##### 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 June 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
(Commission File Number)
    
    86-0843914
(IRS Employer Identification No.)17800 N. Perimeter Dr., Suite 200, Scottsdale, Arizona
(Address of Principal Executive Offices)
    
    85255
(Zip Code)
 (480) 596-0061
(Registrants telephone number, including area code)
 Not applicable
(Former Name, 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 June 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Income Statements for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 6. Exhibits
    
    
    27SIGNATURES
    
    
    27INDEX TO EXHIBITS
    
    
    28EX-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)
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,359
    
    
    $
    13,637Short-term investments
    
    
    9,504
    
    
    
    20,286Accounts receivable, net
    
    
    23,665
    
    
    
    18,778Inventories
    
    
    14,618
    
    
    
    13,373Prepaid expenses and other current assets
    
    
    387
    
    
    
    565Total current assets
    
    
    64,533
    
    
    
    66,639Property and equipment, net
    
    
    3,365
    
    
    
    2,410Goodwill
    
    
    10,807
    
    
    
    10,570Intangible assets, net
    
    
    3,945
    
    
    
    2,720Notes receivable and other assets
    
    
    480
    
    
    
    1,571Total assets
    
    $
    83,130
    
    
    $
    83,910LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    14,552
    
    
    $
    17,606Accrued expenses and other current liabilities
    
    
    3,848
    
    
    
    2,694Current portion of litigation settlement liability
    
    
    
    
    
    
    3,000Current portion of non-current liabilities
    
    
    431
    
    
    
    437Total current liabilities
    
    
    18,831
    
    
    
    23,737Non-current portion of litigation settlement liability
    
    
    
    
    
    
    799Other non-current liabilities, less current portion
    
    
    
    
    
    
    25Total liabilities
    
    
    18,831
    
    
    
    24,561Stockholders equity:Common stock
    
    
    316
    
    
    
    308Additional paid-in capital
    
    
    165,473
    
    
    
    160,622Accumulated deficit
    
    
    (101,643
    )
    
    
    (101,685
    )Accumulated other comprehensive income
    
    
    153
    
    
    
    104Total stockholders equity
    
    
    64,299
    
    
    
    59,349Total liabilities and stockholders equity
    
    $
    83,130
    
    
    $
    83,910
  3




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##### Table of Contents



MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED INCOME STATEMENTS
 (In thousands, except per share amounts)
 (unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    26,147
    
    
    $
    20,427
    
    
    $
    48,984
    
    
    $
    38,785Cost of revenue
    
    
    18,581
    
    
    
    14,016
    
    
    
    34,461
    
    
    
    26,897Gross profit
    
    
    7,566
    
    
    
    6,411
    
    
    
    14,523
    
    
    
    11,888Operating expenses:Marketing and sales
    
    
    2,256
    
    
    
    1,912
    
    
    
    4,285
    
    
    
    3,898Research and development
    
    
    1,897
    
    
    
    1,517
    
    
    
    3,770
    
    
    
    2,914General and administrative
    
    
    2,424
    
    
    
    3,050
    
    
    
    6,815
    
    
    
    6,109Total operating expenses
    
    
    6,577
    
    
    
    6,479
    
    
    
    14,870
    
    
    
    12,921Income (loss) from operations
    
    
    989
    
    
    
    (68
    )
    
    
    (347
    )
    
    
    (1,033
    )Other income (expense):Interest income (expense), net
    
    
    315
    
    
    
    183
    
    
    
    618
    
    
    
    221Litigation settlement expense
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    Gain on disposal of assets and other income (expense), net
    
    
    1
    
    
    
    11,638
    
    
    
    21
    
    
    
    11,638Income before provision for income tax
    
    
    1,305
    
    
    
    11,753
    
    
    
    42
    
    
    
    10,826Provision for income tax
    
    
    
    
    
    
    285
    
    
    
    
    
    
    
    285Net income
    
    $
    1,305
    
    
    $
    11,468
    
    
    $
    42
    
    
    $
    10,541Net income per share:Basic
    
    $
    0.04
    
    
    $
    0.38
    
    
    $
    0.00
    
    
    $
    0.36Diluted
    
    $
    0.04
    
    
    $
    0.36
    
    
    $
    0.00
    
    
    $
    0.34Weighted average common shares outstanding:Basic
    
    
    31,289
    
    
    
