##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from  to
 Commission File No. 001-14944
 MAD CATZ INTERACTIVE, INC.
 (Exact name of registrant as specified in its charter)
 Canada
    
    Not Applicable(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)7480 Mission Valley Road, Suite 101San Diego, California
    
    92108(Address of principal executive offices)
    
    (Zip Code)
 (619) 683-9830
(Registrants telephone number, including area code)
 o þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




---



##### 



MAD CATZ INTERACTIVE, INC.
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2007
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (unaudited)
    
    
    3Consolidated Balance Sheets as of December 31, 2007 and March 31, 2007
    
    
    3Consolidated Statements of Operations for the three and nine months ended December 31, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the nine months ended December 31, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24Item 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 5.
Other Information
    
    
    27Item 6. Exhibits
    
    
    27SIGNATURES
    
    
    28EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 MAD CATZ INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    March 31,2007
    
    
    2007(unaudited)AssetsCurrent assets:Cash
    
    $
    10,293
    
    
    $
    2,350Accounts receivable, net of allowances of
$6,446 and $3,583 as of December 31, 2007
and March 31, 2007, respectively
    
    
    30,339
    
    
    
    13,937Other receivables
    
    
    626
    
    
    
    542Inventories
    
    
    21,450
    
    
    
    12,804Deferred tax assets
    
    
    1,282
    
    
    
    2,009Prepaid expense and other current assets
    
    
    1,376
    
    
    
    1,385Total current assets
    
    
    65,366
    
    
    
    33,027Deferred tax assets
    
    
    523
    
    
    
    1,801Other assets
    
    
    211
    
    
    
    86Property and equipment, net of accumulated
depreciation of $5,946 and $5,050 as of
December 31, 2007 and March 31, 2007,
respectively
    
    
    2,315
    
    
    
    1,658Intangible assets, net
    
    
    9,088
    
    
    
    1,848Goodwill
    
    
    35,575
    
    
    
    17,483Total assets
    
    $
    113,078
    
    
    $
    55,903Liabilities and Shareholders EquityCurrent liabilities:Bank loan
    
    $
    19,157
    
    
    $
    1,345Accounts payable
    
    
    28,863
    
    
    
    13,509Accrued liabilities
    
    
    8,869
    
    
    
    3,338Income taxes payable
    
    
    917
    
    
    
    484Total current liabilities
    
    
    57,806
    
    
    
    18,676Notes payable
    
    
    14,500
    
    
    
    Total liabilities
    
    
    72,306
    
    
    
    18,676Shareholders equity:Common stock, no par value, unlimited shares
authorized; 54,973,549 and 54,244,383 shares
issued and outstanding as of December 31,
2007 and March 31, 2007, respectively
    
    
    47,699
    
    
    
    47,105Accumulated other comprehensive income
    
    
    1,566
    
    
    
    2,615Accumulated deficit
    
    
    (8,493
    )
    
    
    (12,493
    )Total shareholders equity
    
    
    40,772
    
    
    
    37,227Total liabilities and shareholders equity
    
    $
    113,078
    
    
    $
    55,903
  3




---



##### Table of Contents



MAD CATZ INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    34,274
    
    
    $
    36,458
    
    
    $
    65,704
    
    
    $
    80,387Cost of sales
    
    
    21,613
    
    
    
    26,181
    
    
    
    43,411
    
    
    
    60,993Gross profit
    
    
    12,661
    
    
    
    10,277
    
    
    
    22,293
    
    
    
    19,394Operating expenses:Sales and marketing
    
    
    3,296
    
    
    
    2,404
    
    
    
    6,975
    
    
    
    6,997General and administrative
    
    
    3,102
    
    
    
    2,003
    
    
    
    7,379
    
    
    
    6,340Research and development
    
    
    366
    
    
    
    375
    
    
    
    980
    
    
    
    1,079Amortization
    
    
    374
    
    
    
    
    
    
    
    374
    
    
    
    Total operating expenses
    
    
    7,138
    
    
    
    4,782
    
    
    
    15,708
    
    
    
    14,416Operating income
    
    
    5,523
    
    
    
    5,495
    
    
    
    6,585
    
    
    
    4,978Interest expense, net
    
    
    (372
    )
    
    
    (342
    )
    
    
    (581
    )
    
    
    (906
    )Foreign exchange gain, net
    
    
    251
    
    
    
    140
    
    
    
    587
    
    
    
    303Other income
    
    
    177
    
    
    
    118
    
    
    
    328
    
    
    
    247Income before income taxes
    
    
    5,579
    
    
    
    5,411
    
    
    
    6,919
    
    
    
    4,622Income tax expense
    
    
    2,269
    
    
    
    1,722
    
    
    
    2,919
    
    
    
