UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended MARCH 31, 2004

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

                          Commission File No.: 0-27878

                           NORTHGATE INNOVATIONS, INC.
             (Exact name of registrant as specified in its charter)

                Delaware                                 13-3779546
      (State or other jurisdiction                      (IRS Employer
    of incorporation or organization)                Identification No.)

              801 Sentous Street, City of Industry, California 91748
               (Address of principal executive offices)(Zip code)

       Registrant's telephone number, including area code: (626) 923-6000

Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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 whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The number of shares outstanding of each of the issuer's classes of common
stock, as of May 14, 2004, was 18,942,808 shares of Common Stock, $0.03 par
value.





<PAGE>

                           NORTHGATE INNOVATIONS, INC.

                               INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION                                             Page
                                                                           ----

Item 1. Financial Statements

Consolidated Balance Sheets................................................  3

Consolidated Statements of Operations......................................  4

Consolidated Statement of Stockholders' Equity.............................  5

Consolidated Statements of Cash Flows......................................  6

Notes to Condensed Consolidated Financial Statements.......................  7

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 14

Item 3. Quantitative and Qualitative Disclosures About Market Risks........ 32

Item 4. Controls and Procedures............................................ 32

PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K................................... 33

SIGNATURES................................................................. 34





<PAGE>

                           NORTHGATE INNOVATIONS, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                    March 31,              December 31,
                                                                       2004                    2003
                                                                -------------------     -----------------
                                                                -------------------     -----------------
                                                                   (unaudited)
<S>                                                             <C>                       <C>
ASSETS

Current assets:
  Cash and cash equivalents                                     $            814          $         464
  Accounts receivable, net of allowance for doubtful
    accounts of $682 and $911 in 2004 and 2003,
    respectively                                                           8,539                  6,597
  Inventories, net                                                         2,719                  3,480
  Prepaid expenses and other current assets                                  593                    573
                                                                 ---------------           ------------

     Total current assets                                                 12,665                 11,114

Equipment, net                                                               624                    709
Goodwill                                                                   3,492                  3,492
Other assets                                                                  82                     82
                                                                 ---------------           ------------

     Total assets                                               $         16,863          $      15,397
                                                                 ===============           ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                              $          5,705          $       5,710
  Accrued expenses                                                           555                    328
  Short-term financing                                                     1,247                      -
  Accrued royalties                                                        1,431                  1,431
  Convertible notes payable                                                  100                    100
  Dividends payable                                                          186                    186
  Advances from ESOP                                                         210                    210
  Advances from related party                                              1,000                  1,000
  Notes payable - current portion                                              4                     16
                                                                 ---------------           ------------

     Total current liabilities                                            10,438                  8,981

Notes payable, net of current portion                                      1,322                  1,355
                                                                 ---------------           ------------

     Total liabilities                                                    11,760                 10,336
                                                                 ---------------           ------------

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $0.01 par value; 5,000 shares authorized,
   1,350 shares issued and outstanding, liquidation
   preference of $1,350                                                       14                     14
  Common stock, $0.03 par value; 50,000 shares authorized,
   18,943 shares issued and outstanding                                      568                    568
  Additional paid-in capital                                              14,585                 14,572
  Accumulated deficit                                                     (3,501)                (3,530)
                                                                 ---------------           ------------
                                                                          11,666                 11,624

  Less: Unearned ESOP shares                                              (6,563)                (6,563)
                                                                 ---------------           ------------

     Total stockholders' equity                                            5,103                  5,061
                                                                 ---------------           ------------

     Total liabilities and stockholders' equity                 $         16,863          $      15,397
                                                                 ===============           ============
</TABLE>


      See accompanying notes to condensed consolidated financial statements
                                        3

<PAGE>

                           NORTHGATE INNOVATIONS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
                      (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                      For The Three Months Ended
                                                                  March 31,                March 31,
                                                                     2004                    2003
                                                              -------------------     --------------------


<S>                                                           <C>                       <C>
Net sales                                                     $         19,348          $      20,065
Cost of sales                                                           16,911                 19,227
                                                               ---------------           ------------

     Gross profit                                                        2,437                    838

Operating expenses                                                       2,268                  1,879
                                                               ---------------           ------------

     Operating profit (loss)                                               169                 (1,041)
                                                               ---------------           ------------

Other expense:
  Interest expense                                                         127                    133
  Other                                                                     13                     34
                                                               ---------------           ------------

     Total other expense                                                   140                    167
                                                               ---------------           ------------

Income (loss) before provision for income taxes                             29                 (1,208)

Provision for (benefit from) income taxes                                    -                    (79)
                                                               ---------------           -------------

Net income (loss)                                             $             29          $      (1,129)
                                                               ===============           ============

Basic income (loss) per share                                 $              -          $       (0.08)
                                                               ===============           ============

Diluted income (loss) per share                               $              -          $       (0.08)
                                                               ===============           ============

Weighted average shares of common stock outstanding:
   Basic                                                                18,943                 14,694
                                                               ===============           ============
   Diluted                                                              20,246                 14,694
                                                               ===============           ============
</TABLE>


      See accompanying notes to condensed consolidated financial statements
                                        4

<PAGE>

                           NORTHGATE INNOVATIONS, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (unaudited)
                                 (in thousands)


<TABLE>
<CAPTION>

                    Preferred Stock             Common Stock         Additional       Unearned                             Total
                 -----------------------    ---------------------      Paid-in          ESOP         Accumulated       Stockholders'
                   Shares       Amount      Shares       Amount        Capital         Shares          Deficit             Equity
                 -----------   ---------    --------    ---------   --------------   -----------    --------------    --------------
<S>                   <C>      <C>          <C>         <C>         <C>             <C>              <C>              <C>
Balance,
 January 1,
  2004                1,350    $    14      18,943      $   568     $  14,572       $  (6,563)       $  (3,530)       $     5,061

Stock-based
  compensation            -          -           -            -            13               -                -                 13

Net income                -          -           -            -             -               -               29                 29
                      -----      -----       -----       ------        ------        --------        ---------          ---------

Balance,
  March 31,
  2004                1,350    $    14      18,943      $   568     $  14,585       $  (6,563)       $  (3,501)       $     5,103
                      =====     ======      ======       ======      ========        ========         ========         ==========
</TABLE>


      See accompanying notes to condensed consolidated financial statements
                                        5

<PAGE>

                           NORTHGATE INNOVATIONS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                    For The Three Months Ended
                                                                March 31,                March 31,
                                                                   2004                    2003
                                                            -------------------     --------------------
<S>                                                          <C>                   <C>
Cash flows from operating activities:
    Net income (loss)                                        $             29      $         (1,129)
    Adjustments to reconcile net income (loss)
      to net cash used in operating activities:
        Depreciation                                                       87                    67
        Loss on disposal of fixed assets                                   19                     -
        Stock-based compensation                                           13                     -
        Provision for losses on accounts receivable                        22                     -
        Changes in operating assets and liabilities:
           Accounts receivable                                         (1,964)               (7,597)
           Inventories                                                    761                (2,506)
           Prepaid expenses and other current assets                      (20)                  (37)
           Accounts payable                                                (5)                7,933
           Accrued expenses                                               227                    16
           ESOP interest payable                                            -                   101
           Accrued royalties                                                -                    (9)
                                                              ---------------       ---------------

    Net cash used in operating activities                                (831)               (3,161)
                                                              ---------------       ---------------

Cash flows from investing activities:
    Purchases of equipment                                                (62)                  (17)
                                                              ---------------       ---------------

    Net cash used in investing activities                                 (62)                  (17)
                                                              ---------------       ---------------

Cash flows from financial activities:
    Borrowings on line of credit                                            -                 1,994
    Payments on note payable to bank                                       (4)                    -
    Advances from related party                                           500                     -
    Payments on advances from related party                              (500)                    -
    Borrowings under short-term financing, net                          1,247                     -
                                                              ---------------       ---------------

Net cash provided by financing activities                               1,243                 1,994
                                                              ---------------       ---------------

Net increase (decrease) in cash and cash equivalents                      350                (1,184)

Cash and cash equivalents, beginning of period                            464                 1,837
                                                              ---------------       ---------------

Cash and cash equivalents, end of period                     $            814      $            653
                                                              ===============       ===============
</TABLE>

The Company paid $57 and $1 for interest and $0 and $0 for taxes, during the
three months ended March 31, 2004 and 2003, respectively.


      See accompanying notes to condensed consolidated financial statements
                                        6

<PAGE>

                           NORTHGATE INNOVATIONS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - BASIS OF PRESENTATION
------------------------------

The  accompanying  consolidated  financial  statements  include the  accounts of
Northgate  Innovations,  Inc.  (formerly  Mcglen Internet  Group,  Inc.) and its
wholly owned subsidiaries and have been prepared, without audit, pursuant to the
rules and regulations of the Securities and Exchange  Commission  (SEC). We have
eliminated  all  significant  intercompany  transactions.  We have  condensed or
omitted  certain  information  and  footnote  disclosures  normally  included in
financial  statements  prepared in accordance with generally accepted accounting
principles in the United States of America pursuant to such  regulations.  These
financial  statements  should be read in conjunction with the audited  financial
statements and the notes thereto  included in our Annual Report on Form 10-K for
the year ended December 31, 2003.

In the opinion of our management,  the accompanying financial statements contain
all adjustments  necessary to present fairly our financial position at March 31,
2004 and December 31, 2003, and the results of operations and cash flows for the
three months ended March 31, 2004 and March 31, 2003.  The results of operations
for the  interim  periods  are not  necessarily  indicative  of the  results  of
operations for the full year.

The preparation of financial statements in accordance with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that affect the amounts  reported in the  financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

As defined by  Statement  of  Financial  Accounting  Standards  (SFAS) No.  131,
"Disclosures  about  Segments  of an  Enterprise  and Related  Information,"  we
operate in one business segment,  using one measurement of profitability for our
business.

NOTE 2 - OVERVIEW AND RECENT DEVELOPMENTS
-----------------------------------------

We are a Delaware corporation headquartered in the City of Industry, California.
We are a distributor of personal computers, notebooks,  accessories and software
products.  We specialize in selling these products through  television  shopping
networks,  mail order catalog  companies and large  electronic and office supply
chain stores,  principally in the United States. We are organized and operate as
one business segment.