    30,278
    
    
    
    31,109
    
    
    
    29,439Diluted
    
    
    32,723
    
    
    
    32,017
    
    
    
    32,629
    
    
    
    31,095
  4




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MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (unaudited)
 Six months endedJune 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    42
    
    
    $
    10,541Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Provision for accounts receivable and sales returns and credits
    
    
    170
    
    
    
    212Depreciation and amortization
    
    
    968
    
    
    
    978Amortization of deferred compensation
    
    
    977
    
    
    
    728Impairment of tooling equipment
    
    
    31
    
    
    
    82Gain on disposal of assets
    
    
    
    
    
    
    (11,638
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,270
    )
    
    
    21Inventories
    
    
    (840
    )
    
    
    (6
    )Prepaid expenses and other assets
    
    
    1,029
    
    
    
    (260
    )Accounts payable
    
    
    (4,121
    )
    
    
    572Accrued expenses and other current liabilities
    
    
    (1,943
    )
    
    
    31Net cash (used in) provided by operating activities
    
    
    (7,957
    )
    
    
    1,261Cash flows from investing activities:Purchase of property and equipment
    
    
    (709
    )
    
    
    (692
    )Proceeds from sale of intangible assets
    
    
    
    
    
    
    11,692Sale (purchase) of investments, net
    
    
    10,800
    
    
    
    (14,019
    )Net cash provided by (used) in investing activities
    
    
    10,091
    
    
    
    (3,019
    )Cash flows from financing activities:Payment of non-current liabilities
    
    
    (25
    )
    
    
    (25
    )Net proceeds from issuance of common stock
    
    
    54
    
    
    
    9,942Proceeds from exercise of options, warrants, and repayment of
stock subscription notes receivable
    
    
    528
    
    
    
    881Net cash provided by financing activities
    
    
    557
    
    
    
    10,798Effects of exchange rate changes on cash and cash equivalents
    
    
    31
    
    
    
    (29
    )Net increase in cash and cash equivalents
    
    
    2,722
    
    
    
    9,011Cash and cash equivalents, beginning of period
    
    
    13,637
    
    
    
    12,768Cash and cash equivalents, end of period
    
    $
    16,359
    
    
    $
    21,779
  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
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005Net income:As reported
    
    $
    11,468
    
    
    $
    10,541Total stock-based employee
compensation expense determined
under fair-value-based method for
all rewards, net of tax of $0 for
all periods
    
    
    (59
    )
    
    
    (1,956
    )Pro forma
    
    $
    11,409
    
    
    $
    8,585Net income per share  basic:As reported
    
    $
    0.38
    
    
    $
    0.36Pro forma
    
    $
    0.38
    
    
    $
    0.29Net income per share  diluted:As reported
    
    $
    0.36
    
    
    $
    0.34Pro forma
    
    $
    0.36
    
    
    $
    0.28
 ( a ) Stock Options
    WeightedAverageExerciseNumber
    
    
    PriceOutstanding, December 31, 2005
    
    
    1,182,746
    
    
    $
    4.92Granted
    
    
    
    
    
    
    Canceled
    
    
    (20,635
    )
    
    
    4.26Exercised
    
    
    (307,085
    )
    
    
    1.79Outstanding, June 30, 2006
    
    
    855,026
    
    
    $
    6.06
 7




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##### Table of Contents



Weighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    AverageOptions
    
    
    Remaining
    
    
    Exercise
    
    
    Options
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Contractual Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$0.79-$1.78
    
    
    239,128
    
    
    
    2.35
    
    
    $
    1.27
    
    
    
    196,921
    
    
    $
    1.28$1.79-$8.03
    
    
    226,190
    
    
    
    2.83
    
    
    
    5.90
    
    
    
    222,619
    
    
    
    5.93$8.04-$9.00
    
    
    138,708
    
    
    
    4.00
    
    
    
    8.50
    
    
    