    1,613Net income
    
    $
    3,310
    
    
    $
    3,689
    
    
    $
    4,000
    
    
    $
    3,009Basic net income per share
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.06Diluted net income per share
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.06Weighted average shares basic
    
    
    54,973,549
    
    
    
    54,244,383
    
    
    
    54,767,883
    
    
    
    54,244,383Weighted average shares diluted
    
    
    55,949,760
    
    
    
    54,829,038
    
    
    
    55,858,459
    
    
    
    54,378,587
  4




---



##### Table of Contents



MAD CATZ INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine months EndedDecember 31,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    4,000
    
    
    $
    3,009Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    1,788
    
    
    
    1,508Amortization of deferred financing fees
    
    
    25
    
    
    
    5Foreign exchange
    
    
    (1,041
    )
    
    
    (303
    )Provision for deferred income taxes
    
    
    1,278
    
    
    
    1,038Stock-based compensation
    
    
    250
    
    
    
    336Changes in operating assets and liabilities, net of effects of Joytech and
Saitek acquisitions in 2007:Accounts receivable
    
    
    (9,146
    )
    
    
    (14,681
    )Other receivables
    
    
    856
    
    
    
    405Inventories
    
    
    (744
    )
    
    
    5,777Income taxes receivable/payable
    
    
    433
    
    
    
    398Other current assets
    
    
    933
    
    
    
    741Other assets
    
    
    (44
    )
    
    
    Accounts payable
    
    
    5,313
    
    
    
    (1,921
    )Accrued liabilities
    
    
    (149
    )
    
    
    409Net cash provided by (used in) operating activities
    
    
    3,752
    
    
    
    (3,279
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (760
    )
    
    
    (272
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    2Cash paid for Joytech acquisition
    
    
    (2,983
    )
    
    
    Cash paid for Saitek acquisition, less cash acquired
    
    
    (10,214
    )
    
    
    Net cash used in investing activities
    
    
    (13,957
    )
    
    
    (270
    )Cash flows from financing activities:Increase in bank loan
    
    
    17,812
    
    
    
    5,127Proceeds from issuance of common stock
    
    
    345
    
    
    
    Net cash provided by financing activities
    
    
    18,157
    
    
    
    5,127Effects of foreign exchange on cash
    
    
    (9
    )
    
    
    (52
    )Net increase in cash
    
    
    7,943
    
    
    
    1,526Cash, beginning of period
    
    
    2,350
    
    
    
    1,607Cash, end of period
    
    $
    10,293
    
    
    $
    3,133Supplemental cash flow information:Income taxes paid
    
    $
    295
    
    
    $
    184Interest paid
    
    $
    235
    
    
    $
    941Supplemental
disclosures of non-cash investing activities:Note issued in conjunction with Saitek acquisition
    
    $
    14,500
    
    
    
    Fair value of assets acquired in Joytech and Saitek acquisitions:Accounts
receivable and other current assets
    
    
    13,135
    
    
    
    Other assets
    
    
    899
    
    
    
    Inventories
    
    
    7,902
    
    
    
    Assumed
liabilities
    
    
    (13,221
    )Intangible assets
    
    
    8,132
    
    
    
    Goodwill
    
    
    18,092$
    34,939
    
    
    $
    
  5




---



##### Table of Contents



MAD CATZ INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (1) Basis of Presentation
     (2) Acquisitions
 (a) Saitek
    Cash paid
    
    $
    14,956Issuance of convertible notes
    
    
    14,500Transaction costs
    
    
    1,500Restructuring costs
    
    
    1,000Total purchase price
    
    $
    31,956
 6




---



##### Table of Contents



Fair value of net tangible assets acquired and liabilities assumed:Accounts receivable and other current assets, excluding inventories
    
    $
    13,135Inventories
    
    
    5,976Property, plant & equipment
    
    
    524Accounts payable and other liabilities
    
    
    (13,221
    )6,414Fair value of identifiable intangible assets acquired:Product lines
    
    
    3,200Customer relationships
    
    
    3,100Trademarks and tradenames
    
    
    1,100Other intangibles
    
    
    507,450Goodwill
    
    
    
    
    
    
    18,092Total purchase price
    
    
    
    
    
    $
    31,956
   Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2007
    
    2006Revenue
    
    $
    46,226
    
    
    $
    52,979
    
    
    $
    91,086
    
    
    $
    110,175Net income
    
    
    2,358
    
    
    
    2,869
    
    
    
    1,275
    
    
    
    446Net income per share:Basic
    
    $
    0.04
    
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.00Diluted
    
    $
    0.04
    
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.00
  (b) Joytech
   7




---



##### Table of Contents



Cash paid for Joytech business
    
    $
    2,932Transaction costs
    
    
    51Total purchase price
    
    $
    2,983
   Fair value of tangible assets acquired and liabilities assumed:Property and equipment
    