In December  2003,  an  investor  group  acquired a majority of our  outstanding
common stock and  appointed a majority of the members of our board of directors.
In connection  with this  transaction,  we sold  4,000,000  shares of our common
stock to this investor group at $0.25 per share, or a total of $1,000,000.  Also
in connection with this  transaction,  we agreed to issue warrants to purchase a
total of 2,500,000  shares of our common stock to a member of the investor group
as consideration for certain  consulting  services to be provided for six months
following  the date of the stock  purchase.  The  warrants  were issued in three
equal installments of 833,333,  the first of which occurred on December 9, 2003.
The warrants are exercisable over a five-year  period at $0.50 per share.  Since
the change in control resulting from this transaction only involved 50.5% of our
outstanding  common stock,  on a fully  diluted  basis,  "push-down  accounting"
treatment  does not apply.  Therefore,  we accounted  for the  acquisition  on a
historical basis and did not apply purchase accounting.

                                       7
<PAGE>

                           NORTHGATE INNOVATIONS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - OVERVIEW AND RECENT DEVELOPMENTS, continued
----------------------------------------------------

In January and February of 2004, our new board of directors employed new members
of our  management  team,  including a new chief  executive  officer.  Under the
direction of our  restructured  management  team,  we began  implementing  a new
strategic  focus  designed  to  complement  our  existing  business.  We are now
developing a business plan to launch a hardware and software  offering  targeted
at the youth market,  which we believe is an underserved segment of the personal
computer and Internet market.

Our new product  initiative will require  significant  capital to fund operating
expenses,  including  research and development  expenses and sales and marketing
expenses,  capital  expenditures  and  working  capital  needs  until we achieve
positive cash flows from that initiative.  We expect to seek between  $5,000,000
and  $10,000,000 in external  equity  financing by the end of our current fiscal
year to fund our new  product  initiative.  We have yet to come to an  agreement
with potential  investors  regarding the terms of any such equity financing.  In
order to fund our current working capital needs, we have entered into a purchase
and sale  agreement  with a  financial  institution  under  which we may  assign
certain of our accounts  receivable  for  immediate  cash.  We are  currently in
discussions  with other financial  institutions  regarding  alternatives to this
funding source. We may decide to continue with our existing  arrangement or seek
other arrangements on terms that we believe would be more beneficial to meet our
long-term  requirements,   including  funding  a  portion  of  the  requirements
necessary to implement our new product initiative.  We cannot give any assurance
that any  additional  financing  will be  available,  that we can  ever  achieve
positive  operating  cash flows from our new product  initiative or that we will
have  sufficient  cash from any source to meet our needs. It is possible that we
will exhaust all available funds before we reach positive cash flow from our new
product  initiative.  If we are not able to raise sufficient external financing,
we will have to curtail our efforts to implement our new product initiative.

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------

Inventories
-----------

We state  inventories  at the lower of cost or market.  We determine  cost using
average cost.  Inventory costs include raw materials,  labor and overhead.  When
required,  we make provisions to reduce excess and obsolete inventories to their
estimated net realizable value.

From time to time we also maintain at our  facilities  consigned  inventory that
remains  the  property  of  the  vendors  supplying  the  inventory  ("consigned
inventory")  until such time as we elect to use the inventory.  At the time that
we elect to use the consigned inventory, the cost of such inventory is reflected
in our inventory  accounts and a corresponding  account payable to the vendor is
recorded.


Inventories, net, consists of the following (in thousands):

                                    March 31,            December 31
                               -------------------------------------------
                                      2004                   2003
                               -------------------    --------------------

Raw material                   $          2,547        $           2,995
WIP and finished goods                      172                      485
                                ---------------         ----------------

                               $          2,719        $           3,480
                                ===============         ================

                                       8
<PAGE>

                           NORTHGATE INNOVATIONS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES, continued
---------------------------------------------------

Goodwill and Other Intangible Assets
------------------------------------

We have adopted SFAS No. 142 "Goodwill and Other Intangible  Assets." Under SFAS
No. 142, goodwill  associated with acquisitions  consummated after June 30, 2001
is not to be  amortized,  and  effective  January  1, 2002,  goodwill  and other
intangible  assets  with  indefinite  lives are no longer  subject  to  periodic
amortization  but  are  instead  reviewed  annually  for  impairment,   or  more
frequently if impairment  indicators  arise. We decided to perform an impairment
test on goodwill as of December 31, 2003.  We  determined  that  $590,000 of the
recorded  goodwill  balance was  impaired and we wrote down that amount in 2003.
There can be no assurance,  however,  that market  conditions will not change or
demand  for our  services  will  continue,  which  could  result  in  additional
impairment of goodwill and other intangible assets in the future.

We record  identifiable  assets and  liabilities  acquired  in  connection  with
business  combinations   accounted  for  under  the  purchase  method  at  their
respective fair values.  We have recorded deferred income taxes to the extent of
differences  between the fair value and the tax basis of the assets acquired and
liabilities assumed.

Revenue Recognition
-------------------

We derive  revenue  primarily  from sales of our  personal  computers,  and to a
lesser extent, from software,  peripherals and accessories.  Generally,  we will
recognize revenue when persuasive  evidence of an arrangement  exists,  delivery
has occurred,  the fee is fixed or determinable  and collection is probable.  We
record  discounts  provided to resellers for achieving  purchasing  targets as a
reduction of revenue on the date of sale.

For sales of merchandise  owned and warehoused by us, we recognize  revenue when
title to  products  sold has  transferred  to the  customer in  accordance  with
shipping terms. We also sell merchandise from suppliers on a "drop-ship"  basis.
We take title to this  merchandise  from the time it is shipped by the  supplier
until the time it is received by the customer

Stock-Based Compensation
------------------------

We have adopted SFAS No. 123,  "Accounting for Stock-Based  Compensation."  SFAS
No. 123 requires disclosure of the compensation cost for stock-based  incentives
granted  after January 1, 1995 based on the fair value at grant date for awards.
At March 31, 2004,  we have one  stock-based  employee  compensation  plan,  the
Mcglen  Internet Group 2000 Stock Option Plan,  which is described more fully in
Note 10 to the Financial Statements contained in our Annual Report on Form 10-K.
We have also  adopted  a second  stock-based  employee  compensation  plan,  the
Northgate  Innovations,  Inc. 2004 Stock Incentive Plan,  subject to approval by
our  stockholders.  We  account  for  these  plans  under  the  recognition  and
measurement principles of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting  for  Stock  Issued  to  Employees,"  and  related  interpretations.
Approximately $13,000 of stock-based employee compensation cost related to these
plans is reflected in the  statement  of  operations  for the three months ended
March 31, 2004, in  connection  with certain  options  granted under those plans
which had exercise  prices less than the market value of the  underlying  common
stock on the dates of grant.  The following table  illustrates the effect on net
income (loss) and earnings  (loss) per share if we had applied the minimum value
recognition  provisions  of SFAS No. 123 to  stock-based  employee  compensation
(amounts in thousands, except per share data):

                                       9
<PAGE>

                           NORTHGATE INNOVATIONS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES, continued
---------------------------------------------------

<TABLE>
<CAPTION>
                                                                    March 31,
                                                    -------------------------------------------
                                                           2004                     2003
                                                    --------------------       ----------------
<S>                                                  <C>                     <C>
Net income (loss), as reported                       $             29        $        (1,129)

Add:

  Total stock-based compensation under APB 25                      13                      -

Deduct:
  Total stock-based compensation
   expense under fair value based
   method for all awards, net of
   related tax effects                                            (33)                   (10)
                                                      ----------------        ---------------

Pro forma net income (loss)                          $              9        $        (1,139)
                                                      ===============         ===============

Basic EPS - as reported                              $              -        $         (0.08)
                                                      ===============         ===============
Diluted EPS - as reported                            $              -        $         (0.08)
                                                      ===============         ===============
Basic EPS - pro forma                                $              -        $         (0.08)
                                                      ===============         ===============
Diluted EPS - pro forma                              $              -        $         (0.08)
                                                      ===============         ===============
</TABLE>

Net Income (Loss) Per Share
---------------------------

Basic net income (loss) per share excludes  dilution and is computed by dividing
net income by the weighted  average number of common shares  outstanding  during
the reported periods. Diluted net income (loss) per share reflects the potential
dilution  that could occur if other  rights to require us to issue  common stock
were exercised.  Each share of ESOP preferred stock is convertible  into 3.16582
shares of common stock.  Allocated ESOP shares  (including  shares  released for
allocation) are considered  dilutive for all periods presented.  The computation
of basic and diluted shares outstanding is as follows for the three months ended
March 31 (in thousands):

                                                       March 31,
                                       -----------------------------------------
                                              2004                     2003
                                       --------------------       --------------

Weighted average shares - basic                   18,943               14,694
Effect of dilutive shares                          1,303                    -
                                         ---------------              -------

Weighted average shares - dilutive                20,246               14,694


Since we reported a loss for the three months  ended March 31,  2003,  basic and
diluted weighted  average shares are the same for that period,  as the effect of
stock options and warrants per share are  anti-dilutive and thus not included in
the  diluted  loss per share  calculation.  There were no  additional  potential
dilutive shares at March 31, 2003.

                                       10
<PAGE>

                           NORTHGATE INNOVATIONS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - CONCENTRATIONS
-----------------------

Financial  instruments that potentially  subject us to a concentration of credit
risk consist  primarily of cash and cash  equivalents  and accounts  receivable.
Sales are primarily concentrated in the United States. We have primarily offered
consumers personal computers and related products through distribution  channels
that include large electronic and office supply retailers,  television  shopping
networks  and mail  order  catalogues.  We  perform  credit  evaluations  on our
customers  and we provide  allowances  for  potential  credit losses and product
sales  returns.  Some  key  components  included  in our  line of  products  are
currently  available  only from single or limited  sources.  The loss of a major
customer or the inability of one or more of our suppliers to meet our demand for
components in a timely and  cost-effective  manner could have a material adverse
impact on our financial condition or results of operations.

Historically,  we have  relied upon sales to a few  customers.  During the first
quarter of 2004,  approximately 53% of our revenues were from one customer. This
customer had an accounts  receivable  balance of  approximately  $6.1 million at
March 31,  2004.  During  the first  quarter of 2003,  approximately  25% of our
revenues  were  from  that  customer.  We  believe  that we could  locate  other
customers that would  purchase  merchandise on comparable  terms;  however,  the
establishment of new customer relationships could take several months.