    138,708
    
    
    
    8.50$9.01-$11.95
    
    
    251,000
    
    
    
    3.47
    
    
    
    9.43
    
    
    
    251,000
    
    
    
    9.43$0.79-$11.95
    
    
    855,026
    
    
    
    3.07
    
    
    $
    6.06
    
    
    
    809,248
    
    
    $
    6.33
   ( b ) Restricted Stock Units
    2004 Directors Plan
    
    
    2004 Omnibus PlanWeighted Average
    
    
    
    
    
    
    Weighted AverageValue per
    
    
    
    
    
    
    Value perNumber
    
    
    Share
    
    
    Number
    
    
    ShareOutstanding, December 31, 2005
    
    
    141,900
    
    
    $
    8.51
    
    
    
    766,917
    
    
    $
    7.53Granted
    
    
    37,200
    
    
    
    7.15
    
    
    
    272,068
    
    
    
    8.05Canceled
    
    
    
    
    
    
    
    
    
    
    (117,006
    )
    
    
    7.43Released to common stock
    
    
    (14,700
    )
    
    
    8.54
    
    
    
    (14,599
    )
    
    
    7.32Released for settlement of taxes
    
    
    
    
    
    
    
    
    
    
    (5,745
    )
    
    
    7.32Outstanding, June 30, 2006
    
    
    164,400
    
    
    $
    8.20
    
    
    
    901,635
    
    
    $
    7.71
 ( c ) Employee Stock Purchase Plan
  (3) Acquisition
  8




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##### Table of Contents



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
    June 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
    
    $
    1,735
    
    
    $
    (1
    )
    
    $
    1,734
    
    
    $
    6,831
    
    
    $
    (3
    )
    
    $
    6,828Corporate notes and bonds
    
    
    4,666
    
    
    
    (8
    )
    
    
    4,658
    
    
    
    8,295
    
    
    
    (21
    )
    
    
    8,274Bankers acceptance
    
    
    1,899
    
    
    
    3
    
    
    
    1,902
    
    
    
    1,801
    
    
    
    
    
    
    
    1,801Asset backed securities
 fixed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    900
    
    
    
    
    
    
    
    9008,300
    
    
    
    (6
    )
    
    
    8,294
    
    
    
    17,827
    
    
    
    (24
    )
    
    
    17,803U.S. government securities
    
    
    1,213
    
    
    
    (3
    )
    
    
    1,210
    
    
    
    2,486
    
    
    
    (3
    )
    
    
    2,483$
    9,513
    
    
    $
    (9
    )
    
    $
    9,504
    
    
    $
    20,313
    
    
    $
    (27
    )
    
    $
    20,286
 (5) Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    4,708
    
    
    $
    2,946Finished goods
    
    
    9,910
    
    
    
    10,427$
    14,618
    
    
    $
    13,373
 9




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##### Table of Contents



(6) Goodwill
  High Power
    
    
    ConnectivityGroup
    
    
    Group
    
    
    TotalReported balance at December 31, 2005
    
    $
    3,578
    
    
    $
    6,992
    
    
    $
    10,570Acquisition of Think Outside
    
    
    
    
    
    
    237
    
    
    
    237Reported balance at June 30, 2006
    
    $
    3,578
    
    
    $
    7,229
    
    
    $
    10,807
 (7) Intangible Assets
  June 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
    
    
    $
    1,947
    
    
    $
    (856
    )
    
    $
    1,091
    
    
    $
    1,947
    
    
    $
    (743
    )
    
    $
    1,204Patents and trademarks
    
    
    5
    
    
    
    2,876
    
    
    
    (1,136
    )
    
    
    1,740
    
    
    
    2,018
    
    
    
    (968
    )
    
    
    1,050Trade names
    
    
    10
    
    
    
    378
    
    
    
    (145
    )
    
    
    233
    
    
    
    378
    
    
    
    (126
    )
    
    
    252Customer intangibles
    
    
    5
    
    
    
    1,442
    
    
    
    (561
    )
    
    
    881
    
    
    
    662
    
    
    
    (448
    )
    
    
    214Total
    
    
    
    
    
