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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the Quarterly Period Ended June 30, 2007

OR



| ̈ | 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



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MAD CATZ INTERACTIVE, INC.

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Canada                                                         |  | Not Applicable                      
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|7480 Mission Valley Road, Suite 101 San Diego, California      |  | 92108                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(619) 683-9830

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    YES  x    NO ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer
and large accelerated filers in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer    x

Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

There were 54,973,549 shares of the registrants common stock
issued and outstanding as of July 30, 2007.



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##### Table of Contents

MAD CATZ INTERACTIVE, INC.

FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2007

TABLE OF CONTENTS



|                               |  |                                                                                         |  |   
|------------------------------ |  | --------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION |  | 3                                                                                      
|                               |  |                                                                                        
|Item 1.                        |  | Condensed Consolidated Financial Statements (unaudited)                                 |  | 3 
|                               |  |                                                                                        
|                               |  | Consolidated Balance Sheets as of June 30, 2007 and March 31, 2007                      |  | 3 
|                               |  |                                                                                        
|                               |  | Consolidated Statements of Operations for the three months ended June 30, 2007 and 2006 |  | 4 
|                               |  |                                                                                        
|                               |  | Consolidated Statements of Cash Flows for the three months ended June 30, 2007 and 2006 |  | 5 
|                               |  |                                                                                        
|                               |  | Notes to Consolidated Financial Statements                                              |  | 6 
|                               |  |                                                                                        
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations   |  | 10
|                               |  |                                                                                        
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                              |  | 20
|                               |  |                                                                                        
|Item 4.                        |  | Controls and Procedures                                                                 |  | 20
|                               | 
|PART II  OTHER INFORMATION    |  | 20                                                                                     
|                               |  |                                                                                        
|Item 1.                        |  | Legal Proceedings                                                                       |  | 20
|                               |  |                                                                                        
|Item 1A.                       |  | Risk Factors                                                                            |  | 21
|                               |  |                                                                                        
|Item 6.                        |  | Exhibits                                                                                |  | 21
|                               | 
|SIGNATURES                     |  | 22                                                                                     
|                               | 
|CERTIFICATIONS                 |  |                                                                                        



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PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

MAD CATZ INTERACTIVE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)



|                                                                                                                                                                   |  |              |         |   |               |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | - | ------------- | - | ------- | -
|                                                                                                                                                                   |  | June 30,2007 |         |   | March 31,2007 |  
|                                                                                                                                                                   |  | (Unaudited)  |         |   |               |  
|Assets                                                                                                                                                             |  |              |         |   |               |   |         |  
|Current assets:                                                                                                                                                    |  |              |         |   |               |   |         |  
|Cash                                                                                                                                                               |  | $            | 1,939   |   |               | $ | 2,350   |  
|Accounts receivable, net of allowances of $2,996 and $3,583 at June 30, 2007 and March 31, 2007, respectively                                                      |  |              | 11,100  |   |               |   | 13,937  |  
|Other receivables                                                                                                                                                  |  |              | 605     |   |               |   | 542     |  
|Inventories                                                                                                                                                        |  |              | 13,859  |   |               |   | 12,804  |  
|Deferred tax assets                                                                                                                                                |  |              | 2,009   |   |               |   | 2,009   |  
|Other current assets                                                                                                                                               |  |              | 1,537   |   |               |   | 1,385   |  
|                                                                                                                                                                   |  |              |         |   |               |   |         |  
|Total current assets                                                                                                                                               |  |              | 31,049  |   |               |   | 33,027  |  
|Deferred tax assets                                                                                                                                                |  |              | 1,871   |   |               |   | 1,801   |  
|Deferred financing fees                                                                                                                                            |  |              | 78      |   |               |   | 86      |  
|Property and equipment, net                                                                                                                                        |  |              | 1,601   |   |               |   | 1,658   |  
|Intangible assets, net                                                                                                                                             |  |              | 1,675   |   |               |   | 1,848   |  
|Goodwill                                                                                                                                                           |  |              | 17,483  |   |               |   | 17,483  |  
|                                                                                                                                                                   |  |              |         |   |               |   |         |  
|Total assets                                                                                                                                                       |  | $            | 53,757  |   |               | $ | 55,903  |  
|                                                                                                                                                                   |  |              |         |   |               |   |         |  
|Liabilities and Shareholders Equity                                                                                                                               |  |              |         |   |               |   |         |  
|Current liabilities:                                                                                                                                               |  |              |         |   |               |   |         |  
|Bank loan                                                                                                                                                          |  | $            | 2,293   |   |               | $ | 1,345   |  
|Accounts payable                                                                                                                                                   |  |              | 10,317  |   |               |   | 13,509  |  
|Accrued liabilities                                                                                                                                                |  |              | 3,544   |   |               |   | 3,338   |  
|Income taxes payable                                                                                                                                               |  |              | 262     |   |               |   | 484     |  
|                                                                                                                                                                   |  |              |         |   |               |   |         |  
|Total current liabilities                                                                                                                                          |  |              | 16,416  |   |               |   | 18,676  |  
|                                                                                                                                                                   |  |             
|Commitments and contingencies                                                                                                                                      |  |              |         |   |               |   |         |  
|                                                                                                                                                                   |  |             
|Shareholders equity:                                                                                                                                              |  |              |         |   |               |   |         |  
|Common stock, no par value, unlimited shares authorized; 54,873,549 and 54,244,383 shares issued and outstanding at June 30, 2007 and
March 31, 2007, respectively |  |              | 47,430  |   |               |   | 47,105  |  
|Accumulated other comprehensive income                                                                                                                             |  |              | 2,585   |   |               |   | 2,615   |  
|Accumulated deficit                                                                                                                                                |  |              | (12,674 | ) |               |   | (12,493 | )
|                                                                                                                                                                   |  |              |         |   |               |   |         |  
|Total shareholders equity                                                                                                                                         |  |              | 37,341  |   |               |   | 37,227  |  
|                                                                                                                                                                   |  |              |         |   |               |   |         |  
|Total liabilities and shareholders equity                                                                                                                         |  | $            | 53,757  |   |               | $ | 55,903  |  
|                                                                                                                                                                   |  |              |         |   |               |   |         |  

See accompanying notes to consolidated financial statements.