For the three months ended March 31, 2004 and 2003,  one supplier  accounted for
approximately  %19 and 13%,  respectively,  of our total  purchases.  Management
believes that other suppliers  could provide  similar  merchandise on comparable
terms.

We had an  Internet  access and portal  co-marketing  agreement  with  Microsoft
Corporation  and the Microsoft  Network (MSN) to provide  Internet access to our
end users,  for which we paid MSN a royalty.  Under the agreement,  MSN also had
the obligation to pay us for our end users that continued as subscribers to MSN.
This  agreement  was  terminated  in July 2001.  We have  maintained  an accrual
balance of $1,400,000  related to this program  pending final  settlement of the
matter with Microsoft and MSN.

NOTE 5 - SHORT-TERM FINANCING
-----------------------------

At December  31, 2003,  we had a $2,500,000  revolving  credit  facility  with a
commercial bank. The facility expired in January 2004.

In February 2004 we entered into a purchase and sale  agreement with a financial
institution.  Under the terms of that  agreement,  we may assign  certain of our
accounts  receivable to the  financial  institution  for  immediate  cash in the
amount of 75% of the  assigned  receivables.  We also  receive a portion  of the
remaining  balance of the assigned  accounts  receivable,  depending on how soon
after assignment the financial  institution  receives payment on those accounts.
Under this arrangement we have an effective  interest rate of approximately 3.0%
to 4.0% per  month.  Under  the  purchase  and  sale  agreement,  the  financial
institution has certain rights of recourse  against us for uncollected  accounts
receivable.  The  arrangement  expires in August  2004,  with  automatic  annual
extensions  unless  either  party  gives 60 days  prior  written  notice  to the
contrary.  The financial  institution  may terminate the arrangement at any time
with 60 days prior written notice.  We expect to keep this  arrangement in place
until we can obtain another  facility on more  favorable  terms to us. We are in
discussions with several financial  institutions regarding alternative financing
arrangements,  but we do not currently  have any binding  commitments  regarding
such a facility.

                                       11
<PAGE>

                           NORTHGATE INNOVATIONS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - RELATED PARTY TRANSACTIONS
-----------------------------------

During 2003,  we recorded  approximately  $2,506,000 in advances from our former
chief  executive  officer,  Andy Teng. We recorded  approximately  $1,506,000 in
repayment of these  recorded  advances  during 2003.  During  January  2004,  we
recorded an additional  $500,000 in repayments to Mr. Teng.  These payments were
in violation of certain  restrictions in connection with our line of credit.  In
addition,  the payments were in violation of a subordination  agreement that Mr.
Teng executed for the benefit of the bank. Mr. Teng paid us $500,000 on February
2, 2004. The outstanding  recorded advances of $1,000,000 are due on demand. The
advances  from Mr.  Teng  recorded  by us, and the  payments  to Mr. Teng on the
recorded advances, were not approved by our board of directors.

On October 27, 2003,  we received an advance of  approximately  $200,000  from a
trust account in the name of our employee stock  ownership plan, or ESOP. At the
instruction  of Mr. Teng,  we recorded that advance as an advance from Mr. Teng,
individually.  In January  2004, we received  another  advance of $10,000 from a
trust  account  in the name of the ESOP.  We have set aside the  amount of those
advances in a separate  bank  account,  for the benefit of the ESOP,  and we are
holding that amount pending receipt of guidance from governmental authorities.

During  March  2004,  we  received  a demand  from Mr.  Teng  for  repayment  of
$1,210,000  in  advances.  In April 2004,  Mr.  Teng filed suit to collect  this
amount (see Note 7).

NOTE 7 - COMMITMENTS AND CONTINGENCIES
--------------------------------------

On or about  December 16, 2002,  we were  informed  that the Pension and Welfare
Benefits  Administration  of the United  States  Department of Labor ("DOL") had
selected our ESOP for review,  which is  described  more fully in Note 15 to the
Financial  Statements  included  in our Annual  Report on Form 10-K for the year
ended December 31, 2003.  The DOL has raised issues  regarding the December 1999
transaction  between Mr. Teng and the ESOP, in which Mr. Teng sold shares of our
preferred  stock to the ESOP in connection with the  establishment  of the plan.
The  DOL  has  indicated  that  this  transaction  may  have  been a  prohibited
transaction  because the  purchase  price of the shares may have been above fair
market value at the time of the  transaction,  which would require the unwinding
or correction of the transaction. Although Mr. Teng is primarily responsible for
remedying  any  prohibited  transaction,   we  may  have  some  liability  as  a
co-fiduciary of the ESOP.  However,  Mr. Teng has agreed to indemnify us against
any costs or damages  incurred by us in connection with the ESOP,  including any
cost or damages relating to the DOL  investigation.  We intend to cooperate with
the DOL in its review of our ESOP,  and to bring such  review to  conclusion  as
quickly as possible.

In April 2004, Mr. Teng filed suit to collect the recorded advances described in
Note 6. In his  collection  suit, we believe that Mr. Teng,  the sole trustee of
our ESOP, is seeking the  repayment of the initial  advance we received from our
ESOP  described in Note 6 to himself,  individually,  under the premise that the
money was owed to him under a loan  agreement  between our ESOP and Mr. Teng. We
have not been able to  confirm  or deny that  premise.  We intend to defend  the
collection  suit by Mr. Teng to protect  the assets of our ESOP,  to require Mr.
Teng to account  for  amounts he  advanced  to us while he was in control of our

                                       12
<PAGE>

accounting  function,  to assert our right to set off amounts  owed to us by Mr.
Teng against  amounts we otherwise  owe to Mr. Teng, if any, and to assert other
claims that we have against Mr. Teng.

At this  time,  we are not  involved  in any other  legal  proceedings  that our
management  currently  believes  would be  material to our  business,  financial
condition  or  results  of  operations.  We could be  forced  to incur  material
expenses with respect to these legal  proceedings,  and in the event there is an
outcome in any that is adverse to us, our financial position and prospects could
be harmed.

                                       13
<PAGE>


ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This report contains "forward-looking  statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934,  both as amended.  All statements  other than  statements of historical
fact  are  "forward-looking  statements"  for  purposes  of  federal  and  state
securities  laws,  including:  any  projections  of earnings,  revenues or other
financial  items;  any  statements of the plans,  strategies  and  objectives of
management  for  future  operations;  any  statements  concerning  proposed  new
products,  services or  developments;  any statements  regarding future economic
conditions  or  performance;  any  statements of belief;  and any  statements of
assumptions  underlying  any of the  foregoing.  Forward-looking  statements may
include the words "may," "will," "estimate,"  "intend,"  "continue,"  "believe,"
"expect," "plan" or "anticipate" and other similar words.

Although  we believe  that the  expectations  reflected  in our  forward-looking
statements are  reasonable,  actual results could differ  materially  from those
projected or assumed.  Our future financial condition and results of operations,
as well as any forward-looking statements, are subject to change and to inherent
risks and  uncertainties,  such as those  disclosed  in this  report.  We do not
intend, and undertake no obligation, to update any forward-looking statement.

The following  discussion and analysis of our financial condition and results of
operations   should  be  read  in  conjunction  with  the  unaudited   condensed
consolidated  financial  statements and the notes thereto included  elsewhere in
this report.

The information  contained below is subject to the "Factors Affecting  Operating
Results"  and other risks  detailed in this report and our other  reports  filed
with the Securities and Exchange Commission. We urge you to review carefully the
section "Factors Affecting Operating Results" included in this report for a more
complete   discussion  of  the  risks  associated  with  an  investment  in  our
securities.

Executive Overview

Since 1992, when our predecessor was formed, we have primarily offered consumers
personal  computers  and related  products  through  distribution  channels that
include  television  shopping  networks,  mail order catalog companies and large
electronic  and office supply chain stores.  In December  2003, new investors in
the Company acquired a majority of our outstanding  common stock and appointed a
majority of the members of our board of  directors.  In January and  February of
2004, our new board of directors  employed new members of our  management  team,
including a new chief executive officer. Under the direction of our restructured
management  team,  we began  implementing  a new  strategic  focus  designed  to
complement  our existing  business.  We are now  developing  a business  plan to
launch a hardware and software offering  targeted at the youth market,  which we
believe is an untapped segment of the personal computer and Internet market.

Our  operating  results have been subject to  seasonality  and to quarterly  and
annual  fluctuations.  Factors involved in that seasonality  include new product
developments or  introductions,  availability of components,  changes in product
mix and pricing and product reviews and other media coverage.  Historically, our
sales have increased in the third and fourth calendar  quarters due, in part, to
back-to-school and holiday spending,  respectively.  We expect that the sales of
our new product line will have similar seasonality patterns.

                                       14
<PAGE>

On March  20,  2002,  we  completed  a  merger  with  Lan  Plus  Corporation,  a
manufacturer of branded turnkey computer products and services.  In that merger,
the  shareholders  of Lan Plus  acquired  approximately  75% of our  outstanding
common stock as of that date.  In addition,  upon the closing of the merger,  we
completed  a  one-for-ten  reverse  stock split and changed our name from Mcglen
Internet Group, Inc. to Northgate  Innovations,  Inc. As a result of the merger,
for financial  accounting  purposes,  we treat the merger as a purchase of us by
Lan Plus. Therefore,  we present the historical financial statements of Lan Plus
for comparison purposes for all periods presented.

In the  consumer  electronics  industry,  and  particularly  with respect to the
distribution of personal computers, financial performance is closely tied to the
ability of the distributor to receive  adequate gross profit margins.  Since our
operating  expenses are relatively  fixed, we must increase our gross margins in
order to generate more income, and cash. Competition has driven down the selling
prices for personal computers. Due primarily to the competitive pressures on our
selling  prices,  over the last two fiscal years our gross  profit  margins have
decreased  significantly.  As a result, we have experienced operating losses and
net  losses in each of the past two fiscal  years.  These  losses  have been the
primary  reason  for  a  decrease  in  our  cash  and  cash   equivalents   from
approximately $8.6 million at the end of 2001 to approximately $814,000 at March
31, 2004. We expect that there will be continued  pressure on our margins in the
foreseeable future.