    $
    6,643
    
    
    $
    (2,698
    )
    
    $
    3,945
    
    
    $
    5,005
    
    
    $
    (2,285
    )
    
    $
    2,720
  (8) Line of Credit
   (9) Non-current Liabilities
  June 30,
    
    
    December 31,2006
    
    
    2005Estimate of Invision earn-out
    
    $
    406
    
    
    $
    412Liability for license fee
    
    
    25
    
    
    
    50431
    
    
    
    462Less current portion
    
    
    431
    
    
    
    437Non-current liabilities, less current portion
    
    $
    
    
    
    $
    25
  10




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##### Table of Contents



(10) Stockholders Equity
  (11) Net Income per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic net income per share computation:Numerator:Net income
    
    $
    1,305
    
    
    $
    11,468
    
    
    $
    42
    
    
    $
    10,541Denominator:Weighted average number of common shares outstanding
    
    
    31,289
    
    
    
    30,278
    
    
    
    31,109
    
    
    
    29,439Basic net income per share:
    
    $
    0.04
    
    
    $
    0.38
    
    
    $
    0.00
    
    
    $
    0.36Diluted net income per share computation:Numerator:Net income
    
    $
    1,305
    
    
    $
    11,468
    
    
    $
    42
    
    
    $
    10,541Denominator:Weighted average number of common shares outstanding
    
    
    31,289
    
    
    
    30,278
    
    
    
    31,109
    
    
    
    29,439Effect of dilutive stock options, warrants, and restricted stock units
    
    
    1,434
    
    
    
    1,584
    
    
    
    1,520
    
    
    
    1,444Dilutive effect of preferred shares if converted to common shares at
the beginning of the period
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    21232,723
    
    
    
    32,017
    
    
    
    32,629
    
    
    
    31,095Diluted net income per share:
    
    $
    0.04
    
    
    $
    0.36
    
    
    $
    0.00
    
    
    $
    0.34Stock options not included in dilutive net income per share since antidilutive
    
    
    492
    
    
    
    310
    
    
    
    381
    
    
    
    461Warrants not included in dilutive net income per share since antidilutive
    
    
    1,195
    
    
    
    
    
    
    
    1,190
    
    
    
    2,381
 (12) Business Segments, Concentration of Credit Risk and Significant Customers
  11




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:High-Power Group
    
    $
    16,327
    
    
    $
    14,191
    
    
    $
    30,330
    
    
    $
    28,006Low-Power Group
    
    
    3,835
    
    
    
    1,141
    
    
    
    6,511
    
    
    
    1,141Connectivity Group
    
    
    5,985
    
    
    
    5,095
    
    
    
    12,143
    
    
    
    9,638$
    26,147
    
    
    $
    20,427
    
    
    $
    48,984
    
    
    $
    38,785
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating income (loss):High-Power Group
    
    $
    3,366
    
    
    $
    3,027
    
    
    $
    5,702
    
    
    $
    4,545Low-Power Group
    
    
    (75
    )
    
    
    (599
    )
    
    
    (245
    )
    
    
    (599
    )Connectivity Group
    
    
    122
    
    
    
    554
    
    
    
    1,011
    
    
    
    1,131Corporate
    
    
    (2,424
    )
    
    
    (3,050
    )
    
    
    (6,815
    )
    
    
    (6,109
    )$
    989
    
    
    $
    (68
    )
    
    $
    (347
    )
    
    $
    (1,033
    )
  June 30,
    
    
    December 31,2006
    
    
    2005Assets:High-Power Group
    
    $
    35,277
    
    
    $
    33,193Low-Power Group
    
    
    3,071
    
    
    
    287Connectivity Group
    
    
    17,128
    
    
    
    14,961Corporate
    
    
    27,654
    
    
    
    35,469$
    83,130
    
    
    $
    83,910
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005High-power mobile electronic power products
    
    $
    15,899
    
    
    $
    13,030
    
    
    $
    28,884
    
    
    $
    24,813Low-power mobile electronic power products
    
    
    3,608
    
    
    
    1,510
    
    
    
    6,614
    
    
    
    2,664Handheld products
    
    
    4,439
    
    
    