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MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands of U.S. dollars,
except share and per share data)



|                                                                |  |                             |            |   |      |   |            |  
|--------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                |  | Three Months Ended June 30, |           
|                                                                |  | 2007                        |            |   | 2006 |  
|Net sales                                                       |  | $                           | 14,578     |   |      | $ | 18,141     |  
|Cost of sales                                                   |  |                             | 9,899      |   |      |   | 14,594     |  
|                                                                |  |                             |            |   |      |   |            |  
|Gross profit                                                    |  |                             | 4,679      |   |      |   | 3,547      |  
|Operating expenses:                                             |  |                             |            |   |      |   |            |  
|Sales and marketing                                             |  |                             | 1,733      |   |      |   | 2,544      |  
|General and administrative                                      |  |                             | 2,800      |   |      |   | 1,940      |  
|Research and development                                        |  |                             | 314        |   |      |   | 219        |  
|                                                                |  |                             |            |   |      |   |            |  
|Total operating expenses                                        |  |                             | 4,847      |   |      |   | 4,703      |  
|                                                                |  |                             |            |   |      |   |            |  
|Operating loss                                                  |  |                             | (168       | ) |      |   | (1,156     | )
|Interest expense, net                                           |  |                             | (99        | ) |      |   | (273       | )
|Foreign exchange gain, net                                      |  |                             | 30         |   |      |   | 162        |  
|Other income                                                    |  |                             | 91         |   |      |   | 57         |  
|                                                                |  |                             |            |   |      |   |            |  
|Loss before income taxes                                        |  |                             | (146       | ) |      |   | (1,210     | )
|Income tax expense (benefit)                                    |  |                             | 35         |   |      |   | (334       | )
|                                                                |  |                             |            |   |      |   |            |  
|Net loss                                                        |  | $                           | (181       | ) |      | $ | (876       | )
|                                                                |  |                             |            |   |      |   |            |  
|Basic and diluted net loss per share                            |  | $                           | (0.00      | ) |      | $ | (0.02      | )
|                                                                |  |                             |            |   |      |   |            |  
|Shares used in calculating basic and diluted net loss per share |  |                             | 54,355,326 |   |      |   | 54,244,383 |  
|                                                                |  |                             |            |   |      |   |            |  

See accompanying notes to consolidated financial statements.



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MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands of U.S. dollars)



|                                                                            |  |                            |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Three Months EndedJune 30, |       
|                                                                            |  | 2007                       |        |   | 2006 |  
|Cash flows from operating activities:                                       |  |                            |        |   |      |   |        |  
|Net loss                                                                    |  | $                          | (181   | ) |      | $ | (876   | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                            |        |   |      |   |        |  
|Depreciation and amortization                                               |  |                            | 440    |   |      |   | 511    |  
|Amortization of deferred financing fees                                     |  |                            | 8      |   |      |   |       |  
|Foreign exchange gain                                                       |  |                            | (30    | ) |      |   | (162   | )
|Deferred tax assets                                                         |  |                            | (70    | ) |      |   | (396   | )
|Stock-based compensation                                                    |  |                            | 24     |   |      |   |       |  
|Changes in operating assets and liabilities:                                |  |                            |        |   |      |   |        |  
|Accounts receivable                                                         |  |                            | 3,300  |   |      |   | (812   | )
|Other receivables                                                           |  |                            | (526   | ) |      |   | 429    |  
|Inventories                                                                 |  |                            | (1,001 | ) |      |   | 4,328  |  
|Income taxes payable                                                        |  |                            | (230   | ) |      |   | (110   | )
|Other current assets                                                        |  |                            | (825   | ) |      |   | 189    |  
|Accounts payable                                                            |  |                            | (3,158 | ) |      |   | (7,319 | )
|Accrued liabilities                                                         |  |                            | 803    |   |      |   | (56    | )
|                                                                            |  |                            |        |   |      |   |        |  
|Net cash used in operating activities                                       |  |                            | (1,446 | ) |      |   | (4,274 | )
|                                                                            |  |                            |        |   |      |   |        |  
|Cash flows from investing activities:                                       |  |                            |        |   |      |   |        |  
|Purchases of property and equipment                                         |  |                            | (219   | ) |      |   | (55    | )
|                                                                            |  |                            |        |   |      |   |        |  
|Net cash used in investing activities                                       |  |                            | (219   | ) |      |   | (55    | )
|                                                                            |  |                            |        |   |      |   |        |  
|Cash flows from financing activities:                                       |  |                            |        |   |      |   |        |  
|Proceeds from stock option exercises                                        |  |                            | 301    |   |      |   |       |  
|Increase in bank loan                                                       |  |                            | 948    |   |      |   | 4,230  |  
|                                                                            |  |                            |        |   |      |   |        |  
|Net cash provided by financing activities                                   |  |                            | 1,249  |   |      |   | 4,230  |  
|                                                                            |  |                            |        |   |      |   |        |  
|Effects of foreign exchange on cash                                         |  |                            | 5      |   |      |   | 213    |  
|                                                                            |  |                            |        |   |      |   |        |  
|Net increase (decrease) in cash                                             |  |                            | (411   | ) |      |   | 114    |  
|Cash, beginning of period                                                   |  |                            | 2,350  |   |      |   | 1,607  |  
|                                                                            |  |                            |        |   |      |   |        |  
|Cash, end of period                                                         |  | $                          | 1,939  |   |      | $ | 1,721  |  
|                                                                            |  |                            |        |   |      |   |        |  
|Supplemental cash flow information:                                         |  |                            |        |   |      |   |        |  
|Income taxes paid                                                           |  | $                          | 81     |   |      | $ | 176    |  
|                                                                            |  |                            |        |   |      |   |        |  
|Interest paid                                                               |  | $                          | 111    |   |      | $ | 282    |  
|                                                                            |  |                            |        |   |      |   |        |  

See accompanying notes to consolidated financial statements.



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MAD CATZ INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

The consolidated balance sheets and related consolidated statements of operations and cash flows contained in this Quarterly Report on
Form 10-Q, which are unaudited, include the accounts of Mad Catz Interactive, Inc. (the Company) and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In the
opinion of management, all entries necessary for a fair presentation of such condensed consolidated financial statements have been included. These entries consisted only of normal recurring items. The results of operations for the interim period are
not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year.

The condensed
consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results or operations and cash flows in conformity with United States generally accepted accounting principles.
Please refer to the Companys audited consolidated financial statements and related notes for the fiscal year ended March 31, 2007 contained in the Companys Annual Report on Form 10-K as filed with the United States Securities and
Exchange Commission (the SEC).

The preparation of financial statements in conformity with United States generally accepted
accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Certain amounts in the
consolidated financial statements for the three months ended June 30, 2006 have been reclassified to conform to the three months ended June 30, 2007 presentation.

(2) Stock-Based Compensation

On April 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R) and began recording compensation expense associated with share-based awards made to employees and directors based upon their grant date fair value. The
Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which ranges from zero to four years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The expected life of the options is based on a number of factors, including historical exercise
experience, the vesting term of the award, the expected volatility of the Companys stock and an employees average length of service. The expected volatility is estimated based on the historical volatility (using daily pricing) of the
Companys stock. The risk-free interest rate is determined on a constant U.S. Treasury security rate with a contractual life that approximates the expected term of the stock options. In accordance with SFAS No. 123R, the Company reduces
the calculated Black-Scholes value by applying a forfeiture rate, based upon historical pre-vesting option cancellations. Estimated forfeitures will be reassessed at each balance sheet date and may change based on new facts and circumstances.

The following table shows the total stock-based compensation expense, related to all of the Companys stock options, recognized for
the three month period ended June 30, 2007 in accordance with SFAS No. 123R (in thousands):



|                                              |  |                                  |   
|--------------------------------------------- |  | -------------------------------- | --
|                                              |  | Three Months Ended June 30, 2007
|Stock based employee compensation before tax  |  | $                                | 24
|Related income tax benefits                   |  |                                  |  
|Stock-based employee compensation, net of tax |  | $                                | 24

The Company did not recognize stock-based compensation expense for the three month period ended
June 30, 2006.

