##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period fromto
 Commission File No. 001-14944
 
 MAD CATZ INTERACTIVE, INC.
 (Exact name of Registrant as specified in its charter)
 
 Canada
    
    Not Applicable(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)7480 Mission Valley Road, Suite 101San Diego, California
    
    92108(Address of principal executive offices)
    
    (Zip Code)
 (619) 683-9830
(Registrants telephone number, including area code)
 
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



MAD CATZ INTERACTIVE, INC.
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2008
  
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1.        Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of September 30, 2008 and March 31, 2008
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended September 30,
2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 4. Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 6. Exhibits
    
    
    23SIGNATURES
    
    
    24EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MAD CATZ INTERACTIVE, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    March 31,2008
    
    
    2008AssetsCurrent assets:Cash
    
    $
    2,638
    
    
    $
    5,230Accounts receivable, net of allowances of
$5,037 and $4,514 at September 30, 2008 and
March 31, 2008, respectively
    
    
    17,015
    
    
    
    14,567Other receivables
    
    
    1,335
    
    
    
    583Income tax receivable
    
    
    805
    
    
    
    Inventories
    
    
    25,680
    
    
    
    20,554Deferred tax assets
    
    
    1,591
    
    
    
    1,591Prepaid expense and other current assets
    
    
    1,355
    
    
    
    1,369Total current assets
    
    
    50,419
    
    
    
    43,894Deferred tax assets
    
    
    5,187
    
    
    
    978Other assets
    
    
    590
    
    
    
    324Property and equipment, net
    
    
    2,077
    
    
    
    2,101Intangible assets, net
    
    
    6,812
    
    
    
    8,320Goodwill
    
    
    32,477
    
    
    
    35,704Total assets
    
    $
    97,562
    
    
    $
    91,321Liabilities and Shareholders EquityCurrent liabilities:Bank loan
    
    $
    14,545
    
    
    $
    11,470Accounts payable
    
    
    21,466
    
    
    
    16,280Accrued liabilities
    
    
    6,770
    
    
    
    6,859Income taxes payable
    
    
    302
    
    
    
    496Total current liabilities
    
    
    43,083
    
    
    
    35,105Convertible notes payable and accrued interest
    
    
    15,466
    
    
    
    14,901Note payable and accrued interest
    
    
    857
    
    
    
    Other long-term liabilities
    
    
    130
    
    
    
    Total liabilities
    
    
    59,536
    
    
    
    50,006Shareholders equity:Common stock, no par value, unlimited shares
authorized; 55,098,549 and 54,973,549 shares
issued and outstanding at September 30, 2008
and March 31, 2008, respectively
    
    
    47,934
    
    
    
    47,717Accumulated other comprehensive income
    
    
    1,433
    
    
    
    2,923Accumulated deficit
    
    
    (11,341
    )
    
    
    (9,325
    )Total shareholders equity
    
    
    38,026
    
    
    
    41,315Total liabilities and shareholders equity
    
    $
    97,562
    
    
    $
    91,321
  3




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##### Table of Contents



MAD CATZ INTERACTIVE, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    25,750
    
    
    $
    16,853
    
    
    $
    48,976
    
    
    $
    31,431Cost of sales
    
    
    18,027
    
    
    
    11,900
    
    
    
    33,156
    
    
    
    21,799Gross profit
    
    
    7,723
    
    
    
    4,953
    
    
    
    15,820
    
    
    
    9,632Operating expenses:Sales and marketing
    
    
    3,835
    
    
    
    1,946
    
    
    
    6,965
    
    
    
    3,679General and administrative
    
    
    3,630
    
    
    
    1,477
    
    
    
    8,405
    
    
    
    4,277Research and development
    
    
    475
    
    
    
    299
    
    
    
    938
    
    
    
    613Amortization of intangible assets
    
    
    602
    
    
    
    
    
    
    
    1,214
    
    
    
    Total operating expenses
    
    
    8,542
    
    
    
    3,722
    
    
    
    17,522
    
    
    
    8,569Operating income (loss)
    
    
    (819
    )
    
    
    1,231
    
    
    