    3,565
    
    
    
    9,018
    
    
    
    6,370Expansion and docking products
    
    
    1,389
    
    
    
    1,547
    
    
    
    2,968
    
    
    
    3,338Portable keyboard products
    
    
    167
    
    
    
    
    
    
    
    167
    
    
    
    Accessories and other products
    
    
    645
    
    
    
    775
    
    
    
    1,333
    
    
    
    1,600Total revenues
    
    $
    26,147
    
    
    $
    20,427
    
    
    $
    48,984
    
    
    $
    38,785
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005North America (principally United States)
    
    $
    22,002
    
    
    $
    17,433
    
    
    $
    41,998
    
    
    $
    33,002Europe
    
    
    1,871
    
    
    
    1,432
    
    
    
    3,218
    
    
    
    2,674Asia Pacific
    
    
    2,220
    
    
    
    1,562
    
    
    
    3,709
    
    
    
    3,109All other
    
    
    54
    
    
    
    
    
    
    
    59
    
    
    
    $
    26,147
    
    
    $
    20,427
    
    
    $
    48,984
    
    
    $
    38,785
 12




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005OEM and private-label-resellers
    
    
    61
    %
    
    
    63
    %
    
    
    62
    %
    
    
    63
    %Retailers and distributors
    
    
    31
    %
    
    
    22
    %
    
    
    29
    %
    
    
    22
    %Other
    
    
    8
    %
    
    
    15
    %
    
    
    9
    %
    
    
    15
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005High-power mobile electronic power products
    
    
    38
    %
    
    
    37
    %
    
    
    38
    %
    
    
    36
    %Low-power mobile electronic power products
    
    
    46
    %
    
    
    49
    %
    
    
    48
    %
    
    
    43
    %Handheld products
    
    
    37
    %
    
    
    37
    %
    
    
    37
    %
    
    
    35
    %Expansion and docking products
    
    
    59
    %
    
    
    61
    %
    
    
    58
    %
    
    
    61
    %Accessories and other products
    
    
    48
    %
    
    
    46
    %
    
    
    48
    %
    
    
    46
    %
      (13) Contingencies
    
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  13




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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.
 14




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##### Table of Contents



Low-Power Group.
 Connectivity Group. ®
    Critical Accounting Policies and Estimates
   15




---



##### Table of Contents



Revenue Recognition.
    Inventory Valuation.
 Goodwill and Intangible Assets Valuation.
   16




---



##### Table of Contents



Deferred Tax Valuation Allowance.
 Results of Operations
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue
    
    
    71.1
    %
    
    
    68.6
    %
    
    
    70.4
    %
    
    
    69.3
    %Gross profit
    
    
    28.9
    %
    
    
    31.4
    %
    
    
    29.6
    %
    
    
    30.7
    %Operating expenses:Sales and marketing
    
    
    8.6
    %
    
    
    9.4
    %
    
    
    8.7
    %
    
    
    10.1
    %Research and development
    
    
    7.3
    %
    
    
    7.4
    %
    
    
    7.7
    %
    
    
    7.5
    %General and administrative
    
    
    9.3
    %
    
    
    14.9
    %
    
    
    13.9
    %
    
    
    15.8
    %Total operating expenses
    
    
    25.2
    %
    
    
    31.7
    %
    
    
    30.4
    %
    
    
    33.3
    %Income (loss) from operations
    
    
    3.8
    %
    
    
    (0.3
    %)
    
    
    (0.7
    %)
    
    
    (2.7
    %)Other income (expense):Interest, net
    
    
    1.2
    %
    
    
    0.9
    %
    
    
    1.3
    %
    
    
    0.6
    %Other, net
    
    
    0.0
    %
    
    
    57.0
    %
    
    
    (0.5
    %)
    
    
    30.0
    %Provision for income tax
    
    
    0.0
    %
    
    
    (1.4
    %)
    
    
    0.0
    %
    
    
    (0.7
    %)Net income
    
    
    5.0
    %
    
    
    56.1
    %
    
    
    0.1
    %
    
    
    27.2
    %
 Comparison of Three Months Ended June 30, 2006 and 2005
 Revenue .
 Three Months
    