    $
    375Inventories
    
    
    1,9262,301Fair value of identifiable intangible assets acquired:Product lines
    
    
    61Customer relationships
    
    
    302Trademarks
    
    
    257Other intangibles
    
    
    62682Total fair value of assets acquired
    
    $
    2,983
 (3) Stock-Based Compensation
 Share-Based Payment
   Three Months Ended
    
    
    Nine months EndedDecember 31, 2007
    
    
    December 31, 2006
    
    
    December 31, 2007
    
    
    December 31, 2006Stock based employee
compensation before tax
    
    $
    202
    
    
    $
    26
    
    
    $
    250
    
    
    $
    336Related income tax benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based employee
compensation, net of tax
    
    $
    202
    
    
    $
    26
    
    
    $
    250
    
    
    $
    336
  8




---



##### Table of Contents



Weighted-AverageStock options outstanding:
    
    Options
    
    
    Exercise PriceBalance at April 1, 2007
    
    
    3,605,500
    
    
    $
    0.54Options granted
    
    
    1,425,000
    
    
    $
    1.18Options exercised
    
    
    (729,166
    )
    
    $
    0.51Options expired/cancelled
    
    
    (458,500
    )
    
    $
    0.99Balance at December 31, 2007
    
    
    3,842,834
    
    
    $
    0.81Exercisable at December 31, 2007
    
    
    1,854,063
    
    
    $
    0.69
 (4) Inventories
  December 31,
    
    
    March 31,2007
    
    
    2007Raw materials
    
    $
    1,139
    
    
    $
    1,618Finished goods
    
    
    20,311
    
    
    
    11,186Inventories
    
    $
    21,450
    
    
    $
    12,804
 (5) Intangible Assets
  Net Book
    
    
    Net BookAccumulated
    
    
    Value at
    
    
    Value atAmortization at
    
    
    December 31,
    
    
    March 31,
    
    
    Useful lifeCost
    
    
    December 31, 2007
    
    
    2007
    
    
    2007
    
    
    (years)Trademarks
    
    $
    5,469
    
    
    $
    2,820
    
    
    $
    2,649
    
    
    $
    1,762
    
    
    
    4-15Copyrights
    
    
    514
    
    
    
    506
    
    
    
    8
    
    
    
    86
    
    
    
    5Customer relationships
    
    
    3,402
    
    
    
    98
    
    
    
    3,304
    
    
    
    
    
    
    
    3-6Product lines
    
    
    3,261
    
    
    
    219
    
    
    
    3,042
    
    
    
    
    
    
    
    2-3Other intangibles
    
    
    112
    
    
    
    27
    
    
    
    85
    
    
    
    
    
    
    
    4Website
    
    
    457
    
    
    
    457
    
    
    
    
    
    
    
    
    
    
    
    4Intangible assets
    
    $
    13,215
    
    
    $
    4,127
    
    
    $
    9,088
    
    
    $
    1,848
  9




---



##### Table of Contents



(6) Debt
   (7) Legal Proceedings
 Freedom Wave LLC. v. Mad
Catz, Inc. et al.,
 (8) Comprehensive Income
 Reporting Comprehensive Income,
  Three Months Ended
    
    
    Nine months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    3,310
    
    
    $
    3,689
    
    
    $
    4,000
    
    
    $
    3,009Foreign currency translation adjustment
    
    
    (1,417
    )
    
    
    (970
    )
    
    
    (1,050
    )
    
    
    426Comprehensive income
    
    $
    1,893
    
    
    $
    2,719
    
    
    $
    2,950
    
    
    $
    3,435
 10




---



##### Table of Contents



(9) Basic and Diluted Net Income per Share
   Three Months Ended
    
    
    Nine months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    3,310
    
    
    $
    3,689
    
    
    $
    4,000
    
    
    $
    3,009Weighted average common shares outstandingbasic
    
    
    54,974
    
    
    
    54,244
    
    
    
    54,768
    
    
    
    54,244Net income per common sharebasic
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.06Weighted average common shares outstandingbasic
    
    
    54,974
    
    
    
    54,244
    
    
    
    54,768
    
    
    
    54,244Plus dilutive equity instruments
    
    
    976
    
    
    
    585
    
    
    
    1,090
    
    
    
    134Weighted average common shares outstandingdiluted
    
    
    55,950
    
    
    
    54,829
    
    
    
    55,858
    
    
    
    54,378Net income per common sharediluted
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.06
 (10) Income Taxes
 Accounting for Uncertainty in
Income Taxes. Accounting for Income Taxes
     11




---



##### Table of Contents



(11) Geographic Data
  Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales:United States
    