As of June 30, 2007, there were $319,000 of total unrecognized compensation costs, net of estimated forfeitures,
related to non-vested stock options. The Company expects to recognize such costs over a weighted average period of 3.3 years. The total intrinsic value of stock options exercised was $590,000 for the three months ended June 30, 2007. There were
no stock options exercised during the three months ended June 30, 2006.



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During the three months ended June 30, 2007, the Company granted 1,000,000 stock options (130,000 of
which were cancelled due to termination) under the Mad Catz Interactive, Inc. Stock Option Plan  2007 (the 2007 Plan). The Companys Board of Directors has adopted, subject to shareholder approval, the 2007 Plan, and it will
become effective upon approval by the Companys shareholders. As the 2007 Plan is subject to shareholder approval, these options do not qualify as grants during the three months ended June 30, 2007 for accounting purposes. Once all
necessary approvals have been obtained, which is expected during the second fiscal quarter of 2008, the fair value of the option awards will be measured and compensation expense will be recorded over the options vesting period. There were no stock
option grants during the three months ended June 30, 2006.

The Companys options are denominated in Canadian dollars. For
convenience, per share amounts stated below have been translated to U.S. dollars are the rate of exchange in effect at the balance sheet date. A summary of option activity as of June 30, 2007 and changes during the three months then ended is
presented as follows:



|                             |  |           |   |  |                                |     
|---------------------------- |  | --------- | - |  | ------------------------------ | ----
|Stock options outstanding:   |  | Options   |   |  | Weighted-AverageExercise Price
|Balance at April 1, 2007     |  | 3,605,500 |   |  | $                              | 0.54
|Options granted              |  | 1,000,000 |   |  | $                              | 1.23
|Options exercised            |  | (629,166  | ) |  | $                              | 0.48
|Options expired/cancelled    |  | (375,000  | ) |  | $                              | 0.89
|                             |  |           |   |  |                                |     
|Balance at June 30, 2007     |  | 3,601,334 |   |  | $                              | 0.75
|Exercisable at June 30, 2007 |  | 1,548,834 |   |  | $                              | 0.62
|                             |  |           |   |  |                                |     

(3) Inventories

Inventories consist of the following (in thousands):



|               |  |              |        |               |   |       
|-------------- |  | ------------ | ------ | ------------- | - | ------
|               |  | June 30,2007 |        | March 31,2007
|Raw materials  |  | $            | 770    |               | $ | 1,618 
|Finished goods |  |              | 13,089 |               |   | 11,186
|               |  |              |        |               |   |       
|Inventories    |  | $            | 13,859 |               | $ | 12,804
|               |  |              |        |               |   |       



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(4) Intangible Assets

Intangible assets are summarized as follows (in thousands):



|                  |  |      |       |                                         |   |                              |  |                               |       |                    |   |       |  |  
|----------------- |  | ---- | ----- | --------------------------------------- | - | ---------------------------- |  | ----------------------------- | ----- | ------------------ | - | ----- |  | -
|                  |  | Cost |       | AccumulatedAmortization atJune 30, 2007 |   | Net BookValue atJune 30,2007 |  | Net BookValue atMarch 31,2007 |       | Useful life(years)
|Trademarks        |  | $    | 4,112 |                                         | $ | 2,497                        |  | $                             | 1,615 |                    | $ | 1,762 |  | 7
|Copyrights        |  |      | 514   |                                         |   | 454                          |  |                               | 60    |                    |   | 86    |  | 5
|Website           |  |      | 457   |                                         |   | 457                          |  |                               |      |                    |   |      |  | 4
|                  |  |      |       |                                         |   |                              |  |                               |       |                    |   |       |  |  
|Intangible assets |  | $    | 5,083 |                                         | $ | 3,408                        |  | $                             | 1,675 |                    | $ | 1,848 |  |  
|                  |  |      |       |                                         |   |                              |  |                               |       |                    |   |       |  |  

(5) Bank Loan

The Company has a Credit Facility with Wachovia Capital Finance Corporation (Central) (Wachovia) to borrow up to $35 million under a revolving line of credit subject to the availability of eligible
collateral (accounts receivable and inventories), which changes throughout the year. The term of the Credit Facility will expire on October 30, 2009. The line of credit accrues interest on the daily outstanding balance at the U.S. prime rate
plus 0.25% per annum. At June 30, 2007 the interest rate was 8.25%. The Company is also required to pay a monthly service fee of $1,000 and an unused line fee equal to 0.25% of the unused portion of the loan. Borrowings under the Credit
Facility are secured by a first priority interest in the inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc. (MCI) and by a pledge of all of the capital stock of the Companys subsidiaries and is
guaranteed by the Company. The Company is required to meet a quarterly covenant based on the Companys net income before interest, taxes, depreciation and amortization (EBITDA). The Company was in compliance with this covenant as of
June 30, 2007.

(6) Legal Proceedings

On or about May 2, 2005, Mad Catz, Inc. (MCI) was served with a lawsuit filed by Freedom Wave LLC in the United States District Court for the Central District of California entitled, Freedom Wave LLC. v. Mad Catz, Inc.
et al., Case No CV5 2954NM (PLAx). The complaint alleges that certain MCI products infringe U.S. patent numbers 6,878,066 and 6,280,327 ( 327 Patent). MCI answered, denying the allegation in the complaint. The 327 patent
was under reexamination by the patent and trademark office, and the parties agreed that until the reexamination was complete, the case should be dismissed, without prejudice to Freedom Wave refiling its claims at a later date. The reexamination has
been completed and on November 14, 2006 Freedom Wave LLC refiled the lawsuit against the Company. On August 2, 2007, the Company and Freedom Wave executed a Settlement and Intellectual Property License Agreement under which the parties
agreed that the lawsuit would be dismissed. The Companys obligations under this agreement are (i) to pay a one-time licensing fee/royalty of $102,500 for certain products sold prior to the effective date of the agreement, and (ii) to
pay an ongoing royalty of $0.40 per net unit sold during the term of the agreement. The one-time licensing fee/royalty of $102,500 has been accrued as of June 30, 2007. The Companys obligations under the agreement will continue until the
date on which the last of the licensed patents expires, March 15, 2024, unless otherwise terminated under the provisions of the agreement.

(7)
Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive Income,requires classification of other
comprehensive income in a financial statement and display of other comprehensive income separately from retained earnings and additional paid-in capital. Other comprehensive income includes primarily foreign currency translation adjustments and
unrealized gains (losses) on investments.