    
    Three Months
    
    
    Increase
    
    
    Percentage changeEnded
    
    
    Ended
    
    
    from same period
    
    
    from the same periodJune 30, 2006
    
    
    June 30, 2005
    
    
    in the prior year
    
    
    in the prior yearHigh-Power Group
    
    $
    16,327
    
    
    $
    14,191
    
    
    $
    2,136
    
    
    
    15.1
    %Low-Power Group
    
    
    3,835
    
    
    
    1,141
    
    
    
    2,694
    
    
    
    236.1
    %Connectivity Group
    
    
    5,985
    
    
    
    5,095
    
    
    
    890
    
    
    
    17.5
    %Total Revenue
    
    $
    26,147
    
    
    $
    20,427
    
    
    $
    5,720
    
    
    
    28.0
    %
 High-Power Group.
 Low-Power Group.
 17




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##### Table of Contents



Connectivity Group.
 Cost of revenue, gross profit and gross margin .
 Three Months
    
    Three MonthsEnded
    
    Ended
    
    Increase (decrease)
    
    Percentage change fromJune 30,
    
    June 30,
    
    from same period in
    
    the same period in the2006
    
    2005
    
    the prior year
    
    prior yearCost of revenue
    
    $
    18,581
    
    
    $
    14,016
    
    
    $
    4,565
    
    
    
    32.6
    %Gross profit
    
    $
    7,566
    
    
    $
    6,411
    
    
    $
    1,155
    
    
    
    18.0
    %Gross margin
    
    
    28.9
    %
    
    
    31.4
    %
    
    
    (2.5
    )%
    
    
    (8.0
    )%
  Sales and marketing .
 Three Months
    
    Three Months
    
    Increase
    
    Percentage changeEnded
    
    Ended
    
    from same period
    
    from the same periodJune 30, 2006
    
    June 30, 2005
    
    in the prior year
    
    in the prior yearSales and marketing
    
    $
    2,256
    
    
    $
    1,912
    
    
    $
    344
    
    
    
    18.0
    %
  Research and development .
 Three Months
    
    Three Months
    
    Increase from
    
    Percentage change fromEnded
    
    Ended
    
    same period
    
    the same period in theJune 30, 2006
    
    June 30, 2005
    
    in the prior year
    
    prior yearResearch and development
    
    $
    1,897
    
    
    $
    1,517
    
    
    $
    380
    
    
    
    25.0
    %
 18




---



##### Table of Contents



General and administrative.
 Three Months
    
    Three Months
    
    Decrease
    
    Percentage changeEnded
    
    Ended
    
    from same period
    
    from the same periodJune 30, 2006
    
    June 30, 2005
    
    in the prior year
    
    in the prior yearGeneral and administrative
    
    $
    2,424
    
    
    $
    3,050
    
    
    $
    (626
    )
    
    
    (20.5
    )%
  Interest income (expense) net.
 Three Months
    
    Three Months
    
    Increase
    
    Percentage changeEnded
    
    Ended
    
    from same period
    
    from the same periodJune 30, 2006
    
    June 30, 2005
    
    in the prior year
    
    in the prior yearInterest income
    
    $
    340
    
    
    $
    207
    
    
    $
    133
    
    
    
    64.3
    %Interest expense
    
    
    25
    
    
    
    24
    
    
    
    1
    
    
    
    4.2
    %Net interest income (expense)
    
    $
    315
    
    
    $
    183
    
    
    $
    132
    
    
    
    72.1
    %
 Other income (expense) net .
 Income taxes .
 Comparison of Six Months Ended June 30, 2006 and 2005
 Revenue .
 Six Months
    
    
    Six Months
    
    
    Increase
    
    
    Percentage changeEnded June
    
    
    Ended June 30,
    
    
    from same period
    
    
    from the same period30, 2006
    
    
    2005
    
    
    in the prior year
    
    
    in the prior yearHigh-Power Group
    
    $
    30,330
    
    
    $
    28,006
    
    
    $
    2,324
    
    
    
    8.3
    %Low-Power Group
    
    
    6,511
    
    
    