    $
    19,440
    
    
    $
    26,133
    
    
    $
    40,258
    
    
    $
    57,254Europe
    
    
    13,342
    
    
    
    8,193
    
    
    
    22,574
    
    
    
    17,495Canada
    
    
    1,007
    
    
    
    2,132
    
    
    
    2,356
    
    
    
    5,529Other countries
    
    
    485
    
    
    
    
    
    
    
    516
    
    
    
    109$
    34,274
    
    
    $
    36,458
    
    
    $
    65,704
    
    
    $
    80,387
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 This section contains forward-looking statements involving risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking statements as a
result of certain factors including those set out under Forward-looking Statements herein and in
Part I  Item 1A,. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2007 and in Part II Other Information  Item 1A,. Risk Factors in this Quarterly
Report on Form 10-Q . The following discussion should be read in conjunction with our consolidated
financial statements and related notes included in this Form 10-Q and in our Annual Report on Form
10-K for the fiscal year ended March 31, 2007.
 Overview
 Our Business
    12




---



##### Table of Contents



Seasonality
  Transition to Next-Generation Consoles
  Potential Fluctuations in Foreign Currency
  Critical Accounting Policies
  Revenue Recognition
 Revenue Recognition Software Revenue Recognition.
  13




---



##### Table of Contents



Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)
 Customer Marketing Programs
       Allowance for Doubtful Accounts
    14




---



##### Table of Contents



Inventory Valuation
   Royalties and Intellectual Property Licenses
   Valuation of Goodwill
 Goodwill and Other Intangible Assets
 Share-Based Payments
 Share-Based Payment,
  15




---



##### Table of Contents



RESULTS OF OPERATIONS
 Net Sales
  Three months ended December 31,
    
    
    $
    
    
    %2007
    
    
    % of total
    
    
    2006
    
    
    % of total
    
    
    Change
    
    
    ChangeUnited States
    
    $
    19,440
    
    
    
    57
    %
    
    $
    26,133
    
    
    
    72
    %
    
    $
    (6,693
    )
    
    
    (25.6
    )%Europe
    
    
    13,342
    
    
    
    39
    %
    
    
    8,193
    
    
    
    22
    %
    
    
    5,149
    
    
    
    62.8
    %Canada
    
    
    1,007
    
    
    
    3
    %
    
    
    2,132
    
    
    
    6
    %
    
    
    (1,125
    )
    
    
    (52.8
    )%Other countries
    
    
    485
    
    
    
    1
    %
    
    
    
    
    
    
    0
    %
    
    
    485
    
    
    
    N/AConsolidated net sales
    
    $
    34,274
    
    
    
    100
    %
    
    $
    36,458
    
    
    
    100
    %
    
    $
    (2,184
    )
    
    
    (6.0
    )%
 Nine months ended December 31,
    
    
    $
    
    
    %2007
    
    
    % of total
    
    
    2006
    
    
    % of total
    
    
    Change
    
    
    ChangeUnited States
    
    $
    40,258
    
    
    
    61
    %
    
    $
    57,254
    
    
    
    71
    %
    
    $
    (16,996
    )
    
    
    (29.7
    )%Europe
    
    
    22,574
    
    
    
    34
    %
    
    
    17,495
    
    
    
    22
    %
    
    
    5,079
    
    
    
    29.0
    %Canada
    
    
    2,356
    
    
    
    4
    %
    
    
    5,529
    
    
    
    7
    %
    
    
    (3,173
    )
    
    
    (57.4
    )%Other countries
    
    
    516
    
    
    
    1
    %
    
    
    109
    
    
    
    0
    %
    
    
    407
    
    
    
    (373.4
    )%Consolidated net sales
    
    $
    65,704
    
    
    
    100
    %
    
    $
    80,387
    
    
    
    100
    %
    
    $
    (14,683
    )
    
    
    (18.3
    )%
    Three months endedDecember 31,2007
    
    2006Xbox 360
    
    
    16
    %
    
    
    19
    %PlayStation 2
    
    
    12
    %
    
    
    26
    %PlayStation 3
    
    
    11
    %
    
    
    2
    %Handheld Consoles(a)
    
    
    21
    %
    
    
    15
    %GameCube
    
    
    6
    %
    
    
    12
    %Xbox
    
    
    4
    %
    
    
    9
    %Wii
    
    
    6
    %
    
    
    1
    %PC
    
    
    15
    %
    
    
    All Others
    
    
    9
    %
    
    
    16
    %Total
    
    
    100
    %
    
    
    100
    %
 Nine months endedDecember 31,2007
    
    2006Xbox 360
    
    
    18
    %
    
    
    16
    %PlayStation 3
    
    
    15
    %
    
    
    1
    %Handheld Consoles(a)
    