In order to improve our gross  profit  margins,  we have adopted our new product
initiative to try to decrease the competitive  pressures on our margins. Our new
product  initiative is designed to increase demand for our products,  so that we
can charge a higher price for, and thereby  increase the profit margin on, those
products.  If we are unsuccessful in increasing the demand for our new products,
and  receiving  a higher  price  for those  products,  we will  probably  not be
successful in improving our profit  margins.  We are also trying to increase the
profit  margins  on both  our new  products  and our  existing  product  line by
lowering our component costs,  which decreases our cost of goods sold.  However,
lowering  component costs has proven difficult in the past. If we cannot improve
our margins  through our new product  initiative,  or by lowering our  component
costs,  our  financial  performance  is likely to continue to suffer in 2004 and
beyond.

Critical Accounting Policies and Estimates

Management's  discussion  and  analysis of  financial  condition  and results of
operations is based upon our 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 us to make
estimates and judgments that affect the reported amounts of assets,  liabilities
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going  basis,  we evaluate  our  estimates,  including  those  related to our
revenue  recognition,  deferred  taxes,  impairment  of  long-lived  assets  and
inventory.  We base our estimates on historical  experience and on various other
assumptions that we believe are 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.

Our critical accounting policies are as follows:

Revenue  Recognition.  We derive  revenue  primarily  from sales of our personal
computers,  and to a lesser extent, from software,  peripherals and accessories.
Generally,  we will recognize revenue when persuasive evidence of an arrangement
exists,  delivery has occurred,  the fee is fixed or determinable and collection
is probable.  We provide for  estimated  costs of doubtful  accounts and product

                                       15
<PAGE>

warranties  as a reduction  in earnings at the time we  recognize  revenue.  Our
estimate of costs of doubtful  accounts is based upon our historical  collection
experience.  If  our  collections  decrease  due  to  the  deterioration  of the
financial  condition of our customers,  or otherwise,  we would have to increase
the doubtful  account  allowance,  which would reduce  earnings.  Securities and
Exchange  Commission Staff Accounting  Bulletin No. 101 - Revenue Recognition in
Financial Statements requires us to estimate returns and warranty expenses prior
to  recognizing  revenue.  While  certain of the products we sell are covered by
third party manufacturer warranties,  we may have products returned by customers
the costs of which we may not be able to recover from the manufacturer.  Returns
of this nature have been immaterial in the past; however,  should actual product
failure rates increase,  or if the manufacturers go out of business or refuse to
honor their warranty obligations, we may be forced to cover these warranty costs
and the costs may differ from our estimates.  We will record discounts  provided
to resellers for achieving  purchasing  targets as a reduction of revenue on the
date of sale.

Vendor  Rebates.  We earn  rebates  from our  vendors  that are based on various
quantitative  contract terms. Amounts we expect to receive from vendors relating
to the purchase of merchandise inventories are recognized as a reduction of cost
of goods  sold at the time the  merchandise  is sold.  If the  amounts  of those
rebates we actually receive are less than we expected, our cost of sales will be
understated for the period covered.  We record rebates received that represent a
reimbursement of incremental  costs, such as advertising,  as a reduction to the
related  expense in the period that the  related  expense is  incurred.  We have
several  controls in place that we believe allow us to ensure that these amounts
are recorded in accordance  with the terms of the applicable  contracts.  Should
the vendors paying the rebates reach different  judgments regarding the terms of
these  contracts,  they may seek to recover all or a portion of the rebates from
us.

Deferred Taxes. As part of the process of preparing our financial statements, we
are required to estimate our income taxes. This process involves  estimating our
actual  current tax  exposure  together  with  assessing  temporary  differences
resulting  from differing  treatment of items for tax and  accounting  purposes.
These  differences  result in  deferred  tax assets and  liabilities,  which are
included  within our balance sheet.  We must then assess the likelihood that our
deferred  tax assets will be  recovered  from future  taxable  income and to the
extent we believe  that  recovery is not likely,  we must  establish a valuation
allowance.  To the extent we establish a valuation  allowance  or increase  this
allowance in a period,  we must include an expense  within the tax  provision in
our statement of operations.

Significant judgment involving multiple variables is required in determining our
deferred tax assets and liabilities and any valuation allowance recorded against
our net deferred tax assets. In assessing the potential  realization of deferred
tax assets,  we consider whether it is more likely than not that some portion or
all of the  deferred tax assets will be realized.  The ultimate  realization  of
deferred tax assets is dependent upon achieving future taxable income during the
period in which our  deferred  tax  assets  are  recoverable.  If our  estimates
regarding our future taxable income prove to be incorrect,  we may have to write
down the value of the deferred tax assets.

Impairment  of  Long-Lived   Assets.  We  evaluate  the  recoverability  of  our
long-lived  assets and review  these  assets for  recoverability  when events or
circumstances  indicate a potential  impairment.  Factors we consider  important
that could trigger an impairment review include the following:

     1.   significant  underperformance  relative  to  historical  or  projected
          operating results;

                                       16
<PAGE>

     2.   significant changes in the manner or use of the assets or the strategy
          for our overall business; and

     3.   significant negative industry or economic trends.

When we determine that the carrying value of these assets may not be recoverable
based on the existence of one or more of the above indicators of impairment,  we
measure any impairment by estimating the undiscounted cash flows to be generated
from the use and ultimate  disposition  of these assets.  We record assets to be
disposed  of at the lower of the  carrying  amount  or fair  market  value  less
anticipated costs of sales.

Impairment of Goodwill and Other Intangible  Assets. As a result of our adoption
of Statement of  Financial  Accounting  Standards  No. 142  "Goodwill  and Other
Intangible  Assets", we now annually review goodwill and other intangible assets
that have  indefinite  lives for  impairment  and  whether  events or changes in
circumstances  indicate  the  carrying  value of these assets might exceed their
current fair values.  These reviews require us to estimate the fair value of our
identified  reporting  units and  compare  those  estimates  against the related
carrying  values.  For each of the reporting  units, the estimated fair value is
determined as compared to our stock price.

Inventory.  We adjust our inventory  values so that the carrying  value does not
exceed net  realizable  value.  We  estimate  net  realizable  value  based upon
forecasted demand. However, forecasted demand is subject to revisions and actual
demand may differ.  This  difference  may require a write-down of our inventory,
which could have a material  effect on our  financial  condition  and results of
operations.  From time to time, we maintain at our  facilities  component  parts
inventory that remains the property of our vendors supplying the inventory until
such  time as we  elect  to use the  inventory.  At the time we elect to use the
inventory,  we reflect the cost of that inventory in our inventory account,  and
generate a corresponding account payable.

RESULTS OF OPERATIONS

The following  table sets forth for the periods  indicated the percentage of net
sales  represented  by  certain  items  reflected  in  the  Company's  condensed
statements  of  operations.  There can be no assurance  that the trends in sales
growth or operating results will continue in the future.

                                               PERCENTAGE OF NET SALES
                                               -----------------------
                                                PERIOD ENDED MARCH 31,
                                                  2004       2003
                                                  ----       ----

     Net sales                                    100.0%     100.0%
     Cost of sales                                 84.4       95.8
                                                  ------     ------
     Gross profit                                  12.6        4.2
     Operating expenses                            11.7        9.4
                                                  ------     ------
     Income (loss) from operations                  0.9       (5.2)
     Interest expense, net                          0.7        0.7
     Other expense                                  0.1        0.1
                                                  ------     ------
     Loss before income taxes                       0.1       (6.0)
     Provision for income taxes                     0.0       (0.4)
                                                  ------     ------
     Net income (loss)                              0.1%        (5.6)%
                                                  ======     =======

THREE MONTHS  ENDED MARCH 31, 2004  COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2003

During the three months ended March 31, 2003,  approximately  15% of our revenue
was derived through  television  shopping  networks,  compared to 4% in 2004. In
addition,  sales to our largest  customer went from  approximately  25% of total

                                       17
<PAGE>

sales during the three months ended March 31, 2003 to approximately 53% in 2004.
This shift in customer and product mix had a  significant  impact on the results
of  operations  for the three months  ended March 31, 2004 when  compared to the
comparable period in 2003. Our net sales decreased by approximately $717,000, or
3.6%, to approximately  $19.4 million for the three months ended March 31, 2004,
compared to  approximately  $20.1  million for the three  months ended March 31,
2003, while our gross profit increased by approximately  $1.6 million,  or 190%,
to  approximately  $2.4  million  for the three  months  ended  March 31,  2004,
compared to  approximately  $838,000  for the three months ended March 31, 2003.
Our gross profit as a percentage  of net sales  increased to 12.6% for the three
months  ended March 31, 2004 from 4.2% for the  comparable  period in 2003.  The
relative  decrease in  distribution  and  Internet  sales  allowed us to achieve
better margins in the first three months of 2004. Other factors  contributing to
improved  margins  include  favorable  component  pricing in 2004 and a $250,000
provision for slow moving inventory recorded during the three months ended March
31, 2003.  We did not record an additional  provision for slow moving  inventory
during the three months ended March 31, 2004.

Our future gross profit margins may fluctuate  significantly  from recent levels
as the result of competitive  pressures on revenues or higher  component  costs.
The preceding statement concerning our future gross margins is a forward looking
statement that involves certain risks and  uncertainties  that could result in a
fluctuation  of gross  margins  below those  achieved for the three months ended
March 31, 2004 or year ended  December  31,  2003.  Although we believe  that we
provide a high level of value and added services, pricing and gross profit could
be negatively impacted by the activities of larger computer manufacturers.

Our  operating  expenses  increased  by  approximately  $389,000,  or 20.7%,  to
approximately  $2.3  million for the three  months  ended March 31,  2004,  from
approximately  $1.9  million  for the same  period  in  2003.  The  increase  in
operating expenses was attributable to an increase of approximately  $234,000 in
professional  fees related to regulatory  filings and audit fees, an increase of
approximately   $100,000  in  marketing  costs  related  to  outsourced  product
development  and design relating to our new product  initiative,  an increase of
approximately $67,000 in travel related costs associated with new members of our
management  team who do not live near our  principal  offices and the opening of
our administrative office in Austin, Texas.

Our other expense decreased by approximately $27,000, or 16.2%, to approximately
$140,000 for the three months ended March 31, 2004, from approximately  $167,000
for same period in the prior year.  The decrease was due primarily to a decrease
in interest  expense  related to certain debt of our ESOP that we paid and a net
decrease in borrowings on our revolving line of credit or through  assignment of
accounts receivable during the three months ended March 31, 2004.