    (1,702
    )
    
    
    1,063Interest expense, net
    
    
    (525
    )
    
    
    (110
    )
    
    
    (992
    )
    
    
    (209
    )Foreign exchange gain (loss), net
    
    
    (101
    )
    
    
    307
    
    
    
    (173
    )
    
    
    336Other income
    
    
    82
    
    
    
    60
    
    
    
    218
    
    
    
    151Income (loss) before income taxes
    
    
    (1,363
    )
    
    
    1,488
    
    
    
    (2,649
    )
    
    
    1,341Income tax expense (benefit)
    
    
    (124
    )
    
    
    616
    
    
    
    (633
    )
    
    
    651Net income (loss)
    
    $
    (1,239
    )
    
    $
    872
    
    
    $
    (2,016
    )
    
    $
    690Basic net income (loss) per share
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    (0.04
    )
    
    $
    0.01Diluted net income (loss) per share
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    (0.04
    )
    
    $
    0.01Weighted average shares  basic
    
    
    55,098,549
    
    
    
    54,970,288
    
    
    
    55,079,423
    
    
    
    54,664,487Weighted average shares  diluted
    
    
    55,098,549
    
    
    
    55,877,078
    
    
    
    55,079,423
    
    
    
    55,531,186
  4




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MAD CATZ INTERACTIVE, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (2,016
    )
    
    $
    690Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization
    
    
    2,165
    
    
    
    884Amortization of deferred financing fees
    
    
    36
    
    
    
    8Foreign exchange gain
    
    
    
    
    
    
    (336
    )Provision (benefit) for deferred income taxes
    
    
    (135
    )
    
    
    411Stock-based compensation
    
    
    161
    
    
    
    48Changes in operating assets and liabilities, net of acquisition:Accounts receivable
    
    
    (2,772
    )
    
    
    538Other receivables
    
    
    (683
    )
    
    
    33Income tax receivable
    
    
    (893
    )
    
    
    Inventories
    
    
    (5,684
    )
    
    
    1,164Prepaid expense and other current assets
    
    
    12
    
    
    
    154Other assets
    
    
    (94
    )
    
    
    Accounts payable
    
    
    4,622
    
    
    
    (5,986
    )Accrued liabilities
    
    
    428
    
    
    
    395Income taxes payable
    
    
    (215
    )
    
    
    (96
    )Net cash used in operating activities
    
    
    (5,068
    )
    
    
    (2,093
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (850
    )
    
    
    (536
    )Cash paid for acquisition
    
    
    
    
    
    
    (2,983
    )Net cash used in investing activities
    
    
    (850
    )
    
    
    (3,519
    )Cash flows from financing activities:Proceeds from stock option exercises
    
    
    56
    
    
    
    344Proceeds from bank loan, net
    
    
    3,075
    
    
    
    5,626Net cash provided by financing activities
    
    
    3,131
    
    
    
    5,970Effects of foreign exchange on cash
    
    
    195
    
    
    
    314Net increase (decrease) in cash
    
    
    (2,592
    )
    
    
    672Cash, beginning of period
    
    
    5,230
    
    
    
    2,350Cash, end of period
    
    $
    2,638
    
    
    $
    3,022Supplemental cash flow information:Income taxes paid
    
    $
    409
    
    
    $
    295Interest paid
    
    $
    373
    
    
    $
    235Supplemental disclosure of non-cash investing and financing activities:Lease incentives recorded as deferred rent
    
    $
    136
    
    
    $
    Note payable issued for final Saitek acquisition working capital purchase price adjustment
    
    $
    847
    
    
    $
    Fair value of assets acquired in acquisition:Property and equipment
    
    $
    
    
    
    $
    357Inventories
    
    
    
    
    
    
    2,060Intangible assets
    
    
    
    
    
    
    566$
    
    
    
    $
    2,983
  5




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MAD CATZ INTERACTIVE, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (1) Basis of Presentation
    (2) Fair Value Measurements
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115
 (3) Fiscal 2008 Acquisitions
 Saitek
  6