    
    19
    %
    
    
    15
    %PlayStation 2
    
    
    14
    %
    
    
    30
    %Xbox
    
    
    5
    %
    
    
    11
    %GameCube
    
    
    7
    %
    
    
    11
    %Wii
    
    
    6
    %
    
    
    PC
    
    
    8
    %
    
    
    All Others
    
    
    8
    %
    
    
    16
    %Total
    
    
    100
    %
    
    
    100
    %
 
 (a)
    
    Handheld consoles include Sony PSP and Nintendo Game Boy Advance, Game Boy Advance SP, DS, DS
Lite, DS Micro and iPod. 16




---



##### Table of Contents



Three months endedDecember 31,2007
    
    2006Control pads
    
    
    26
    %
    
    
    40
    %Bundles
    
    
    17
    %
    
    
    12
    %Software(b)
    
    
    3
    %
    
    
    8
    %Accessories
    
    
    12
    %
    
    
    16
    %Steering wheels
    
    
    4
    %
    
    
    5
    %Memory
    
    
    3
    %
    
    
    4
    %PC
    
    
    13
    %
    
    
    Cable
    
    
    12
    %
    
    
    14
    %Audio
    
    
    5
    %
    
    
    
    %All others
    
    
    5
    %
    
    
    1
    %Total
    
    
    100
    %
    
    
    100
    %
 Nine months endedDecember 31,2007
    
    2006Control pads
    
    
    32
    %
    
    
    41
    %Bundles
    
    
    15
    %
    
    
    11
    %Software(b)
    
    
    5
    %
    
    
    14
    %Accessories
    
    
    14
    %
    
    
    13
    %Steering wheels
    
    
    3
    %
    
    
    6
    %Memory
    
    
    3
    %
    
    
    4
    %PC
    
    
    7
    %
    
    
    Cable
    
    
    12
    %
    
    
    11
    %Audio
    
    
    5
    %
    
    
    
    %All others
    
    
    4
    %
    
    
    
    %Total
    
    
    100
    %
    
    
    100
    %
 
 (b)
    
    Software includes game enhancement software in addition to published and distributed video
game software with related accessories. Gross Profit
   Three months ended December 31,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2007
    
    
    Sales
    
    
    2006
    
    
    Sales
    
    
    Change
    
    
    ChangeNet sales
    
    $
    34,274
    
    
    
    100.0
    %
    
    $
    36,458
    
    
    
    100.0
    %
    
    $
    (2,184
    )
    
    
    (6.0
    )%Cost of sales
    
    
    21,613
    
    
    
    63.1
    %
    
    
    26,181
    
    
    
    71.8
    %
    
    
    (4,568
    )
    
    
    (17.4
    )%Gross profit
    
    $
    12,661
    
    
    
    36.9
    %
    
    $
    10,277
    
    
    
    28.2
    %
    
    $
    2,384
    
    
    
    23.2
    %
 Nine months ended December 31,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2007
    
    
    Sales
    
    
    2006
    
    
    Sales
    
    
    Change
    
    
    ChangeNet sales
    
    $
    65,704
    
    
    
    100.0
    %
    
    $
    80,387
    
    
    
    100.0
    %
    
    $
    (14,683
    )
    
    
    (18.3
    )%Cost of sales
    
    
    43,411
    
    
    
    66.1
    %
    
    
    60,993
    
    
    
    75.9
    %
    
    
    (17,582
    )
    
    
    (28.8
    )%Gross profit
    
    $
    22,293
    
    
    
    33.9
    %
    
    $
    19,394
    
    
    
    24.1
    %
    
    $
    2,899
    
    
    
    14.9
    %
   17




---



##### Table of Contents



Operating Expenses
  Three months ended December 31,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2007
    
    
    Sales
    
    
    2006
    
    
    Sales
    
    
    Change
    
    
    ChangeSales and marketing
    
    $
    3,296
    
    
    
    9.6
    %
    
    $
    2,404
    
    
    
    6.6
    %
    
    $
    892
    
    
    
    37.1
    %General and administrative
    
    
    3,102
    
    
    
    9.0
    %
    
    
    2,003
    
    
    
    5.5
    %
    
    
    1,099
    
    
    
    54.9
    %Research and development
    
    
    366
    
    
    
    1.1
    %
    
    
    375
    
    
    
    1.0
    %
    
    
    (9
    )
    
    
    (2.4
    )%Amortization of intangibles
    
    
    374
    
    
    
    1.1
    %
    
    
    
    
    
    
    0.0
    %
    
    
    374
    
    
    
    n/aTotal operating expenses
    
    $
    7,138
    
    
    
    20.8
    %
    
    $
    4,782
    
    
    
    13.1
    %
    
    $
    2,356
    
    
    
    49.3
    %
 Nine months ended December 31,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2007
    
