaho, Inc., Mobility Texas, Inc. and iGo Direct Corporation in favor of JPMorgan Chase Bank, N.A.
(3)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(1)
    
    Previously filed as an exhibit to Current Report on Form 8-K filed August 4, 2006.(2)
    
    Previously filed as an exhibit to Current Report on Form 8-K filed July 18, 2006.(3)
    
    Previously filed as an exhibit to Current Report on Form 8-K filed July 28, 2006. 30