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Severance
    
    
    Lease Exit
    
    
    TotalBalance at March 31, 2008
    
    $
    830
    
    
    $
    80
    
    
    $
    910Payments
    
    
    (482
    )
    
    
    
    
    
    
    (482
    )Balance at September 30, 2008
    
    $
    348
    
    
    $
    80
    
    
    $
    428
 Pro forma information
  Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2007
    
    2007Revenue
    
    $
    25,849
    
    
    $
    47,461Net loss
    
    
    (761
    )
    
    
    (2,910
    )Net loss per share  basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.05
    )
  Joytech
  (4) Stock-Based Compensation
   Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock-based employee compensation before tax
    
    $
    93
    
    
    $
    24
    
    
    $
    161
    
    
    $
    48Related income tax benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based employee compensation, net of tax
    
    $
    93
    
    
    $
    24
    
    
    $
    161
    
    
    $
    48
  7




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Weighted-AverageStock options outstanding:
    
    Options
    
    
    Exercise PriceBalance at April 1, 2008
    
    
    3,835,334
    
    
    $
    0.80Options granted
    
    
    3,725,000
    
    
    $
    0.47Options exercised
    
    
    (125,000
    )
    
    $
    0.45Options expired/cancelled
    
    
    (38,200
    )
    
    $
    1.06Balance at September 30, 2008
    
    
    7,397,134
    
    
    $
    0.63Exercisable at September 30, 2008
    
    
    2,348,634
    
    
    $
    0.72
 (5) Inventories
  September 30,
    
    
    March 31,2008
    
    
    2008Raw materials
    
    $
    1,424
    
    
    $
    816Finished goods
    
    
    24,256
    
    
    
    19,738Inventories
    
    $
    25,680
    
    
    $
    20,554
 (6) Goodwill
  Goodwill and Other Intangible Assets
 (7) Note Payable
  8




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(8) Comprehensive Income (Loss)
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (1,239
    )
    
    $
    872
    
    
    $
    (2,016
    )
    
    $
    690Foreign currency translation adjustment
    
    
    (715
    )
    
    
    397
    
    
    
    (1,490
    )
    
    
    367Comprehensive income (loss)
    
    $
    (1,954
    )
    
    $
    1,269
    
    
    $
    (3,506
    )
    
    $
    1,057
 Accounting for
Income Taxes  Special Areas
 (9) Basic and Diluted Net Income (Loss) per Share
   Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (1,239
    )
    
    $
    872
    
    
    $
    (2,016
    )
    
    $
    690Weighted average common shares outstandingbasic
    
    
    55,099
    
    
    
    54,970
    
    
    
    55,079
    
    
    
    54,664Plus dilutive equity instruments
    
    
    
    
    
    
    907
    
    
    
    
    
    
    
    867Weighted average common shares outstandingdiluted
    
    
    55,099
    
    
    
    55,877
    
    
    
    55,079
    
    
    
    55,531Net income (loss) per common sharebasic
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    (0.04
    )
    
    $
    0.01Net income (loss) per common sharediluted
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    (0.04
    )
    
    $
    0.01
 (10) Geographic Data
  Three months ended
    
    
    Six months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales:United States
    
    $
    14,343
    
    
    $
    11,103
    
    
    $
    27,069
    
    
    $
    20,818Europe
    
    
    9,963
    
    
    
    5,062
    
    
    
    19,467
    
    
    
    9,232Canada
    
    
    322
    
    
    
    663
    
    
    
    562
    
    
    
    1,349Other countries
    
    
    1,122
    
    
    
    25
    
    
    
    1,878
    
    
    
    32$
    25,750
    
    
    $
    16,853
    
    
    $
    48,976
    
    
    $
    31,431
  (11) Leases
  (12) Correction of Prior Period Error
 Materiality Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
 (13) Subsequent Event
  9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This section contains forward-looking statements and forward looking information (collectively
forward-looking statements) as defined in applicable securities legislation 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, 2008 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 condensed 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, 2008.
 Overview
 Our Business
  Comparability of Prior Year to Current Year due to Acquisitions
  Seasonality and Fluctuation of Sales
  Current Generation Consoles
  Potential Fluctuations in Foreign Currency
  10




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Material Weakness in our Internal Controls over Financial Reporting
  
    
    Developing and implementing new reporting instructions and checklists for the
newly-acquired foreign subsidiaries accounting functions.
    