    
    Sales
    
    
    2006
    
    
    Sales
    
    
    Change
    
    
    ChangeSales and marketing
    
    $
    6,975
    
    
    
    10.6
    %
    
    $
    6,997
    
    
    
    8.7
    %
    
    $
    (22
    )
    
    
    (0.3
    )%General and administrative
    
    
    7,379
    
    
    
    11.2
    %
    
    
    6,340
    
    
    
    7.9
    %
    
    
    1,039
    
    
    
    16.4
    %Research and development
    
    
    980
    
    
    
    1.5
    %
    
    
    1,079
    
    
    
    1.3
    %
    
    
    (99
    )
    
    
    (9.2
    )%Amortization of intangibles
    
    
    374
    
    
    
    0.6
    %
    
    
    
    
    
    
    0.0
    %
    
    
    374
    
    
    
    n/aTotal operating expenses
    
    $
    15,708
    
    
    
    23.9
    %
    
    $
    14,416
    
    
    
    17.9
    %
    
    $
    1,292
    
    
    
    9.0
    %
 Sales and Marketing Expenses.
 General and Administrative.
 Research and Development.
 18




---



##### Table of Contents



Interest Expense, Foreign Exchange Gain and Other Income
  Three months ended December 31,% of Net
    
    
    
    
    
    % of Net
    
    $
    
    %2007
    
    Sales
    
    2006
    
    Sales
    
    Change
    
    ChangeInterest expense
    
    $
    (372
    )
    
    
    1.1
    %
    
    $
    (342
    )
    
    
    0.9
    %
    
    $
    (30
    )
    
    
    (8.8
    )%Foreign exchange gain
    
    $
    251
    
    
    
    0.7
    %
    
    $
    140
    
    
    
    0.4
    %
    
    $
    111
    
    
    
    79.3
    %Other income
    
    $
    177
    
    
    
    0.5
    %
    
    $
    118
    
    
    
    0.3
    %
    
    $
    59
    
    
    
    50.0
    %
 Nine months ended December 31,% of Net
    
    
    
    
    
    % of Net
    
    $
    
    %2007
    
    Sales
    
    2006
    
    Sales
    
    Change
    
    ChangeInterest expense
    
    $
    (581
    )
    
    
    0.9
    %
    
    $
    (906
    )
    
    
    1.1
    %
    
    $
    325
    
    
    
    35.9
    %Foreign exchange gain
    
    $
    587
    
    
    
    0.9
    %
    
    $
    303
    
    
    
    0.4
    %
    
    $
    284
    
    
    
    93.7
    %Other income
    
    $
    328
    
    
    
    0.5
    %
    
    $
    247
    
    
    
    0.3
    %
    
    $
    81
    
    
    
    32.8
    %
   Income Tax Expense
  Three months ended December 31,Effective
    
    
    
    
    
    Effective
    
    $
    
    %2007
    
    Tax Rate
    
    2006
    
    Tax Rate
    
    Change
    
    ChangeIncome tax expense
    
    $
    2,269
    
    
    
    40.7
    %
    
    $
    1,722
    
    
    
    31.8
    %
    
    $
    547
    
    
    
    31.8
    %
 Nine months ended December 31,Effective
    
    
    
    
    
    Effective
    
    $
    
    %2007
    
    Tax Rate
    
    2006
    
    Tax Rate
    
    Change
    
    ChangeIncome tax expense
    
    $
    2,919
    
    
    
    42.2
    %
    
    $
    1,613
    
    
    
    34.9
    %
    
    $
    1,306
    
    
    
    81.0
    %
  19




---



##### Table of Contents



Liquidity and Capital Resources
 Sources of Liquidity
 As of and for thenine months endedDecember 31,(in thousands)
    
    2007
    
    
    2006
    
    
    ChangeCash
    
    $
    10,293
    
    
    $
    3,133
    
    
    $
    7,160Percentage of total assets
    
    
    9.0
    %
    
    
    4.1
    %Cash provided by (used in) operating
activities
    
    $
    3,752
    
    
    $
    (3,279
    )
    
    $
    7,031Cash used in investing activities
    
    
    (13,957
    )
    
    
    (270
    )
    
    
    (13,687
    )Cash provided by financing activities
    
    
    18,157
    
    
    
    5,127
    
    
    
    13,030Effects of foreign exchange on cash
    
    
    (9
    )
    
    
    (52
    )
    
    
    43Net increase in cash
    
    $
    7,943
    
    
    $
    1,526
    
    
    $
    6,417
  Cash Flows from Operating Activities
  Cash Flows from Investing Activities
  Cash Flows from Financing Activities
   20




---



##### Table of Contents



Contractual Obligations and Commitments
  Payments DueLess Than
    
    
    1-3
    
    
    3-5Total
    
    
    1 Year
    
    
    Years
    
    
    YearsBank loan (excludes interest)
    