    1,141
    
    
    
    5,370
    
    
    
    470.6
    %Connectivity Group
    
    
    12,143
    
    
    
    9,638
    
    
    
    2,505
    
    
    
    26.0
    %Total Revenue
    
    $
    48,984
    
    
    $
    38,785
    
    
    $
    10,199
    
    
    
    26.3
    %
 19




---



##### Table of Contents



High-Power Group.
 Low-Power Group.
 Connectivity Group.
 Cost of revenue, gross profit and gross margin .
 Six Months
    
    Six Months
    
    Increase (decrease)
    
    Percentage change fromEnded June
    
    Ended June
    
    from same period in
    
    the same period in the30, 2006
    
    30, 2005
    
    the prior year
    
    prior yearCost of revenue
    
    $
    34,461
    
    
    $
    26,897
    
    
    $
    7,564
    
    
    
    28.1
    %Gross profit
    
    $
    14,523
    
    
    $
    11,888
    
    
    $
    2,635
    
    
    
    22.2
    %Gross margin
    
    
    29.6
    %
    
    
    30.7
    %
    
    
    (1.1
    )%
    
    
    (3.6
    )%
  Sales and marketing .
 Six Months
    
    Six Months
    
    Increase
    
    Percentage changeEnded June
    
    Ended June 30,
    
    from same period
    
    from the same period30, 2006
    
    2005
    
    in the prior year
    
    in the prior yearSales and marketing
    
    $
    4,285
    
    
    $
    3,898
    
    
    $
    387
    
    
    
    9.9
    %
 20




---



##### Table of Contents



Research and development .
 Six Months
    
    Six Months
    
    Increase
    
    Percentage changeEnded June
    
    Ended June
    
    from same period
    
    from the same period30, 2006
    
    30, 2005
    
    in the prior year
    
    in the prior yearResearch and development
    
    $
    3,770
    
    
    $
    2,914
    
    
    $
    856
    
    
    
    29.4
    %
  General and administrative.
 Six Months
    
    Six Months
    
    Increase
    
    Percentage changeEnded June 30,
    
    Ended June
    
    from same period
    
    from the same period2006
    
    30, 2005
    
    in the prior year
    
    in the prior yearGeneral and administrative
    
    $
    6,815
    
    
    $
    6,109
    
    
    $
    706
    
    
    
    11.6
    %
  Interest income (expense) net.
 Six Months
    
    Six Months
    
    Increase (decrease)
    
    Percentage changeEnded June
    
    Ended June
    
    from same period
    
    from the same period30, 2006
    
    30, 2005
    
    in the prior year
    
    in the prior yearInterest income
    
    $
    663
    
    
    $
    267
    
    
    $
    396
    
    
    
    148.3
    %Interest expense
    
    
    45
    
    
    
    46
    
    
    
    (1
    )
    
    
    (2.2
    )%Net interest income (expense)
    
    $
    618
    
    
    $
    221
    
    
    $
    397
    
    
    
    179.6
    %
 Other income (expense) net .
 Income taxes .
 21




---



##### Table of Contents



Operating Outlook
  
    
    Restructuring the strategic alliance with RadioShack to reduce their role in driving
distribution into other channels beyond the RadioShack stores. As a result, we reduced our
pricing on certain products sold to RadioShack, effective as of April 1, 2006, we have
cancelled the warrants RadioShack held to purchase Mobility common stock, and we are no
longer obligated to pay RadioShack a 24.5% share of the net profit of the low-power
products operating division. RadioShack will continue to carry our low-power products in
its more than 6,000 retail stores.
    
    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.
    