    Pursuing alternatives to upgrade our information technology tools to minimize the manual
process currently required to record, process, summarize and report information required to
be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended.
    
    Retaining additional senior accounting personnel with specific responsibilities to
improve the oversight and review of financial reporting.
    
    Implementing additional management reviews of manually prepared schedules.
   Critical Accounting Policies
  Revenue Recognition
 Revenue Recognition.
 Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)
 11




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Customer Marketing Programs
      Allowance for Doubtful Accounts
     Inventory Reserves
  12




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Valuation of Goodwill
 Goodwill and Other Intangible Assets
  Share-Based Payments
   13




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RESULTS OF OPERATIONS
 Net Sales
  Three months ended September 30,
    
    
    $
    
    
    %2008
    
    
    % of total
    
    
    2007
    
    
    % of total
    
    
    Change
    
    
    ChangeUnited States
    
    $
    14,343
    
    
    
    56
    %
    
    $
    11,103
    
    
    
    66
    %
    
    $
    3,240
    
    
    
    29
    %Europe
    
    
    9,963
    
    
    
    39
    %
    
    
    5,062
    
    
    
    30
    %
    
    
    4,901
    
    
    
    97
    %Canada
    
    
    322
    
    
    
    1
    %
    
    
    663
    
    
    
    4
    %
    
    
    (341
    )
    
    
    (51
    )%Other countries
    
    
    1,122
    
    
    
    4
    %
    
    
    25
    
    
    
    0
    %
    
    
    1,097
    
    
    
    4,388
    %Consolidated net sales
    
    $
    25,750
    
    
    
    100
    %
    
    $
    16,853
    
    
    
    100
    %
    
    $
    8,897
    
    
    
    53
    %
 Six months ended September 30,
    
    
    $
    
    
    %2008
    
    
    % of total
    
    
    2007
    
    
    % of total
    
    
    Change
    
    
    ChangeUnited States
    
    $
    27,069
    
    
    
    55
    %
    
    $
    20,818
    
    
    
    66
    %
    
    $
    6,251
    
    
    
    30
    %Europe
    
    
    19,467
    
    
    
    40
    %
    
    
    9,232
    
    
    
    30
    %
    
    
    10,235
    
    
    
    111
    %Canada
    
    
    562
    
    
    
    1
    %
    
    
    1,349
    
    
    
    4
    %
    
    
    (787
    )
    
    
    (58
    )%Other countries
    
    
    1,878
    
    
    
    4
    %
    
    
    32
    
    
    
    0
    %
    
    
    1,846
    
    
    
    5,769
    %Consolidated net sales
    
    $
    48,976
    
    
    
    100
    %
    
    $
    31,431
    
    
    
    100
    %
    
    $
    17,545
    
    
    
    56
    %
    Three months ended

    Six months endedSeptember 30,

    September 30,2008
    
    2007

    2008
    
    2007PlayStation 3
    
    
    7
    %
    
    
    13
    %


    9
    %


    18
    %Handheld Consoles(a)
    
    
    12
    %
    
    
    18
    %


    12
    %


    18
    %PlayStation 2
    
    
    4
    %
    
    
    17
    %


    4
    %


    16
    %Xbox 360
    
    
    17
    %
    
    
    25
    %


    14
    %


    20
    %GameCube
    
    
    3
    %
    
    
    8
    %


    3
    %


    7
    %Xbox
    
    
    1
    %
    
    
    7
    %


    1
    %


    6
    %Wii
    
    
    18
    %
    
    
    4
    %


    18
    %


    5
    %PC
    
    
    30
    %
    
    
    
    


    32
    %


    All others
    
    
    8
    %
    
    
    8
    %


    6
    %


    10
    %Total
    
    
    100
    %
    
    
    100
    %


    100
    %


    100
    %
 
 (a)
    