Comprehensive income (loss) for the three months ended June 30, 2007 and 2006 consists
of the following components (in thousands):



|                                        |  |                            |      |   |      |   |       |  
|--------------------------------------- |  | -------------------------- | ---- | - | ---- | - | ----- | -
|                                        |  | Three Months EndedJune 30, |     
|                                        |  | 2007                       |      |   | 2006 |  
|Net loss                                |  | $                          | (181 | ) |      | $ | (876  | )
|Foreign currency translation adjustment |  |                            | (30  | ) |      |   | 1,222 |  
|                                        |  |                            |      |   |      |   |       |  
|Comprehensive income (loss)             |  | $                          | (211 | ) |      | $ | 346   |  
|                                        |  |                            |      |   |      |   |       |  



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The foreign currency translation adjustments are not adjusted for income taxes as they relate to
indefinite investments in non-U.S. subsidiaries.

(8) Basic and Diluted Net Loss per Share

Basic earnings per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the reporting period.
Diluted earnings per share includes the impact of potentially dilutive common stock based equity instruments.

Outstanding options to
purchase an aggregate of 3,345,203 and 1,578,333 shares of the Companys common stock for the three months ended June 30, 2007 and 2006, respectively, were excluded from diluted net loss per share calculations because inclusion of such
options would have an anti-dilutive effect on losses in these periods.

(9) Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income TaxesAn
Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a
50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Effective April 1, 2007, the Company adopted the provisions of FIN 48. The adoption did not have a material impact to the Company and there was no
cumulative effect related to the adoption of FIN 48. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company currently has no years under examination by the Internal Revenue Service or any other state or foreign
jurisdiction.

The Companys historical tax years are subject to examination by the Internal Revenue Service and various state
jurisdictions for fiscal years ended March 31, 2004 to present. With few exceptions, the Company is no longer subject to foreign examinations by tax authorities for fiscal years ended before March 31, 2004.

The Company does not foresee any material changes to unrecognized tax benefits within the next twelve months.

(10) Geographic Data

The Companys sales are
attributed to the following geographic regions (in thousands):



|                |  |                            |        |      |   |       
|--------------- |  | -------------------------- | ------ | ---- | - | ------
|                |  | Three months endedJune 30,
|                |  | 2007                       |        | 2006
|Net sales:      |  |                            |        |      |   |       
|United States   |  | $                          | 9,715  |      | $ | 13,689
|Europe          |  |                            | 4,171  |      |   | 2,462 
|Canada          |  |                            | 686    |      |   | 1,881 
|Other countries |  |                            | 6      |      |   | 109   
|                |  |                            |        |      |   |       
|                |  | $                          | 14,578 |      | $ | 18,141
|                |  |                            |        |      |   |       

Revenue is attributed to geographic regions based on the location of the customer. During the
three months ended June 30, 2007, one customer individually accounted for 28% of the Companys gross sales. During the three months ended June 30, 2006, one customer individually accounted for 25% and a second customer individually
accounted for 19% of the Companys gross sales, for a combined total of 44% of gross sales.



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|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 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

We are a leading provider of video game
accessories and software primarily marketed under the Mad Catz and GameShark brands; we also produce a limited range of products which are marketed on a private label basis for selected customers. We design, manufacture (primarily
through third parties in Asia), market and distribute accessories for all major video game platforms, including the Microsoft Xbox 360 and Xbox; Nintendo Wii, GameCube, DS Lite, DS, Game Boy Advance SP, Game Boy Advance, and Micro; Sony PlayStation
3, PlayStation 2 and PSP. Our products include video game accessories, such as control pads, steering wheels, joysticks, memory cards, video cables, light guns, dance pads, microphones, car adapters and carry cases. We also market video game
enhancement software and publish video games.

Seasonality

We generate a substantial percentage of our net sales in the last three months of every calendar year, our fiscal third quarter. Our quarterly results of operations can be expected to fluctuate significantly in the
future, as a result of many factors, including: seasonal influences on our sales; unpredictable consumer preferences and spending trends; the introduction of new video game platforms; the need to increase inventories in advance of our primary
selling season; and timing of introductions of new products. See further discussion and sales by quarter under Results of OperationsNet Sales below.

Transition to Next-Generation Consoles

Our industry is cyclical and we believe it is still
transitioning into the next cycle, which began with the release of Microsofts Xbox 360 in November 2005 and continued with the North American releases of Sonys PlayStation 3 and Nintendos Wii at the end of 2006. In fiscal 2007, we
launched a range of accessories compatible with the Xbox 360, PlayStation 3 and Wii video game consoles as well as continued to provide accessories to the significant installed base of current consoles in the marketplace. To date, our ability to
release certain products on the new video game consoles has been restricted by technological requirements.

Potential Fluctuations in Foreign Currency

During the first quarter of fiscal 2008, approximately 33% of total net sales were transacted outside of the United States. The
majority of our international business is presently conducted in currencies other than the U.S. dollar. As such we are exposed to translation adjustments when converting under the current rate method our foreign subsidiaries functional currency
financial statements to U.S. dollar, which is our reporting currency. Translation adjustments are reported as accumulated other comprehensive income in the shareholders equity section of the balance sheet; whereas, foreign currency transaction
gains and losses, arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which business is conducted relative to the U.S. dollar or the
subsidiaries respective functional currencies will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we
cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future. We do not hedge against foreign currency exposure and we cannot predict the
effect foreign currency fluctuations will have on us in the future.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation
of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenue and expenses during the reporting periods.
The policies discussed below are considered by management to be critical because



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they are not only important to the portrayal of our financial condition and results of operations but also because application and interpretation of these
policies requires both judgment and estimates of matters that are inherently uncertain and unknown. As a result, actual results may differ materially from our estimates.

Revenue Recognition

The Company evaluates the recognition of revenue based on the applicable
provisions of Staff Accounting Bulletin No. 104, Revenue Recognition and on the criteria set forth in Statement of Position 97-2, Software Revenue Recognition. Accordingly, the Company recognizes revenue when (1) there is
persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, (2) the products are delivered, which occurs when the products are shipped and risk of loss has been transferred to the customer,
(3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed probable. Our payment arrangements with customers typically provide net 30 and 60-day terms.

Revenue from sales to authorized resellers are subject to terms allowing price protection, certain rights of return and allowances for volume rebates and
cooperative advertising. Allowances for price protection are recorded when the price protection program is offered. Allowances for estimated future returns and cooperative advertising are provided for upon recognition of revenue. Such amounts are
estimated and periodically adjusted based on historical and anticipated rates of returns, inventory levels and other factors and are recorded as either operating expenses or as a reduction of sales in accordance with Emerging Issues Task Force 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products).

Customer Marketing Programs

We record allowances for customer marketing programs, including certain rights of return, price protection, volume-based cash
incentives and cooperative advertising. The estimated cost of these programs is accrued as a reduction to revenue or as an operating expense in the period we sell the product or commit to the program. Significant management judgments and estimates
must be used to determine the cost of these programs in any accounting period.

We grant limited rights of return for certain products.
Estimates of expected future product returns are based on analyses of historical returns and information regarding inventory levels and the demand and acceptance of our products by the end consumer.