We did not make a provision for income taxes in the three months ended March 31,
2004.  We had a benefit from income taxes of  approximately  $79,000 in the same
period in the prior year.  We  currently  have  sufficient  net  operating  loss
carryforwards to offset any potential incomes taxes on our taxable income in the
current period.

INCOME TAXES

For the periods ended March 31, 2004 and 2003, the difference between the amount
of income tax recorded and the amount of income tax expense calculated using the
federal  statutory rate of 34% is due to state income taxes and other  permanent
differences.

                                       18
<PAGE>

We have federal and state net operating loss  carryforwards of approximately $16
million and $10 million, respectively. The net operating loss carryforwards will
expire at various dates beginning in 2012 through 2023 for federal  purposes and
2004 through 2013 for state  purposes,  if not utilized.  Utilization of the net
operating loss  carryforwards is subject to a substantial  annual limitation due
to the ownership  change  limitations  provided by the Internal  Revenue Code of
1986,  as amended,  and similar state  provisions.  The annual  limitation  will
result in us being able to only  utilize  approximately  $3.8  million  and $0.5
million, to offset federal and state income, respectively, as of March 31, 2004.
The remaining net operating loss carryforwards will go unused.

LIQUIDITY AND CAPITAL RESOURCES

Historically, our primary financing need has been the funding of working capital
requirements.  We  financed  our  operations  and  met our  capital  expenditure
requirements primarily from cash provided by operations, borrowings from private
individuals,   including  our  former  chief  executive   officer  and  majority
stockholder,  and  financial  institutions.   As  of  March  31,  2004,  we  had
approximately  $814,000 in cash, cash  equivalents  and short-term  investments,
compared to  approximately  $464,000  and $653,000 at December 31, and March 31,
2003, respectively.  Our new product initiative will require significant capital
to fund operating  expenses,  including  research and  development  expenses and
sales and marketing  expenses,  capital  expenditures  and working capital needs
until we achieve  positive  cash flows from that  initiative.  We expect to seek
between $5.0 million and $10.0 million in external  equity  financing by the end
of our current  fiscal year to fund our new product  initiative.  We have yet to
enter into an agreement with potential investors regarding the terms of any such
equity  financing.  In order to fund our current  working capital needs, we have
entered into a purchase and sale  agreement with a financial  institution  under
which we assign certain of our accounts  receivable  for immediate  cash. We are
currently  in   discussions   with  other   financial   institutions   regarding
alternatives to this funding source. We may decide to continue with our existing
arrangement  or seek other  arrangements  on terms that we believe would be more
beneficial to meet our long-term  requirements,  including  funding a portion of
the requirements  necessary to implement our new product  initiative.  We cannot
give any assurance that any additional financing will be available,  that we can
ever achieve  positive  operating cash flows from our new product  initiative or
that we will have  sufficient  cash from any  source  to meet our  needs.  It is
possible that we will exhaust all available  funds before we reach positive cash
flow from our new  product  initiative.  If we are not able to raise  sufficient
external  financing,  we will have to curtail our efforts to  implement  our new
product initiative.

During the year ended December 31, 2003, we had a revolving credit facility with
a commercial bank. The facility was  collateralized  by a first priority lien on
substantially  all of our assets and the personal  guarantee of our former chief
executive officer and majority stockholder.  Under the facility, we could borrow
up to $2.3 million for working capital purposes, subject to availability under a
borrowing  base.  As of  December  31,  2003,  we had no  borrowings  under  the
facility.  The revolving  credit  facility  terminated and all amounts  borrowed
thereunder and not previously repaid were due and payable in full (including any
accrued  interest) on January 31,  2004.  Advances  under the  facility  accrued
interest at a rate equal to the bank's prime rate plus 0.75% per annum.

In January 2004 we repaid $500,000 of the approximately $1.0 million in advances
we  had  recorded  from  our  former  chief   executive   officer  and  majority
stockholder,  which was in violation of certain  restrictions in connection with
our revolving credit facility.  In addition,  that payment was in violation of a


                                       19
<PAGE>

subordination  agreement  that our former chief  executive  officer and majority
stockholder  executed for the benefit of the bank.  Our former  chief  executive
officer and majority stockholder repaid the $500,000 to us on February 2, 2004.

On December 9, 2003,  we closed a private  placement of 4 million  shares of our
common  stock  for a  purchase  price of $0.25 per  share,  and  realized  gross
proceeds of approximately $1 million.  The investor in the private placement was
a limited liability  company,  which is controlled by Samuel J. Furrow,  Jr. and
Marc B. Crossman, each of whom joined our board of directors as a result of that
private  placement.  We used the proceeds of the private  placement  for working
capital needs.

On or about February 6, 2004, we entered into a purchase and sale agreement with
a  financial  institution.  Under the  terms of that  agreement,  we may  assign
certain of our accounts  receivable to the financial  institution  for immediate
cash in the amount of 75% of the assigned receivables. We also receive a portion
of the remaining balance of the assigned accounts  receivable,  depending on how
soon  after  assignment  the  financial  institution  receives  payment on those
accounts.  Under  this  arrangement  we  have  an  effective  interest  rate  of
approximately 3.0% to 4.0% per month. Under the purchase and sale agreement, the
financial  institution has certain rights of recourse against us for uncollected
accounts  receivable.  The  arrangement  expires in August 2004,  with automatic
annual  extensions unless either party gives 60 days prior written notice to the
contrary.  The financial  institution  may terminate the arrangement at any time
with 60 days prior written  notice.  We expect to keep this  financing  purchase
line in place until we can obtain another  facility on more  favorable  terms to
us.  We  are  in  discussions  with  several  financial  institutions  regarding
alternative  financing  arrangements,  but we do not currently  have any binding
commitments regarding such a facility.

Our net cash used in operating  activities  for the three months ended March 31,
2004 was  approximately  $831,000,  as  compared  to net cash used in  operating
activities of $3.2 million for the comparable  period during 2003. This decrease
was  primarily the result of net income of  approximately  $29,000 for the three
months ended March 31, 2004 compared to a net loss of approximately $1.1 million
for the comparable period in 2003.

Our net cash used in  investing  activities  was  approximately  $62,000 for the
three  months  ended  March 31,  2004,  compared  to net cash used in  investing
activities of approximately $17,000 for the comparable period in 2003. Cash used
in investing activities consists of the purchase of property and equipment.

Our net cash provided by financing activities was approximately $1.2 million for
the three months ended March 31, 2004,  compared to  approximately  $2.0 million
for the comparable  period in 2003.  Our net borrowings  during the three months
ended March 31, 2003 were  approximately $2.0 million under our revolving credit
facility  compared to the assignment of  approximately  $1.2 million of accounts
receivable  under our purchase and sale agreement  with a financial  institution
during the comparable period in 2004.

FACTORS AFFECTING OPERATING RESULTS

There are numerous  risks  affecting our business,  some of which are beyond our
control.  An investment  in our common stock  involves a high degree of risk and
may not be  appropriate  for  investors  who cannot  afford to lose their entire
investment. In addition to the risks outlined below, risks and uncertainties not
presently known to us or that we currently  consider  immaterial may also impair
our business  operations.  Our future operating results and financial  condition
are heavily  dependent on our ability to successfully  develop,  manufacture and

                                       20
<PAGE>

market  technologically  innovative  solutions in order to meet customer demands
for  personal  computers  and related  products.  Inherent in this process are a
number of factors that we must successfully manage if we are to achieve positive
operating results in the future.  Potential risks and  uncertainties  that could
affect  our  operating  results  and  financial   condition   include,   without
limitation, the following:

We cannot predict our future results because we have recently  implemented a new
strategic initiative and have no operating history with that line of business.

Although  we have  over  ten  years of  operating  history,  we have no  history
operating our new business model. We began exploring our new product  initiative
in December  2003.  Our new product  initiative  is still in the early  planning
stage and is a new strategic focus for us. There are significant risks and costs
inherent in our efforts to undertake our new product  initiative.  These include
the risk that we may not be able to  develop  viable  products,  achieve  market
acceptance for our proposed line of products or earn adequate  revenues from the
sale of such products,  that our new business  model, if started at all, may not
be profitable and other significant risks related to the implementation of a new
business model described below. Our prospects must be considered in light of the
uncertainties  and  difficulties  frequently  encountered  by companies in their
early  stages of  development.  We will devote a great deal of our  resources to
implementing our new product  initiative.  Therefore,  if that initiative is not
successful,  we may not be able to continue to operate our existing business. It
is  possible  that we will  exhaust  all  available  funds  before  we reach the
positive cash flow phase of our proposed  business  model,  which would hurt our
existing business.

We may have difficulty in raising capital because our common stock is not traded
on a recognized public market.

In order to implement  our new product  growth  strategy,  we will need to raise
significant  amounts of additional  capital. In April 2001, our common stock was
de-listed  from  trading  on the Nasdaq  SmallCap  Market.  Our common  stock is
presently  traded  in the  over-the-counter  market,  which  is  viewed  by most
investors as a less desirable,  and less liquid,  marketplace.  As a result,  an
investor may find it more difficult to purchase,  dispose of and obtain accurate
quotations as to the value of our common stock.

In addition,  since the trading price of our common stock is less than $5.00 per
share,  trading in our common stock is also subject to the  requirements of Rule
15g-9 of the Exchange  Act.  Our common  stock is also  considered a penny stock
under the  Securities  Enforcement  Remedies and Penny Stock Reform Act of 1990,
which defines a penny stock,  generally, as any equity security not traded on an
exchange or quoted on the Nasdaq SmallCap Market that has a market price of less
than $5.00 per share.  Under Rule 15g-9,  brokers who recommend our common stock
to persons  who are not  established  customers  and  accredited  investors,  as
defined in the Exchange Act, must satisfy  special sales practice  requirements,
including requirements that they:

     o    make  an  individualized  written  suitability  determination  for the
          purchaser; and

     o    receive the purchaser's written consent prior to the transaction.

The  Securities  Enforcement  Remedies  and Penny Stock  Reform Act of 1990 also
requires additional  disclosures in connection with any trades involving a penny
stock,  including  the  delivery,  prior to any penny  stock  transaction,  of a
disclosure  schedule  explaining the penny stock market and the risks associated
with that market.  Such  requirements may severely limit the market liquidity of

                                       21
<PAGE>

our common stock and the ability of purchasers of our equity  securities to sell
their  securities  in the  secondary  market.  For  all  of  these  reasons,  an
investment  in our equity  securities  may not be  attractive  to our  potential
investors.