    Launching our first 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.
   Liquidity and Capital Resources
  Six Months Ended June 30,2006
    
    
    2005Net cash provided by (used in) operating activities
    
    $
    (7,957
    )
    
    $
    1,261Net cash provided by (used in) investing activities
    
    
    10,091
    
    
    
    (3,019
    )Net cash provided by financing activities
    
    
    557
    
    
    
    10,798Foreign currency exchange impact on cash flow
    
    
    31
    
    
    
    (29
    )Increase (decrease) in cash and cash equivalents
    
    $
    2,722
    
    
    $
    9,011Cash and cash equivalents at beginning of period
    
    $
    13,637
    
    
    $
    12,768Cash and cash equivalents at end of period
    
    $
    16,359
    
    
    $
    21,779
 Cash and Cash Flow
 
    
    Net cash (used in) provided by operating activities.Cash was used in operating
activities for the six months ended June 30, 2006 primarily to fund working capital
necessary to support our growing revenue base.
 22




---



##### Table of Contents



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 six months ended
June 30, 2006. Later in 2006, we expect to generate positive cash flow from operating
activities as we expect our operating results to be at or near breakeven with non-cash
items and changes in working capital to have a relatively neutral effect on cash flows.
Our consolidated cash flow operating metrics are as follows:
 June 30, 2006
    
    June 30, 2005Days outstanding in ending accounts receivable (DSOs)
    
    
    87
    
    
    
    77Inventory turns
    
    
    5
    
    
    
    7
 The increase in DSOs at June 30, 2006 compared to June 30, 2005, is primarily due to
the timing of payments received by our large OEM, retail and private-label reseller
customers. Also, at June 30, 2006 a $1.5 million receivable was recorded in connection
with an insurance recovery, which was collected shortly after June 30, 2006. Excluding
the $1.5 million insurance receivable, DSOs increased to
81 days at June 30, 2006 compared to 77 days at
June 30, 2005. We expect DSOs to
improve during 2006 as we continue to leverage our key OEM, private-label reseller and
retail customer relationships. The decline in inventory turns is primarily due to
investment in low-power and connectivity inventories in anticipation of revenue later in
2006. We expect to manage inventory growth during 2006 and we expect inventory turns to
improve as we increase sales volumes in 2006.
    
    Net cash provided by investing activities.For the six months ended June 30, 2006,
net cash was provided by investing activities as we generated proceeds from the sale of
investments of $10.8 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 six months ended June 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
    
    $
    530
    
    
    $
    835
    
    
    $
    490
    
    
    $
    19
    
    
    $
    
    
    
    $
    Inventory Purchase obligations
    
    
    20,162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totals
    
    $
    20,692
    
    
    $
    860
    
    
    $
    490
    
    
    $
    19
    
    
    $
    
    
    
    $
    
 Off-Balance Sheet Arrangements.
 Acquisitions and dispositions.
 23




---



##### Table of Contents



Liquidity Outlook.
 Recent Accounting Pronouncements
    24




---



##### 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
  25




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##### Table of Contents



ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    The re-election of Charles R. Mollo and Robert W. Shaner as Class III members of our
Board of Directors to serve until the 2009 annual meeting of stockholders and until their
respective successors have been elected and qualified; and2.
    
    The selection of KPMG LLP as our independent registered public accounting firm for the
year ending December 31, 2006.
  Shares
    
    Shares
    
    
    
    
    
    Abstention/Voted
    
    Voted
    
    Shares
    
    BrokerFor
    
    Against
    
    Withheld
    
    Non-Votes1. Election of Directors:Charles R. Mollo
    
    
    25,592,170

    
    
    

    
    
    319,696

    
    
    Robert W. Shaner
    
    
    25,655,258

    
    
    

    
    
    256,608

    
    
    2. Ratification of KPMG LLP
as independent registered
public accounting firm
    
    
    25,710,589

    
    
    184,977

    
    
    

    
    
    16,300
  26




---



##### Table of Contents



ITEM 6. EXHIBITS
  MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
 
 SIGNATURES
  MOBILITY ELECTRONICS, INC.Dated: August 9, 2006
    
    By:
    
    /s/ Charles R. MolloCharles R. MolloPresident, Chief Executive Officerand Chairman of the Board(Principal Executive Officer)By:
    
    /s/ Joan W. BrubacherJoan W. BrubacherExecutive Vice President and Chief Financial Officerand Authorized Officer of Registrant(Principal Financial Officer)By:
    
    /s/ Darryl S. BakerDarryl S. BakerVice President, Chief Accounting Officer and Controller
 27




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document31.1
    
    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 28