Consistent with industry standards and practices, on a product-by-product basis by customer, we allow price protection credits to be issued to retailers
in the event of a subsequent price reduction. In general, price protection refers to the circumstances when we elect to decrease the price of a product as a result of reduction in competitive prices and issue credits to our customers to protect the
customers from lower profit margins on their then current inventory of the product. The decision to effect price reductions is influenced by retailer inventory levels, product lifecycle stage, market acceptance, competitive environment and new
product introductions. Credits are issued based upon the number of units that customers have on hand at the date of the price reduction. Upon approval of a price protection program, reserves for the estimated amounts to be reimbursed to qualifying
customers are established. Reserves are estimated based on analyses of qualified inventories on hand with retailers and distributors.

We
enter into cooperative advertising arrangements with many of our customers allowing customers to receive a credit for various advertising programs. The amounts of the credits are based on specific dollar-value programs or a percentage of sales,
depending on the terms of the program negotiated with the individual customer. The objective of these programs is to encourage advertising and promotional events to increase sales of our products. Accruals for the estimated costs of these
advertising programs are recorded based on the specific negotiations with individual customers in the period in which the revenue is recognized. We regularly evaluate the adequacy of these cooperative advertising program accruals.

We also offer volume rebates to several of our customers and record reserves for such rebates as a reduction of revenue at the time revenue is
recognized. Estimates of required reserves are determined based on programs negotiated with the specific customers.

Future market
conditions and product transitions may require us to take action to increase customer programs and incentive offerings that could result in incremental reductions to revenue or increased operating expenses at the time the incentive is offered.



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Allowance for Doubtful Accounts

We sell our products in the United States and internationally primarily through retailers. We generally do not require any collateral from our customers. However, we seek to control our credit risk through ongoing
credit evaluations of our customers financial condition and by purchasing credit insurance on European accounts receivable balances.

We regularly evaluate the collectibility of our accounts receivable and we maintain an allowance for doubtful accounts which we believe is adequate. The allowance is based on managements assessment of the collectibility of specific
customer accounts, including their credit worthiness and financial condition, as well as historical experience with bad debts, receivables aging and current economic trends.

Our customer base is highly concentrated and a deterioration of a significant customers financial condition, or a decline in general economic
conditions could cause actual write-offs to be materially different from the estimated allowance. As of June 30, 2007, one customer represented 40% of total accounts receivable. The customers comprising the ten highest outstanding trade
receivable balances accounted for approximately 83% to total accounts receivable at June 30, 2007. If any of these customers receivable balances should be deemed uncollectible, we would have to make adjustments to our allowance for
doubtful accounts, which could have an adverse affect on our financial condition and results of operations in the period the adjustments are made.

Inventory Reserves

We value inventories at the lower of cost or market value. If the estimated market value is determined
to be less than the recorded cost of the inventory, a provision is made to reduce the carrying amount of the inventory item. Determination of the market value may be complex, and therefore, requires management to make assumptions and to apply a high
degree of judgment. In order for management to make the appropriate determination of market value, the following items are commonly considered: inventory turnover statistics, inventory quantities on hand in our facilities and customer inventories,
unfilled customer order quantities, forecasted customer demand, current retail prices, competitive pricing, seasonality factors, consumer trends, and performance of similar products or accessories. Subsequent changes in facts or circumstances do not
result in the reversal of previously recorded reserves.

We have not made any significant changes in the methodology or assumptions used to
establish our inventory reserves as reported during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a significant change in the future methodology or assumptions we use to calculate our inventory
reserves. However, if our estimates regarding market value are inaccurate, or changes in consumer demand affect specific products in an unforeseen manner, we may be exposed to additional increases in our inventory reserves that could be material.

Royalties and Intellectual Property Licenses

Royalty and license expenses consist of royalties and license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology or other intellectual property or proprietary rights in the
development or sale of our products. Royalty-based payments that are paid in advance are generally capitalized and expensed to cost of sales at the greater of the contractual or effective royalty rate based on net product sales.

Royalty payments to independent software developers and co-publishing affiliates are payments for the development of intellectual property related to the
Companys video game titles. Payments made prior to the establishment of technological feasibility are expensed as research and development. Once technological feasibility has been established, payments made are capitalized and amortized upon
release of the product. Additional royalty payments due after the general release of the product are typically expensed as cost of sales at the higher of the contractual or effective royalty rate based on net product sales.

Valuation of Goodwill

In accordance with SFAS
No. 142, Goodwill and Other Intangible Assets(SFAS No. 142) we perform an annual impairment review at the reporting unit level during the fourth quarter of each fiscal year or more frequently if we believe indicators of
impairment are present. SFAS No. 142 requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. The first
step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carry amount, including goodwill. If the fair value of a reporting unit exceeds its carry amount, goodwill of the
reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the
amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting units goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting



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units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. We performed the
most recent annual goodwill impairment test in the fourth quarter of fiscal year 2007 and determined that there was no impairment.

Share-Based Payments

Effective April 1, 2006, we adopted the provisions of SFAS No. 123R, Share-Based Payment, which established accounting
for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. Accordingly, stock-based compensation cost is measured at the grant date,
based on the fair value of the award, and is recognized as expense over the employees requisite service period.

The fair value of
each option award is estimated on the date of grant using the Black-Scholes option valuation model. The expected life of the options is based on a number of factors, including historical exercise experience, the vesting term of the award, the
expected volatility of the Companys stock and an employees average length of service. The expected volatility is estimated based on the historical volatility (using daily pricing) of the Companys stock. The risk-free interest rate
is determined on a constant U.S. Treasury security rate with a contractual life that approximates the expected term of the stock options. In accordance with SFAS No. 123R, the Company reduces the calculated Black-Scholes value by applying a
forfeiture rate, based upon historical pre-vesting option cancellations. Estimated forfeitures will be reassessed at each balance sheet date and may change based on new facts and circumstances.

RESULTS OF OPERATIONS

Net Sales

From a geographical perspective, our net sales for the three months ended June 30, 2007 and 2006 were as follows (in thousands):



|                       |  |              |        |            |     |   |              |   |            |  |     |         |  |   |         |   |  |       |   
|---------------------- |  | ------------ | ------ | ---------- | --- | - | ------------ | - | ---------- |  | --- | ------- |  | - | ------- | - |  | ----- | --
|                       |  | June 30,2007 |        | % of total |     |   | June 30,2006 |   | % of total |  |     | $Change |  |   | %Change |  
|United States          |  | $            | 9,715  |            | 67  | % |              | $ | 13,689     |  | 75  | %       |  | $ | (3,974  | ) |  | (29.0 | )%
|Europe                 |  |              | 4,171  |            | 29  | % |              |   | 2,462      |  | 14  | %       |  |   | 1,709   |   |  | 69.4  | % 
|Canada                 |  |              | 686    |            | 4   | % |              |   | 1,881      |  | 10  | %       |  |   | (1,195  | ) |  | (63.5 | )%
|Other countries        |  |              | 6      |            | 0   | % |              |   | 109        |  | 1   | %       |  |   | (103    | ) |  | (94.5 | )%
|                       |  |              |        |            |     |   |              |   |            |  |     |         |  |   |         |   |  |       |   
|Consolidated net sales |  | $            | 14,578 |            | 100 | % |              | $ | 18,141     |  | 100 | %       |  | $ | 3,563   |   |  | (19.6 | )%
|                       |  |              |        |            |     |   |              |   |            |  |     |         |  |   |         |   |  |       |   

For the three months ended June 30, 2007, consolidated net sales decreased 19.6% as compared
to the three month period ended June 30, 2006. The first quarter 2008 decrease in U.S. and Canadian net sales relative to the first quarter of 2007 is primarily due to our launch and related sales of the Real World Golf software product in the
first quarter of 2007. The increase in Europe sales is due in part to an increase in demand for the new platform products (the demand tends to cycle slightly behind the U.S.) and increased sales to several key customers in Europe.