The implementation of our new product initiative is risky and expensive,  and it
is possible that we may never become profitable.

Successful  implementation  of our new product  initiative  continues to involve
several risks. These risks include:

     o    reliance upon unproven products;

     o    our unproven and evolving business model;

     o    unknown  market  acceptance of our new product line and any additional
          products that we may be able to develop;

     o    our ability to anticipate and adapt to a rapidly developing market and
          to changing technologies;

     o    the effect of competitive pressures in the marketplace;

     o    our  need  to  structure   our  internal   resources  to  support  the
          development,  marketing  and  future  growth of our  proposed  product
          offerings;

     o    uncertainties   concerning  our  strategic   direction  and  financial
          condition;

     o    our need to  introduce  additional  reliable  products  that  meet the
          demanding needs of our target market; and

     o    our  need  to  enhance  our   business   development,   research   and
          development,  product  development and support  organizations,  and to
          expand  our  distribution   channels,   to  develop  our  new  product
          initiative.

In  addition,  although we believe that the actions that we are taking will help
us become profitable, we cannot assure you that such actions will succeed in the
long or short term.

Internal and external changes resulting from our financial condition may concern
our prospective  customers,  investors,  suppliers and employees,  and produce a
prolonged  period of uncertainty,  which could have a material adverse affect on
our  business.  Our growth  strategy  requires  substantial  changes,  including
pursuing new strategic  relationships,  increasing our research and  development
expenditures,  adding  employees  who possess the skills we believe we will need
going forward,  establishing leadership positions in what we believe will be new
high-growth markets, establishing distribution channels for our new products and
realigning and enhancing our sales and marketing  departments.  Many factors may
impact our ability to successfully implement our growth strategy,  including our
ability to finalize agreements with other companies, sustain the productivity of
our workforce,  introduce  innovative  new products in a timely  manner,  manage
operating  expenses and quickly respond to, and recover from,  unforeseen events
associated with our strategy.

As a result of our new growth  strategy,  it is extremely  difficult to forecast
our future financial  performance.  We are now in the initial stages of pursuing
our new business plan. Therefore, we do not expect to achieve profitability with

                                       22
<PAGE>

our new product line,  and expect to incur net losses,  at least through the end
of 2004. We expect to incur significant product development,  administrative and
operating expenses relating to our new product initiative in the future. Only if
we are able to successfully develop our proposed products,  bring them to market
before our  competitors,  and gain the  acceptance of our products by our target
market,  will we be able to  generate  any  significant  revenues  from  our new
business  model.  It is possible that we will exhaust all available funds before
we reach the positive cash flow phase of that business model.

If we are unable to develop our new line of products and services,  our business
will suffer.

We hope to develop and then deliver to market an offering of hardware,  software
and services focused on the youth market, a segment of the personal computer and
online market that we believe is currently  underserved.  If we are unsuccessful
in developing  these new  products,  we will have no new products or services to
bring to market and, therefore, will never be able to generate revenues from our
new product  initiative,  and our business will suffer.  Also, if we exhaust all
available funds before we can develop our new line of products and services, our
new business model will fail, and our existing business will suffer.

The market potential for our new products is unproven, and may not develop as we
hope,  which could  result in our failure to achieve  sales and profits from our
new product initiative.

Our  business  model  involves  competing  in a  dynamic,  but  mature,  market.
Therefore, our financial performance and any future growth will depend, in large
part,  upon our ability to obtain  market share from  existing  competitors.  We
intend to invest a significant portion of our resources in the market segment we
have targeted, which we anticipate will grow at a significantly higher rate than
the broader consumer  electronics  industry on average. The markets for consumer
electronics  products  are highly  competitive,  and we are not certain that our
target  customers will widely adopt our new products.  Our target  customers may
not choose to use our  products for  technical,  style,  cost,  support or other
reasons.  If we are  incorrect  in our  assumption  that our  target  market  is
underserved, and that market does not develop as we hope, or if our new products
and  services  do not meet the  demand  in that  market,  we may  never  achieve
significant  revenues and profits from our new product initiative.  We cannot be
certain  that a market for our new  products or services  will ever emerge or be
sustainable if it does emerge. If this market does not develop, or develops more
slowly  than we expect,  our  business,  results  of  operations  and  financial
condition will be seriously harmed.

If we are unable to develop and  introduce  our new product  line  quickly,  our
business will suffer.

The  market  for  consumer   electronics  products  is  characterized  by  rapid
technological change, frequent new product introductions and changes in customer
requirements.  We believe  that we have  identified  a segment  of the  personal
computer  market that is  currently  underserved.  Therefore,  our success  will
depend upon our ability to develop and  introduce  our new  products in a timely
manner  and to gain  market  acceptance  of any  products  developed,  before  a
competitor can introduce  competing products aimed at our target market segment.
In developing our new line of products, we have made, and will continue to make,
assumptions  with respect to which features and performance  criteria our target
customers will require.  If we implement features and performance  criteria that
are different from those required by our target customers,  market acceptance of
our products may be  significantly  reduced or delayed and our business would be
seriously harmed.

                                       23
<PAGE>

Competition in the personal  computer market may reduce the demand for, or price
of, our products.

We are considered one of the second tier personal computer manufacturers,  which
include Systemax,  Sys Technologies and Acer, among others.  Although we compete
with  these  manufacturers,  we also  compete  with a number of large,  national
brand,   personal  computer   manufacturers,   including  Dell,  Inc.,  Gateway,
Inc./e-Machines,   Hewlett-Packard  Company,  Apple  Computer,  Inc.,  Sony  and
Toshiba.  We may also face  additional  competition  from new entrants  into the
personal  computer  market  that we have  not yet  identified.  The  market  for
personal  computers and related  products is highly  competitive,  and we expect
competition  to intensify  in the future.  Our  competitors  may  introduce  new
competitive products aimed at the same markets targeted by our line of products.
These products may have better performance,  lower prices and broader acceptance
than our products. Competition may reduce the overall market for our products.

Most of these current and potential competitors have longer operating histories,
greater  name  recognition,  larger  customer  bases and  significantly  greater
financial,  technical,  sales,  marketing  and  other  resources  than we do. In
addition,  because  of  the  higher  volume  of  components  that  many  of  our
competitors purchase from their suppliers,  they are able to keep their costs of
supply relatively low and, as a result,  may be able to recognize higher margins
on their personal  computer sales than we do. Many of our  competitors  may also
have existing  relationships with the resellers who we use to sell our products,
or with our  existing or potential  customers.  This  competition  may result in
reduced prices,  reduced  margins and longer sales cycles for our products.  The
introduction  of  lower-priced  personal  computers,  combined  with  the  brand
strength,  extensive distribution channels and financial resources of the larger
vendors,  would  cause us to lose market  share and would  reduce our margins on
those  personal  computers  we sell.  If any of our larger  competitors  were to
commit greater technical,  sales,  marketing and other resources to our markets,
our ability to compete would be adversely affected.

We are dependent on Staples for a substantial portion of our revenues.

We are dependent upon our relationship with Staples the Office Superstore,  Inc.
for a substantial portion of our existing and anticipated revenues. For the year
ended December 31, 2003, sales to Staples represented approximately 36.5% of our
total net sales for the year.  For the three months ended March 31, 2004,  sales
to Staples represented  approximately 52% of our total sales for the quarter. We
expect that we will  continue to be  dependent  upon  Staples for a  significant
portion of our revenues in future periods.  As a result of this concentration of
sales, our business,  operating results or financial condition would suffer as a
result of the  termination  of, or an adverse change in, our  relationship  with
Staples.  In addition,  we cannot assure you that our relationship  with Staples
will continue, or if continued,  will not decrease in any future period. Staples
may also use this  concentration  of sales to  negotiate  lower  prices  for our
products,  which  would  result  in lower  margins  on the  products  we sell to
Staples. Our agreement with Staples expires at the end of 2004. The agreement is
renewable  annually upon mutual agreement between Staples and us. Therefore,  we
cannot assure you that we will generate  significant  revenues in future periods
from Staples.  The loss of all or any significant part of our relationship  with
Staples would seriously harm our business.

We will not be able to develop or  continue  our  business if we fail to attract
and retain key personnel.

Our future success depends on our ability to attract,  hire,  train and retain a
number of highly  skilled  employees and on the service and  performance  of our
senior  management  and other key  personnel.  The loss of the  services  of our

                                       24
<PAGE>

executive  officers or other key employees could adversely  affect our business.
Competition for qualified personnel  possessing the skills necessary for success
in the competitive  consumer electronics industry is intense, and we may fail to
attract  or retain  the  employees  necessary  to  execute  our  business  model
successfully.  Because we have  experienced  operating  losses,  and because our
common stock is not traded on a recognized  national market,  we may have a more
difficult   time  in  attracting  and  retaining  the  employees  we  need.  Our
relationships  with most of these key employees are "at will."  Moreover,  we do
not have "key person" life insurance policies covering any of our employees.

Some members of our management  team have joined us only  recently.  Our success
depends to a  significant  degree upon the  continued  contributions  of our key
management,  business  development  and  marketing,  engineering,  research  and
development and other personnel,  many of whom would be difficult to replace. In
particular,  we believe that our future  success is highly  dependent on Kent A.
Savage, our chairman and chief executive officer.

The brand for our new product  initiative may not achieve the broad  recognition
necessary to grow our customer base.

We believe that  recognition and a favorable  perception of our new products and
services  by our target  market is  essential  to the success of our new product
initiative.  If we are  unsuccessful  in establishing or maintaining a favorable
perception of our products and services, we may not be able to grow our customer
base.  Our  success  in  promoting  and  maintaining  the  brand  that we use in
connection with the new business model, will depend largely on:

     o    the success of our brand-enhancement strategy, including marketing and
          advertising, promotional programs and public relations activities;

     o    the  quality  and   ease-of-use   of  our   products,   services   and
          applications;

     o    our ability to provide high quality customer service; and

     o    our ability to enhance  and  improve  the quality and  features of our
          products and services.

We cannot  assure  you that we will be able to  achieve  success in any of these
areas. In addition,  in order to attract and retain customers and to promote and
maintain  our  brands,  we will need to  substantially  increase  our  marketing
expenditures.  If we incur  excessive  expenses in promoting and maintaining our
brands, our financial results could be seriously harmed.