    Handheld consoles include Sony PSP and Nintendo Game Boy Advance, Game Boy Advance SP, DS, DS
Lite, and Micro. 14




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Three months ended
    
    Six months endedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Control pads
    
    
    23
    %
    
    
    36
    %
    
    
    19
    %
    
    
    38
    %Accessories
    
    
    20
    %
    
    
    24
    %
    
    
    20
    %
    
    
    21
    %Personal computer products
    
    
    29
    %
    
    
    
    
    
    
    31
    %
    
    
    Cables
    
    
    7
    %
    
    
    
    
    
    
    9
    %
    
    
    Bundles
    
    
    7
    %
    
    
    14
    %
    
    
    7
    %
    
    
    13
    %Games(b)
    
    
    2
    %
    
    
    6
    %
    
    
    2
    %
    
    
    8
    %Steering wheels
    
    
    1
    %
    
    
    2
    %
    
    
    1
    %
    
    
    3
    %Batteries
    
    
    9
    %
    
    
    
    
    
    
    9
    %
    
    
    All others
    
    
    2
    %
    
    
    18
    %
    
    
    2
    %
    
    
    17
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (b)
    
    Games include GameShark videogame enhancement products in addition to videogames with related
accessories. Gross Profit
   Three months ended September 30,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2008
    
    
    Sales
    
    
    2007
    
    
    Sales
    
    
    Change
    
    
    ChangeNet sales
    
    $
    25,750
    
    
    
    100.0
    %
    
    $
    16,853
    
    
    
    100.0
    %
    
    $
    8,897
    
    
    
    52.8
    %Cost of sales
    
    
    18,027
    
    
    
    70.0
    %
    
    
    11,900
    
    
    
    70.6
    %
    
    
    6,127
    
    
    
    51.5
    %Gross profit
    
    $
    7,723
    
    
    
    30.0
    %
    
    $
    4,953
    
    
    
    29.4
    %
    
    $
    2,770
    
    
    
    55.9
    %
 Six months ended September 30,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2008
    
    
    Sales
    
    
    2007
    
    
    Sales
    
    
    Change
    
    
    ChangeNet sales
    
    $
    48,976
    
    
    
    100.0
    %
    
    $
    31,431
    
    
    
    100.0
    %
    
    $
    17,545
    
    
    
    55.8
    %Cost of sales
    
    
    33,156
    
    
    
    67.7
    %
    
    
    21,799
    
    
    
    69.4
    %
    
    
    11,357
    
    
    
    52.1
    %Gross profit
    
    $
    15,820
    
    
    
    32.3
    %
    
    $
    9,632
    
    
    
    30.6
    %
    
    $
    6,188
    
    
    
    64.2
    %
  15




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##### Table of Contents



Operating Expenses
  Three months ended September 30,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2008
    
    
    Sales
    
    
    2007
    
    
    Sales
    
    
    Change
    
    
    ChangeSales and marketing
    
    $
    3,835
    
    
    
    14.9
    %
    
    $
    1,946
    
    
    
    11.5
    %
    
    $
    1,889
    
    
    
    97.1
    %General and administrative
    
    
    3,630
    
    
    
    14.1
    %
    
    
    1,477
    
    
    
    8.8
    %
    
    
    2,153
    
    
    
    145.8
    %Research and development
    
    
    475
    
    
    
    1.8
    %
    
    
    299
    
    
    
    1.8
    %
    
    
    176
    
    
    
    58.9
    %Amortization
    
    
    602
    
    
    
    2.3
    %
    
    
    
    
    
    
    
    
    
    
    602
    
    
    
    N/ATotal operating expenses
    
    $
    8,542
    
    
    
    33.1
    %
    
    $
    3,722
    
    
    
    22.1
    %
    
    $
    4,820
    
    
    
    129.5
    %
 Six months ended September 30,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2008
    
    
    Sales
    
    
    2007
    
    
    Sales
    
    
    Change
    
    
    ChangeSales and marketing
    
    $
    6,965
    
    
    
    14.2
    %
    
    $
    3,679
    
    
    