    $
    19,157
    
    
    $
    19,157
    
    
    $
    
    
    
    $
    Note payable
    
    
    14,500
    
    
    
    
    
    
    
    14,500
    
    
    
    Operating leases
    
    
    2,432
    
    
    
    1,292
    
    
    
    1,139
    
    
    
    1Royalty & license guaranteed commitments
    
    
    541
    
    
    
    224
    
    
    
    317
    
    
    
    Total
    
    $
    36,630
    
    
    $
    20,673
    
    
    $
    15,956
    
    
    $
    1
  EBITDA
  Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    3,310
    
    
    $
    3,689
    
    
    $
    4,000
    
    
    $
    3,009Adjustments:Interest expense
    
    
    372
    
    
    
    342
    
    
    
    581
    
    
    
    906Income tax expense, net
    
    
    2,269
    
    
    
    1,722
    
    
    
    2,919
    
    
    
    1,613Depreciation and amortization
    
    
    904
    
    
    
    493
    
    
    
    1,788
    
    
    
    1,508EBITDA
    
    $
    6,855
    
    
    $
    6,246
    
    
    $
    9,288
    
    
    $
    7,036
 21




---



##### Table of Contents



Recent Accounting Pronouncements
 Fair
Value Measurements ,
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115 Accounting for Certain Investments in Debt and Equity Securities
 Business Combinations
 Forward-Looking Statements
   22




---



##### Table of Contents




    
    Our dependence upon a few large customers, and their continued viability and financial
stability, and a few core products to generate a significant portion of our revenues,
    
    Risks related to acquisitions and related integration of acquired businesses,
    
    Our need to constantly change our product mix by introducing new products in response to
changing competitive and market conditions, and our need to obtain sufficient retail shelf
space at our retailers to display and market our products,
    
    Risks associated with the introduction of new video game consoles, including
technological compatibility of our products and obsolescence of our older products,
    
    Our dependence upon third parties to manufacture, ship and sell our products,
    
    Our dependence upon third parties to develop new and enhanced video game consoles and
software that promote demand for our products and the commercial acceptance of the new
consoles and software,
    
    The seasonality of our business, with the bulk of our sales coming in our fiscal third
quarter,
    
    Regulatory requirements of new laws related to environmental practices in connection with
developing, manufacturing and distributing electronics products,
    
    Potential political events, particularly in China, that may negatively affect economic
conditions generally and our ability to obtain sufficient quantities of our products in a
timely and efficient manner,
    
    Product liability claims, product defects, recalls and other manufacturing activity
risks,
    
    Risks related to our pricing, product return, promotion and production practices,
    
    Our ability to negotiate and comply with licensing arrangements with first party
manufacturers and other parties that are necessary to manufacture our products,
    
    Provisions in some of our supply agreements that could require us to make substantial
minimum annual purchases,
    
    The impact on our sales of disruptions of shipping and product delivery operations
worldwide,
    
    Costs associated with defending our intellectual property rights and with defending
assertions by other parties that we infringe their intellectual property rights,
    
    Risks associated with our international operations,
    
    The fact that accounts receivable represent a large portion of our assets and are owed by
a few large customers,
    
    Our dependence upon the availability of capital under our credit facility to finance our
operations,
    
    Potential inability to sustain or manage growth, including the failure to continue to
develop new products and markets,
    
    Our reliance on the use of information technology,
 23




---



##### Table of Contents




    
    Our need to attract, train and retain skilled personnel to manage our business, develop
new products and market our products to retailers,
    
    The loss of product market share to competitors,
    
    Potential adverse effects of domestic and international taxation and transfer pricing
regulations, and
    
    Fluctuations in the value of foreign currencies against the U.S. dollar.
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Market Risk
  Foreign Currency Exchange Rate Risk.
  Interest Rate Risk.
  
 Item 4. Controls and Procedures.
  24




---



##### Table of Contents



Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors
  Acquired companies can be difficult to integrate, disrupt our business and adversely affect our
operating results. The benefits we anticipate may not be realized in the manner anticipated.
   
    
    difficulties in integrating operations, technologies, services and personnel of
the acquired companies;
    
    potential loss of customers of the acquired companies;
    
    diversion of financial and management resources from existing operations;
    
    potential loss of key employees of the acquired companies;
    
    integrating personnel with diverse business and cultural backgrounds;
    
    preserving the development, distribution, marketing and other important
relationships of the companies;
    
    assumption of liabilities of the acquired companies; and
    
    inability to generate sufficient revenue and cost savings to offset acquisition
costs.
 25