If we are  unable to acquire  key  components  or are unable to acquire  them on
favorable terms, our business will suffer.

Some key  components  included in our line of products are  currently  available
only from single or limited sources. In addition, some of the suppliers of these
components are also supplying  certain of our competitors.  We cannot be certain
that our  suppliers  will be able to meet our demand for  components in a timely
and  cost-effective  manner.  We expect to carry little inventory of some of our
products and product  components,  and we will rely on our  suppliers to deliver
necessary components to our contract manufacturers in a timely manner based upon
forecasts  we  provide.  We may not be able to  develop an  alternate  source of
supply in a timely manner,  which could hurt our ability to deliver our products
to our  customers.  If we are unable to buy these  components  on a timely and a
cost-efficient  basis, we may not be able to deliver  products to our customers,
or the margins we receive for our  products may suffer,  which would  negatively

                                       25
<PAGE>

impact  our  future  financial  performance  and,  in turn,  seriously  harm our
business.

We purchase a substantial  portion of our products  from a single  manufacturer.
Purchases  from this  manufacturer  accounted for more than 11% of our aggregate
merchandise  purchases for 2003 and  approximately  19% for the first quarter of
2004. We have no long-term contracts or arrangements with this manufacturer,  or
our other suppliers,  that guarantee the availability of components.  If we lose
our relationship with this manufacturer, we may not be able to find an alternate
supplier on a timely basis, or on reasonable terms.

At various times, some of the key components for our products have been in short
supply.  Delays in  receiving  components  would harm our ability to deliver our
products on a timely basis.  In addition,  because we expect to rely on purchase
orders rather than long-term  contracts  with our  suppliers,  we cannot predict
with  certainty  our ability to procure  components  in the longer  term.  If we
receive a smaller  allocation  of  components  than is necessary to  manufacture
products in quantities sufficient to meet our customers' demand, those customers
could choose to purchase competing products.

Our reliance on third  parties to  manufacture  and assemble our products  could
cause a delay in our ability to fill orders, which might cause us to lose sales.

We currently use third parties to manufacture sub-assemblies of our products and
we purchase our components on a purchase order basis. We expect to continue this
method of  procurement  indefinitely,  at least  with  respect  to our  existing
business. If we cannot continue our arrangement with our contract manufacturers,
and  if  we  cannot   establish  an  arrangement  with  at  least  one  contract
manufacturer who agrees to manufacture our sub-assemblies on terms acceptable to
us, we may not be able to produce and ship our  products,  and our business will
suffer. If we fail to manage our relationships  with our contract  manufacturers
effectively,  or if they  experience  delays,  disruptions  or  quality  control
problems in their manufacturing operations,  our ability to ship products to our
customers could be delayed.

The absence of dedicated  capacity with our contract  manufacturers  means that,
with  little or no  notice,  they could  refuse to  continue  manufacturing,  or
increase the pricing of, some or all of our  products.  Qualifying  new contract
manufacturers   and  commencing   volume   production  would  be  expensive  and
time-consuming.  If we are required or choose to change contract  manufacturers,
we could lose revenues and damage our customer relationships.

Our reliance on third-party manufacturers also exposes us to the following risks
that are outside our control:

     o    unexpected increases in manufacturing and repair costs;

     o    interruptions  in shipments if one of our  manufacturers  is unable to
          complete production;

     o    inability to control delivery schedules;

     o    unpredictability of manufacturing yields; and

     o    inability of a manufacturer to maintain the financial strength to meet
          our procurement and manufacturing needs.

                                       26
<PAGE>

We may not be able to  compete  effectively  if we are not able to  protect  our
intellectual property.

We rely,  and intend to rely,  on a combination  of trademark,  trade secret and
copyright law and contractual restrictions to protect the proprietary aspects of
our  products.  We have  applied to  register,  or intend to apply to  register,
various  trademarks  relating  to our  existing  business  and our  new  product
initiative.  Although we have yet to file any patent applications for inventions
related to our new line of products,  we anticipate  filing patent  applications
for  inventions  relating to that product line that we determine  will be key to
our new product  initiative.  If we are not  successful  in obtaining the patent
protection we need, our  competitors may be able to replicate our technology and
compete  more  effectively  against us. We also  enter,  and plan to continue to
enter,  into   confidentiality   or  license   agreements  with  our  employees,
consultants  and other parties with whom we contract,  and control access to and
distribution of our software,  documentation and other proprietary  information.
The legal  protections  described  above would afford only  limited  protection.
Unauthorized  parties may attempt to copy aspects of our products,  or otherwise
attempt to obtain and use our intellectual property. Monitoring unauthorized use
of our products will be  difficult,  and the steps we have taken may not prevent
unauthorized use of our technology,  particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States.

Undetected  product errors or defects could result in loss of revenues,  delayed
market acceptance and claims against us.

We offer a warranty on all of our  products,  allowing  the end user to have any
defective  unit  repaired or to receive a replacement  product  within a certain
period after the date of sale.  Our products  may contain  undetected  errors or
defects.  If one of our  products  fails,  we may have to replace  all  affected
products without being able to record any revenue for the replacement  units, or
we may have to refund the purchase  price for the defective  units.  Some errors
are discoverable  only after a product has been installed and used by end users.
Any errors  discovered  after our products have been widely used could result in
loss of revenues and claims against us.

If we are unable to fix errors or other problems that later are identified after
installation,  in  addition  to  the  consequences  described  above,  we  could
experience:

     o    failure to achieve market acceptance;

     o    loss of customers;

     o    loss of market share;

     o    diversion of development resources;

     o    increased service and warranty costs; and

     o    increased insurance costs.

If we fail to predict our manufacturing  requirements accurately, we could incur
additional  costs or  experience  manufacturing  delays,  which could reduce our
gross margins or cause us to lose sales.

We provide  forecasts of our demand to our contract  manufacturers  prior to the
scheduled  delivery  of  products  to  our  customers.  If we  overestimate  our

                                       27
<PAGE>

requirements,  our contract  manufacturers may have excess component  inventory,
which would  increase  our costs.  If we  underestimate  our  requirements,  our
contract  manufacturers may have an inadequate component inventory,  which could
interrupt  the  manufacturing  of our products and result in delays in shipments
and revenues. In addition, lead times for materials and components that we order
vary significantly and depend on factors such as the specific supplier, contract
terms and demand for each  component  at a given  time.  We may also  experience
shortages  of  components  from  time  to  time,  which  also  could  delay  the
manufacturing of our products or increase the costs of our products.

We could become subject to litigation  regarding  intellectual  property  rights
that could be costly and result in the loss of significant rights.

In recent  years,  there has been a  significant  increase in  litigation in the
United States involving patents and other  intellectual  property rights. In the
future, we may become a party to litigation to protect our intellectual property
or  to  defend  against  an  alleged  infringement  by  us  of  another  party's
intellectual  property.  Claims  for  alleged  infringement  and  any  resulting
lawsuit,  if successful,  could subject us to significant  liability for damages
and invalidation of our intellectual property rights. These lawsuits, regardless
of their success,  would likely be  time-consuming  and expensive to resolve and
would divert management time and attention.  Any potential intellectual property
litigation could also force us to do one or more of the following:

     o    stop or delay  selling,  integrating  or using  products  that use the
          challenged intellectual property;

     o    obtain from the owner of the infringed  intellectual  property right a
          license to sell or use the relevant  technology,  which  license might
          not be available on reasonable terms, or at all; or

     o    redesign the products that use that technology.

If we are forced to take any of these  actions,  our business might be seriously
harmed.  Our business  insurance may not cover potential  claims of this type or
may not be adequate to indemnify us for all liability that could be imposed.

The inability to obtain any third-party license required to develop new products
and product enhancements could seriously harm our business,  financial condition
and results of operations.

From time to time, we are required to license  technology  from third parties to
develop new products or product  enhancements.  Third-party  licenses may not be
available to us on  commercially  reasonable  terms, or at all. Our inability to
obtain any  third-party  license  necessary  to develop new  products or product
enhancements  could require us to obtain substitute  technology of lower quality
or performance  standards,  or at greater cost,  which could  seriously harm our
business, financial condition and results of operations.

Our  management  and  other  related  parties  own a  large  percentage  of  our
outstanding stock and could significantly influence the outcome of actions.

As of April 23, 2004, our executive  officers and directors  beneficially  owned
approximately  86.4% of our common stock. On December 9, 2003,  Glenbrook Group,
LLC purchased  7,600,000  shares of common stock from our former chief executive
officer and majority  stockholder and 4,000,000  shares of common stock directly
from us. In connection  with those  transactions  we issued warrants to purchase
2,500,000  shares  of  common  stock  to J&M  Interests,  LLC and J&M  Interests
received the right to nominate at least five members of our seven member  board.
Marc B. Crossman and Samuel J. Furrow,  Jr., each current  members of our board,

                                       28
<PAGE>

are the managing  members of J&M  Interests,  which is a  controlling  member of
Glenbrook.

Because of their stock ownership and other  relationships  with us, Mr. Crossman
and Mr.  Furrow  have been and will  continue  to be in a  position  to  greatly
influence the election of our board, and thus control our affairs. Additionally,
our  bylaws  limit  the  ability  of  stockholders  to  call  a  meeting  of the
stockholders.  These bylaw  provisions  could have the effect of  discouraging a
takeover  of us,  and  therefore  may  adversely  affect  the  market  price and
liquidity  of  our  securities.  We  are  also  subject  to a  Delaware  statute
regulating  business  combinations that may hinder or delay a change in control.
The  anti-takeover  provisions of the Delaware  statute may adversely affect the
market price and liquidity of our securities.

Shares of common  stock  eligible for public sale could cause our stock price to
decline.

The market price of our common  stock could  decline as a result of sales by our
existing  stockholders  of a large  number of shares of our common  stock in the
market,  or the perception that such sales could occur. This circumstance may be
more  significant  because of the relatively low volume of our common stock that
is traded on any given day. As of May 14, 2004,  18,942,808 shares of our common
stock were issued and outstanding.  All of our outstanding common stock that was
issued in private  placements  prior to December 2003 may currently be resold in
reliance on Rule 144 of the Securities Act.