Our sales by product group as a percentage of gross sales are as follows:



|                     |  |                            |   |  |      |  
|-------------------- |  | -------------------------- | - |  | ---- | -
|                     |  | Three months endedJune 30, |  
|                     |  | 2007                       |   |  | 2006 |  
|PlayStation 3        |  | 25                         | % |  | 0    | %
|Handheld Consoles(a) |  | 18                         | % |  | 14   | %
|PlayStation 2        |  | 15                         | % |  | 34   | %
|Xbox 360             |  | 15                         | % |  | 11   | %
|GameCube             |  | 7                          | % |  | 10   | %
|Xbox                 |  | 6                          | % |  | 18   | %
|Wii                  |  | 6                          | % |  | 0    | %
|All others           |  | 8                          | % |  | 13   | %
|                     |  |                            |   |  |      |  
|Total                |  | 100                        | % |  | 100  | %
|                     |  |                            |   |  |      |  

---

|(a) | Handheld consoles include Nintendo Game Boy Advance, Game Boy Advance SP, DS and Micro and Sony PSP.
|--- | ----------------------------------------------------------------------------------------------------

Our sales by product category as a percentage of gross sales are as follows:



|             |  |                            |   |  |      |  
|------------ |  | -------------------------- | - |  | ---- | -
|             |  | Three months endedJune 30, |  
|             |  | 2007                       |   |  | 2006 |  
|Control pads |  | 41                         | % |  | 39   | %
|Accessories  |  | 18                         | % |  | 6    | %
|Cables       |  | 13                         | % |  | 8    | %
|Bundles      |  | 11                         | % |  | 7    | %
|Software(b)  |  | 10                         | % |  | 28   | %
|All others   |  | 7                          | % |  | 12   | %
|             |  |                            |   |  |      |  
|Total        |  | 100                        | % |  | 100  | %
|             |  |                            |   |  |      |  

---

|(b) | Software includes game enhancement software in addition to published and distributed software with related accessories.
|--- | -----------------------------------------------------------------------------------------------------------------------



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Gross Profit

Gross profit is defined as net sales less cost of sales. Cost of sales consists of product costs, cost of licenses and royalties, cost of freight-in and freight-out and distribution center costs, including
depreciation and other overhead.

The following table presents net sales, cost of sales and gross profit for the three months ended
June 30, 2007 and 2006 (in thousands):



|              |  |               |        |                |       |   |               |   |                |  |       |          |  |   |          |   |  |       |   
|------------- |  | ------------- | ------ | -------------- | ----- | - | ------------- | - | -------------- |  | ----- | -------- |  | - | -------- | - |  | ----- | --
|              |  | June 30, 2007 |        | % of Net Sales |       |   | June 30, 2006 |   | % of Net Sales |  |       | $ Change |  |   | % Change |  
|Net sales     |  | $             | 14,578 |                | 100.0 | % |               | $ | 18,141         |  | 100.0 | %        |  | $ | (3,563   | ) |  | (19.6 | )%
|Cost of sales |  |               | 9,899  |                | 67.9  | % |               |   | 14,594         |  | 80.4  | %        |  |   | (4,695   | ) |  | (32.2 | )%
|              |  |               |        |                |       |   |               |   |                |  |       |          |  |   |          |   |  |       |   
|Gross profit  |  | $             | 4,679  |                | 32.1  | % |               | $ | 3,547          |  | 19.6  | %        |  | $ | 1,132    |   |  | 31.9  | % 
|              |  |               |        |                |       |   |               |   |                |  |       |          |  |   |          |   |  |       |   

Gross profit for the three months ended June 30, 2007 increased 31.9%, while gross profit as
a percentage of net sales, or gross profit margin, increased from 19.6% to 32.1%. The increase in gross profit was primarily due to a reduction in sales of low margin and unprofitable products and an increase in sales of higher margin products,
which increased profit margin by approximately 10 percentage points. A decrease in sales discounts and allowances increased profit margin by approximately 3 percentage points. A reduction in royalty and license expenses, mainly due to a decrease in
expenses related to our Real World Golf software product increased profit margin by approximately 4 percentage points. These increases in profit margin were offset by an increase in inventory reserves, which decreased profit margin by approximately
3 percentage points and an increase in distribution and handling costs which decreased profit margin by 1 percent.



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Operating Expenses

Operating expenses for the three months ended June 30, 2007 and 2006 were as follows (in thousands):



|                           |  |              |       |               |      |   |              |   |               |  |      |         |  |   |         |   |  |       |   
|-------------------------- |  | ------------ | ----- | ------------- | ---- | - | ------------ | - | ------------- |  | ---- | ------- |  | - | ------- | - |  | ----- | --
|                           |  | June 30,2007 |       | % ofNet Sales |      |   | June 30,2006 |   | % ofNet Sales |  |      | $Change |  |   | %Change |  
|Sales and marketing        |  | $            | 1,733 |               | 11.9 | % |              | $ | 2,544         |  | 14.0 | %       |  | $ | (811    | ) |  | (31.9 | )%
|General and administrative |  |              | 2,800 |               | 19.2 | % |              |   | 1,940         |  | 10.7 | %       |  |   | 860     |   |  | 44.3  | % 
|Research and development   |  |              | 314   |               | 2.2  | % |              |   | 219           |  | 1.2  | %       |  |   | 95      |   |  | 43.4  | % 
|                           |  |              |       |               |      |   |              |   |               |  |      |         |  |   |         |   |  |       |   
|Total operating expenses   |  | $            | 4,847 |               | 33.2 | % |              | $ | 4,703         |  | 25.9 | %       |  | $ | 144     |   |  | 3.1   | % 
|                           |  |              |       |               |      |   |              |   |               |  |      |         |  |   |         |   |  |       |   

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
payroll, commissions, participation at trade shows and travel costs for our worldwide sales and marketing staff, advertising expense and costs of operating our GameShark.com website. The decrease in sales and marketing expense is primarily due to a
decrease in advertising expenses related to the Real World Golf software product which was launched in the first quarter of fiscal 2007.

General and Administrative. General and administrative expenses include salaries and benefits for our executive and administrative personnel, facilities costs and professional services, such as legal and accounting. The
increase in general and administrative expense is primarily due to audit fees related to services rendered during the first quarter of fiscal 2008 for the fiscal 2007 year-end audit.

Research and Development. Research and development expenses include the costs of developing and enhancing new and existing products in
addition to the costs of developing software products. The increase in research and development expenses relates primarily to development costs of our audio products using technology purchased during the third quarter of fiscal 2007.