---



##### Table of Contents




    
    assume certain liabilities;
    
    incur additional debt, such as the debt we incurred to fund the acquisitions of
Joytech and Saitek
    
    make large and immediate one-time write-offs and restructuring and other related
expenses;
    
    become subject to intellectual property or other litigation; and
    
    create goodwill or other intangible assets that could result in significant
impairment charges and/or amortization expense.
  The amount of our outstanding debt may prevent us from taking actions we would otherwise consider
in our best interest.
  
    
    it may be difficult for us to satisfy our obligations under the Loan Notes and our
outstanding credit facility;
    
    cash that would otherwise be available for potential investments will be used to pay
interest on the borrowings outstanding under our working capital facility and may be
required to redeem the Loan Notes should such Notes not be converted into Mad Catz common
stock prior to maturity;
    
    we may be less able to obtain other debt financing in the future;
    
    we could be less able to take advantage of significant business opportunities,
including acquisitions or divestitures, as a result of debt;
    
    our vulnerability to general adverse economic and industry conditions could be
increased; and
    
    we could be at a competitive disadvantage to competitors with less debt.
 
 Item 4. Submission of Matters to a Vote of Security Holders.
  1.
    
    Election of Directors
 For
    
    Withhold
    
    Invalid
    
    Non-VotesGeofrey Myers
    
    
    40,268,746
    
    
    
    1,403,314
    
    
    
    0
    
    
    
    1Darren Richardson
    
    
    39,213,716
    
    
    
    2,458,344
    
    
    
    0
    
    
    
    1Thomas R. Brown
    
    
    40,270,596
    
    
    
    1,401,464
    
    
    
    0
    
    
    
    1Robert J. Molyneaux
    
    
    40,268,066
    
    
    
    1,403,994
    
    
    
    0
    
    
    
    1William Woodward
    
    
    40,194,799
    
    
    
    1,477,261
    
    
    
    0
    
    
    
    1
 26




---



##### Table of Contents



2.
    
    Proposal to appoint KPMG LLP as our Independent Registered Public Accounting Firm and Auditor
of the Company and to authorize the Board of Directors to approve the Independent Registered
Public Accounting Firm and Auditors remuneration.
 For
    
    
    
    Withhold
    
    Invalid
    
    Non-Votes41,082,539
    
    
    
    
    
    545,522
    
    
    
    0
    
    
    
    1
 3.
    
    Proposal to approve the Mad Catz Interactive, Inc. Stock Option Plan  2007 and the grant
under that plan of options to purchase 1,000,000 shares of common stock.
 For
    
    
    
    Withhold
    
    Invalid
    
    Non-Votes13,906,902
    
    
    
    
    
    5,206,799
    
    
    
    0
    
    
    
    22,445,560
 
 Item 5. Other Information.
  
 Item 6. Exhibits.
 2.1
    
    Stock Purchase Agreement dated as of November 14, 2007 by and between Guymont Services SA as trustee of The
Winkler Atlantic Trust and Mad Catz Interactive, Inc., a company incorporated and existing under the laws of
Canada (incorporated by reference to the Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 20, 2007).10.1
    
    Consideration Loan Note Instrument dated November 20, 2007 by Mad Catz Interactive, Inc., a company
incorporated and existing under the laws of Canada to and in favor of the Noteholders named therein
(incorporated by reference to the Companys Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 20, 2007).10.2
    
    First Amending Agreement dated as of November 20, 2007 by and between Mad Catz, Inc. and Wachovia Capital
Finance Corporation (Central), an Illinois corporation (incorporated by reference to the Companys Current
Report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2007).10.3
    
    Pledge and Security Agreement dated November 20, 2007 by Winkler Atlantic Holdings Limited, a British Virgin
Islands corporation to and in favor of Wachovia Capital Finance Corporation (Central), and Illinois
corporation (incorporated by reference to the Companys Current Report on Form 8-K filed with the Securities
and Exchange Commission on November 20, 2007).10.4
    
    Guarantee dated November 20, 2007 by Saitek Industries, Limited, a Delaware corporation, in favor of Wachovia
Capital Finance Corporation (Central), and Illinois corporation (incorporated by reference to the Companys
Current Report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2007).10.5
    
    General Security Agreement dated November 20, 2007 by Saitek Industries, Limited, a Delaware corporation, in
favor of Wachovia Capital Finance Corporation (Central), and Illinois corporation (incorporated by reference
to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on November 20,
2007).31.1
    
    Certification of Registrants Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Registrants Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Registrants Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this
Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.32.2
    
    Certification of Registrants Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this
Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.
 27




---



##### Table of Contents



MAD CATZ INTERACTIVE, INC.February 19, 2008
    /s/ Darren RichardsonDarren RichardsonPresident and Chief Executive OfficerFebruary 19, 2008
    /s/ Stewart A. HalpernStewart A. HalpernChief Financial Officer 28