We  have  filed  a  registration  statement  registering  the  resale  of  up to
15,943,600  shares of our common stock,  which includes the 4,000,000  shares we
issued in our December 2003 private  placement,  the 7,600,000  shares purchased
from our former majority  stockholder on the same day, 2,500,000 shares issuable
upon  exercise  of  certain  warrants  issued  in  connection  with the  private
placement  and  1,843,600  shares  issuable  upon  conversion  of  shares of our
preferred stock that may be purchased from our former majority stockholder. That
registration statement must be declared effective prior to June 21, 2004. We are
unable to predict the potential  effect that sales into the market of 15,943,600
shares may have on the then prevailing  market price of our common stock. On May
14,  2004,   the  last   reported   sale  price  of  our  common  stock  on  the
Over-the-Counter  Bulletin  Board was $[0.65].  During the three months prior to
May 14, 2004,  the average daily trading volume of our common stock was [23,306]
shares.  It is  likely  that  market  sales  of the  15,943,600  shares  (or the
potential  for those  sales  even if they do not  actually  occur)  may have the
effect of  depressing  the market price of our common  stock.  As a result,  the
potential  resale  and  possible  fluctuations  in  trading  volume  of  such  a
substantial amount of our stock may affect the share price negatively beyond our
control.

We have a substantial number of authorized common and preferred shares available
for future issuance that could cause dilution of our stockholder's  interest and
adversely impact the rights of holders of our common stock.

We have a total of  50,000,000  shares of common stock and  5,000,000  shares of
"blank check"  preferred stock  authorized for issuance.  As of May 14, 2004, we
had 31,057,192  shares of common stock and 3,650,000  shares of preferred  stock
available for issuance.  We have reserved  4,273,857  shares of common stock for
issuance  upon  the  conversion  of the  1,350,000  shares  of  our  outstanding
preferred stock,  8,729,835 shares for issuance upon the exercise of outstanding
options and  warrants,  and  2,779,752  additional  shares  available for future
grants  under our option  plans.  In fiscal 2003,  we raised  gross  proceeds of
approximately  $1,000,000 through the sale, in a private placement  transaction,
of 4,000,000 shares of our common stock. We expect to continue to seek financing
that could  result in the  issuance of  additional  shares of our capital  stock

                                       29
<PAGE>

and/or  rights  to  acquire  additional  shares  of  our  capital  stock.  Those
additional  issuances  of  capital  stock  would  result in a  reduction  of our
existing  stockholders'  percentage interest in us. Furthermore,  the book value
per share of our common stock may be reduced.  This reduction would occur if the
exercise  price of any issued  warrants  or the  conversion  ratio of any issued
preferred  stock is lower than the book  value per share of our common  stock at
the time of such exercise or conversion.

The  addition  of a  substantial  number of shares of our common  stock into the
market or by the registration of any of our other  securities may  significantly
and  negatively  affect the  prevailing  market price for our common stock.  The
future  sales of  shares of our  common  stock  issuable  upon the  exercise  of
outstanding  warrants  and  options may have a  depressive  effect on the market
price of our common stock,  as such warrants and options would be more likely to
be  exercised  at a time when the price of our common  stock is greater than the
exercise price.

Our board has the power to establish the dividend rates,  preferential  payments
on  any  liquidation,   voting  rights,  redemption  and  conversion  terms  and
privileges  for any series of our preferred  stock.  The sale or issuance of any
shares of our  preferred  stock  having  rights  superior to those of our common
stock may result in a decrease in the value or market price of our common stock.
The issuance of preferred stock could have the effect of delaying,  deferring or
preventing  a  change  of  ownership  without  further  vote  or  action  by our
stockholders and may adversely affect the voting and other rights of the holders
of our common stock.

We may be unable to obtain the additional capital required to grow our business,
which could seriously harm our proposed business.  If we raise additional funds,
our current stockholders may suffer substantial dilution.

As of March 31, 2004, we had approximately $814,000 in cash and cash equivalents
on hand. We currently do not have a traditional revolving credit facility with a
commercial  bank. We may need to raise  additional  funds at any time and, given
our  history,  we cannot be  certain  that we will be able to obtain  additional
financing on favorable  terms,  if at all. Due to the recent  volatility  of the
U.S. equity markets,  particularly for smaller technology companies,  we may not
have access to new capital investment when we need to raise additional funds.

Our future  capital  requirements  will depend upon several  factors,  including
whether we are successful in developing our products, and our level of operating
expenditures.  Our expenditures are likely to rise as we continue our technology
and business  development  efforts. If our capital  requirements vary materially
from those we currently plan, we may require  additional  financing  sooner than
anticipated. If we cannot raise funds on acceptable terms, we may not be able to
develop our new products and services, take advantage of future opportunities or
respond to competitive  pressures or  unanticipated  requirements,  any of which
could  have a material  adverse  effect on our  ability to develop  and grow our
business.

Further,  if  we  issue  equity  securities,   our  existing  stockholders  will
experience  dilution  of  their  ownership  percentages,   and  the  new  equity
securities  may have rights,  preferences  or privileges  senior to those of our
common stock. If we do not obtain additional funds when needed, we could quickly
cease to be a viable going concern.

                                       30
<PAGE>

We do not  intend  to  declare  dividends  and our  stock  could be  subject  to
volatility.

We have  never  declared  or paid any cash  dividends  on our common  stock.  We
presently  intend  to  retain  all  future  earnings,  if any,  to  finance  the
development of our business and do not expect to pay any dividends on our common
stock in the foreseeable future.

The market price of our common stock may fluctuate  significantly in response to
a number of factors, some of which are beyond our control, including:

     o    variations in the magnitude of our losses from operations from quarter
          to quarter;

     o    changes in market valuations of companies in the consumer  electronics
          industry;

     o    changes in the dynamics of the market  segment  that we are  targeting
          with our new product initiative;

     o    announcements  by us or our competitors of new  technology,  products,
          services,    significant    contracts,     acquisitions,     strategic
          relationships,  joint ventures,  capital commitments or other material
          developments  that affect our prospects  and our relative  competitive
          position in our prospective markets;

     o    our  inability to locate or maintain  suppliers of  components  of our
          line of consumer  electronics products at prices that will allow us to
          attain profitability;

     o    product or design flaws, or our inability to bring functional products
          to market,  product  recalls or similar  occurrences,  or failure of a
          substantial market to develop for our planned products;

     o    additions or departures of key personnel;

     o    sales of capital stock in the future;

     o    stock liquidity or cash flow constraints; and

     o    fluctuations in stock market prices and volume, which are particularly
          common for the  securities  of highly  volatile  technology  companies
          pursuing untested markets and new technologies.

                                       31
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use  derivative  financial  instruments  to  hedge  interest  rate and
foreign currency exposure.  We do not believe that we have any material exposure
to interest  rate risk.  We did not  experience a material  impact from interest
rate risk during the first quarter of fiscal 2004.

Currently,  we do not have any significant  investments in financial instruments
for  trading  or other  speculative  purposes,  or to manage our  interest  rate
exposure.

ITEM 4. CONTROLS AND PROCEDURES

The term "disclosure  controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act.  This term refers to the controls and  procedures
of a  company  that are  designed  to ensure  that  information  required  to be
disclosed by a company in the reports it files or submits under the Exchange Act
is  recorded,  processed,  summarized  and  reported  within  the  time  periods
specified by the Securities and Exchange Commission.  Our management,  including
our chief executive officer and chief financial officer,  each of whom joined us
during the period covered by this report, has evaluated the effectiveness of our
disclosure  controls and  procedures as of the end of the period covered by this
report.  Based  upon that  evaluation,  our chief  executive  officer  and chief
financial  officer have concluded  that our  disclosure  controls and procedures
were not  effective  in all  material  respects as of the end of our last fiscal
year, and that our disclosure controls and procedures are still not effective in
all material respects as of the end of the period covered by this report.

During the first fiscal quarter of 2004 we took  corrective  actions with regard
to  significant   deficiencies  and  material  weaknesses  that  our  management
discovered in its evaluation of the effectiveness of our disclosure controls and
procedures.  Included in our new  management  team, all of whom were employed in
the  first  quarter  of  2004,  is (i)  our  chief  executive  officer,  who has
experience  in  management of various  reporting  companies,  including as chief
executive  officer,  (ii) our chief financial  officer,  a position that was not
filled for most of 2003 and early 2004, and (iii) our general  counsel,  who has
experience representing a number of reporting companies. In the first quarter we
also retained a consultant to act as our director of finance, who has experience
in financial  reporting positions with a number of reporting  companies.  During
the  quarter,  we began  implementing  supervisory  controls,  primarily  in our
accounting function,  formed a disclosure committee to implement and support our
disclosure controls and procedures and adopted a corporate code of conduct.  Our
board of directors  also formed a new audit  committee and a new  nominating and
corporate  governance  committee  that,  among other things,  will  periodically
review and assess our code of conduct.  Each of these  committees is composed of
independent  directors.  In the  second  quarter  of 2004,  so far,  we have (i)
employed a new director of our IT and MIS functions,  who has begun to implement
controls  and  procedures  in those  systems  and (ii)  agreed  to  employ a new
principal  accounting  officer,  who will  continue to  implement  controls  and
procedures  for our  accounting  function.  We also  expect to begin an internal
control review in the second quarter of 2004. We expect to have  implemented our
corrective  actions regarding our disclosure  controls and procedures by the end
of our fiscal year ending December 31, 2004.

                                       32
<PAGE>

PART II - OTHER INFORMATION

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K
         --------------------------------

a.   Exhibits

     31.1 - Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
     31.2 - Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
     32 - Section 1350 Certifications.

b.   Reports on Form 8-K

On  January  22,  2004,  we filed a Current  Report on Form 8-K,  under  Item 5,
disclosing that we had issued a press release announcing that Kent A. Savage had
been appointed as our chief  executive  officer.  No financial  statements  were
filed with that report.

On  March  5,  2004,  we filed a  Current  Report  on Form  8-K,  under  Item 5,
disclosing that we had issued a press release announcing that Theodore B. Muftic
had been appointed as our chief financial officer. No financial  statements were
filed with that report.



                                       33
<PAGE>

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.

                                Northgate Innovations, Inc.


Date: May 17, 2004              By  /s/ Theodore B. Muftic
                                    --------------------------
                                    Chief Financial Officer
                                    (Principal Financial and
                                    Accounting Officer)



                                       34