Interest Expense, net, Foreign Exchange Gain and Other Income

Interest expense, foreign exchange gain and other income for the three months ended June 30, 2007 and 2007 were as follows (in thousands):



|                      |  |              |     |   |               |     |   |              |   |      |               |  |     |         |  |   |         |   |  |       |   
|--------------------- |  | ------------ | --- | - | ------------- | --- | - | ------------ | - | ---- | ------------- |  | --- | ------- |  | - | ------- | - |  | ----- | --
|                      |  | June 30,2007 |     |   | % of NetSales |     |   | June 30,2006 |   |      | % of NetSales |  |     | $Change |  |   | %Change |  
|Interest expense, net |  | $            | (99 | ) |               | 0.7 | % |              | $ | (273 | )             |  | 1.5 | %       |  | $ | 174     |   |  | 63.7  | % 
|Foreign exchange gain |  | $            | 30  |   |               | 0.2 | % |              | $ | 162  |               |  | 0.9 | %       |  | $ | (132    | ) |  | (81.5 | )%
|Other income          |  | $            | 91  |   |               | 0.6 | % |              | $ | 57   |               |  | 0.3 | %       |  | $ | 34      |   |  | 59.6  | % 

The decrease in interest expense is attributable to lower bank balances during the three month
period ended June 30, 2007 as compared to the three months ended June 30, 2006. The decrease in foreign exchange gain in the three months ended June 30, 2007 compared to the quarter ended June 30, 2006 is due primarily to a large
increase in the Great British Pound (GBP) in the quarter ended June 30, 2006 relative to the U.S. dollar and the Euro. In the quarter ended June 30, 2007 the GBP has increased modestly. The gain directly relates to the revaluation of
intercompany payables arising from product purchases at the Companys foreign subsidiaries.

Other income primarily consists of
advertising income from our GameShark.com website and royalties paid by an unrelated third party to distribute our products in Australia. The increase in other income is primarily due to increased purchases from an unrelated third party distributor.

Income Tax Expense (Benefit)

Income tax expense (benefit) for the three months ended June 30, 2007 and 2006 was as follows (in thousands):



|              |  |                    |  |               |  |                    |  |          |  |         
|------------- |  | ------------------ |  | ------------- |  | ------------------ |  | -------- |  | --------
|June 30, 2007 |  | Effective Tax Rate |  | June 30, 2006 |  | Effective Tax Rate |  | $ Change |  | % Change
|$ 35          |  | (23.7)%            |  | $(334)        |  | 27.6%              |  | $369     |  | 110.5%  

Income tax expense increased due to the smaller loss incurred during the first quarter of fiscal
2008 as compared to the loss incurred for the first quarter of fiscal 2007. The effective tax rate is a blended rate for different jurisdictions in which the Company operates.



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Liquidity and Capital Resources

Sources of Liquidity



|                                      |  |                                              |        |   |      |   |        |        |  |   |        |  
|------------------------------------- |  | -------------------------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | ------ | -
|                                      |  | As of and for theThree months ended June 30, |        |   |      |  
|(in thousands)                        |  | 2007                                         |        |   | 2006 |   |        | Change | 
|Cash                                  |  | $                                            | 1,939  |   |      | $ | 1,721  |        |  | $ | 218    |  
|                                      |  |                                              |        |   |      |   |        |        |  |   |        |  
|Percentage of total assets            |  |                                              | 3.6    | % |      |   | 3.1    | %      |  |   |        |  
|Cash used in operating activities     |  | $                                            | (1,446 | ) |      | $ | (4,274 | )      |  | $ | 2,828  |  
|Cash used in investing activities     |  |                                              | (219   | ) |      |   | (55    | )      |  |   | (164   | )
|Cash provided by financing activities |  |                                              | 1,249  |   |      |   | 4,230  |        |  |   | (2,981 | )
|Effect of foreign exchange on cash    |  |                                              | 5      |   |      |   | 213    |        |  |   | (208   | )
|                                      |  |                                              |        |   |      |   |        |        |  |   |        |  
|Net increase (decrease) in cash       |  | $                                            | (411   | ) |      | $ | 114    |        |  |   |        |  
|                                      |  |                                              |        |   |      |   |        |        |  |   |        |  

At June 30, 2007, available cash was approximately $1.9 million compared to cash of
approximately $2.4 million at March 31, 2007 and $1.7 million at June 30, 2006. Our primary sources of liquidity include a revolving line of credit (as discussed below under Cash Flows from Financing Activities), cash on hand at the
beginning of the year and cash flows generated from operations.

Cash Flows from Operating Activities

Our cash flows from operating activities have typically included the collection of customer receivables generated by the sale of our products, offset by
payments to vendors for materials and manufacture of our products. For the three months ended June 30, 2007, cash used in operating activities was $1.4 million compared to cash used of $4.3 million for the three months ended June 30, 2006.
Cash was primarily used for the payment of accounts payable and purchases of inventories.

Cash Flows from Investing Activities

Cash used in investing activities was $219,000 during the three months ended June 30, 2007 and $55,000 during the three months ended June 30,
2006. Investing activities consist of capital expenditures to support our operations and were made up primarily of production molds and leasehold improvements.

Cash Flows from Financing Activities

Cash provided by financing activities during the three months ended June 30, 2007
was a result of increased borrowings under our line of credit and proceeds from the exercise of stock options. For the three months ended June 30, 2007, cash provided by financing activities was $1.2 million compared to cash provided of $4.2
million in the three months ended June 30, 2006. We are focused on effectively managing our overall liquidity position by continuously monitoring expenses and managing our accounts receivable collection efforts.

We maintain a Credit Facility with Wachovia Capital Finance Corporation (Central) (Wachovia) to borrow up to $35 million under a revolving
line of credit subject to the availability of eligible collateral (accounts receivable and inventories), which changes throughout the year. The line of credit accrues interest on the daily outstanding balance at the U.S. prime rate plus
0.25% per annum. At June 30, 2007 the interest rate was 8.25%. We are also required to pay a monthly service fee of $1,000 and an unused line fee equal to 0.25% of the unused portion of the loan. Borrowings under the Credit Facility are
secured by a first priority interest in the inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc. and by a pledge of all of the capital stock of the Companys subsidiaries and is guaranteed by the Company. We
are required to meet a quarterly covenant based on the Companys net income before interest, taxes, depreciation and amortization (EBITDA). We were in compliance with this covenant as of June 30, 2007.

We believe that our available cash balances, anticipated cash flows from operations and available line of credit will be sufficient to satisfy our
operating needs for at least the next twelve months. However, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there
can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from additional credit facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all.
Furthermore, additional debt financing may contain more restrictive covenants than our existing debt.



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Contractual Obligations and Commitments

The following summarizes our minimum contractual obligations as of June 30, 2007 (in thousands):





|                                         |  |              |       |                 |   |          |  |          |       |  |   |  
|---------------------------------------- |  | ------------ | ----- | --------------- | - | -------- |  | -------- | ----- |  | - | -
|                                         |  | Payments Due
|                                         |  | Total        |       | Less Than1 Year |   | 1-3Years |  | 3-5Years
|Bank loan (excludes interest)            |  | $            | 2,293 |                 | $ | 2,293    |  | $        |      |  | $ | 
|Operating leases                         |  |              | 2,145 |                 |   | 1,144    |  |          | 1,001 |  |   | 
|Royalty & license guaranteed commitments |  |              | 271   |                 |   | 271      |  |          |      |  |   |  
|                                         |  |              |       |                 |   |          |  |          |       |  |   |  
|Total                                    |  | $            | 4,709 |                 | $ | 3,708    |  | $        | 1,001 |  | $ | 
|                                         |  |              |       |                 |   |          |  |          |       |  |   |  

As of June 30, 2007 and March 31, 2007, we did not have any relationships with
unconsolidated entities or financial parties, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.



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EBITDA

EBITDA, a non-GAAP financial measure, represents net income (loss) before interest, taxes, depreciation and amortization. EBITDA is not intended to represent cash flows for the period, nor is it being presented as an alternative to
operating income or net income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. As defined, EBITDA
is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. We believe, however, that in addition to the performance measures found in our financial statements,
EBITDA is a useful financial performance measurement for assessing our Companys operating performance. Our management uses EBITDA as a measurement of operating performance in comparing our performance on a consistent basis over prior periods,
as it removes from operating results the impact of our capital structure, including the interest expense resulting from our outstanding debt, and our asset base, including depreciation and amortization of our capital and intangible assets.



|                              |  |                            |      |   |      |   |      |  
|----------------------------- |  | -------------------------- | ---- | - | ---- | - | ---- | -
|                              |  | Three months endedJune 30, |     
|                              |  | 2007                       |      |   | 2006 |  
|                              |  | (in thousands)             |     
|Net loss                      |  | $                          | (181 | ) |      | $ | (876 | )
|Adjustments:                  |  |                            |      |   |      |   |      |  
|Interest expense, net         |  |                            | 99   |   |      |   | 273  |  
|Income tax expense (benefit)  |  |                            | 35   |   |      |   | (334 | )
|Depreciation and amortization |  |                            | 448  |   |      |   | 511  |  
|                              |  |                            |      |   |      |   |      |  
|EBITDA                        |  | $                          | 401  |   |      | $ | (426 | )
|                              |  |                            |      |   |      |   |      |  

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements(SFAS
No. 157), which provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting
pronouncements creating inconsistencies in measurement and disclosures. SFAS No. 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123R and related
interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007. The Company does not
expect the adoption of SFAS No. 157 to have a material impact on its consolidated financial statements.

In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115(SFAS No. 159). This standard permits an entity to choose to measure
many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies
to all entities with available-for-sale and trading securities. The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report
unrealized gains and losses on items for which the fair value of the option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option:
(a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire
instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. The Company does not expect the adoption of SFAS No. 159 to have
a material impact on its consolidated financial statements.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q are not historical fact and constitute forward-looking statements within the meaning
of Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may address, among other
things, our strategy for growth, business development, market and competitive position, financial results, expected revenue, expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending
needs. These statements relate to our expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future, and may be identified by the use of words or phrases such as believe, expect,
anticipate, should, plan, estimate, and potential, among others.



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Forward-looking statements are not guarantees of performance and are subject to important factors and
events that could cause our actual business, prospects and results of operations to differ materially from the historical information contained in this Form 10-Q, and from those that may be expressed or implied by the forward-looking statements.
Readers are cautioned that actual results could differ materially from the anticipated results or other expectations expressed in these forward-looking statements for the reasons detailed in Part I  Item 1A.  Risk Factors of our
most recent Annual Report on Form 10-K, and in Part II Other Information  Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. The fact that some risk factors may be the same or similar to our past reports filed with the
Securities and Exchange Commission means only that the risks are present in multiple periods. We believe that many of the risks listed here and detailed in our other SEC filings are part of doing business in the industry in which we operate, and
will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen their significance. The forward-looking statements contained in this report are made as of the date of this report and we assume
no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements. Among others, risks and uncertainties that may affect our business, financial condition, performance,
development and results of operations include:



| |  |  | 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,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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,
| | - |  | --------------------------------------------------



| |  |  | 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.
| | - |  | ------------------------------------------------------------------------



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##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Market Risk

Market risk is the potential loss arising from changes in market rates and market prices. Our market risk
exposure results primarily from fluctuations in foreign exchange rates and interest rates. Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may
occur, since actual gains and losses will differ from those estimated, based upon actual fluctuations in foreign currency exchange rates and interest rates and the timing of transactions.

Foreign Currency Exchange Rate Risk.

A
majority of our international business is presently conducted in currencies other than the U.S. dollar and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly the CNY, the
Pound Sterling, the Euro and the Canadian dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value
of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange
rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future. We do not hedge against foreign currency
exposure and we cannot predict the effect foreign currency fluctuations will have on us in the future. We estimate that an immediate 10% adverse change in foreign exchange rates would decrease our reported net income by approximately $0.9 million
for the three months ended June 30, 2007.

Interest Rate Risk.

We are exposed to interest rate risk on borrowings under our Credit Facility. Funds advanced to us pursuant to the Credit Facility bear interest at the
U.S. prime rate plus 0.25%. We do not hedge our exposures to interest rate risk. We estimate that an increase of 100 basis points in the interest rate under our Credit Facility would not materially impact reported net loss for the three months ended
June 30, 2007.



|Item 4. | Controls and Procedures
|------- | -----------------------

We maintain disclosure
controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Evaluation of Disclosure Controls and Procedures

As required by Securities and Exchange Commission
Rules 13a-15(a) and 13a-15(e), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (who is also the Chief Accounting Officer), of the
effectiveness of the design and operation of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and the Chief Financial Officer concluded that
our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Controls over Financial Reporting

There has been no change in our internal controls over financial reporting during the period covered by this quarterly report that has
materially affected, or is reasonably likely to materially affect our internal controls over financial reporting.

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

Discussion of legal matters is
incorporated by reference from Part I, Item 1, Note 6, Commitments and Contingencies, of this document, and should be considered an integral part of Part II, Item 1, Legal Proceedings.



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##### Table of Contents

|Item 1A. | Risk Factors
|-------- | ------------

There have been no material changes
to the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2007.



|Item 6. | Exhibits
|------- | --------



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Registrants Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                     
|     | 
|31.2 |  | Certification of Registrants Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                     
|     | 
|32.1 |  | 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.



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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.



|                |  |  |  |                                       |  | 
|--------------- |  |  |  | ------------------------------------- |  | 
|                |  |  |  | MAD CATZ INTERACTIVE, INC.            |  | 
|                |  |  | 
|August 14, 2007 |  |  |  | /s/ Darren Richardson                 |  | 
|                |  |  |  | Darren Richardson                     |  | 
|                |  |  |  | President and Chief Executive Officer |  | 
|                |  |  | 
|August 14, 2007 |  |  |  | /s/ Stewart A. Halpern                |  | 
|                |  |  |  | Stewart A. Halpern                    |  | 
|                |  |  |  | Chief Financial Officer               |  | 



22