    11.7
    %
    
    $
    3,286
    
    
    
    89.3
    %General and administrative
    
    
    8,405
    
    
    
    17.2
    %
    
    
    4,277
    
    
    
    13.6
    %
    
    
    4,128
    
    
    
    96.5
    %Research and development
    
    
    938
    
    
    
    1.9
    %
    
    
    613
    
    
    
    2.0
    %
    
    
    325
    
    
    
    53.0
    %Amortization
    
    
    1,214
    
    
    
    2.5
    %
    
    
    
    
    
    
    
    
    
    
    1,214
    
    
    
    N/ATotal operating expenses
    
    $
    17,522
    
    
    
    35.8
    %
    
    $
    8,569
    
    
    
    27.3
    %
    
    $
    8,953
    
    
    
    104.5
    %
 Sales and Marketing.
 General and Administrative.
 Research and Development.
 Amortization.
 16




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##### Table of Contents



Interest Expense, Foreign Exchange Gain and Other Income
  Three months ended September 30,% of Net
    
    
    
    
    
    % of Net
    
    $
    
    %2008
    
    Sales
    
    2007
    
    Sales
    
    Change
    
    ChangeInterest expense
    
    $
    (525
    )
    
    
    2.0
    %
    
    $
    (110
    )
    
    
    0.7
    %
    
    $
    415
    
    
    
    377.3
    %Foreign exchange gain (loss)
    
    $
    (101
    )
    
    
    0.4
    %
    
    $
    307
    
    
    
    1.8
    %
    
    $
    (408
    )
    
    
    (132.9
    )%Other income
    
    $
    82
    
    
    
    0.3
    %
    
    $
    60
    
    
    
    0.4
    %
    
    $
    22
    
    
    
    36.7
    %
 Six months ended September 30,% of Net
    
    
    
    
    
    % of Net
    
    $
    
    %2008
    
    Sales
    
    2007
    
    Sales
    
    Change
    
    ChangeInterest expense
    
    $
    (992
    )
    
    
    2.0
    %
    
    $
    (209
    )
    
    
    0.7
    %
    
    $
    783
    
    
    
    374.6
    %Foreign exchange gain (loss)
    
    $
    (173
    )
    
    
    0.4
    %
    
    $
    336
    
    
    
    1.1
    %
    
    $
    (509
    )
    
    
    (151.5
    )%Other income
    
    $
    218
    
    
    
    0.5
    %
    
    $
    151
    
    
    
    0.5
    %
    
    $
    67
    
    
    
    44.4
    %
    Income Tax Expense (Benefit)
  Three months ended September 30,Effective
    
    
    
    
    
    Effective
    
    $
    
    %2008
    
    Tax Rate
    
    2007
    
    Tax Rate
    
    Change
    
    ChangeIncome tax expense (benefit)
    
    $
    (124
    )
    
    
    9.1
    %
    
    $
    616
    
    
    
    41.4
    %
    
    $
    (740
    )
    
    
    (120.1
    )%
 Six months ended September 30,Effective
    
    
    
    
    
    Effective
    
    $
    
    %2008
    
    Tax Rate
    
    2007
    
    Tax Rate
    
    Change
    
    ChangeIncome tax expense (benefit)
    
    $
    (633
    )
    
    
    23.9
    %
    
    $
    651
    
    
    
    48.6
    %
    
    $
    (1,284
    )
    
    
    (197.2
    )%
  17




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##### Table of Contents



Liquidity and Capital Resources
 Sources of Liquidity
 As of and for thesix months endedSeptember 30,(in thousands)
    
    2008
    
    
    2007
    
    
    ChangeCash
    
    $
    2,638
    
    
    $
    3,022
    
    
    $
    (384
    )Percentage of total assets
    
    
    2.7
    %
    
    
    5.3
    %Cash used in operating activities
    
    $
    (5,068
    )
    
    $
    (2,093
    )
    
    $
    (2,975
    )Cash used in investing activities
    
    
    (850
    )
    
    
    (3,519
    )
    
    
    2,669Cash provided by financing activities
    
    
    3,131
    
    
    
    5,970
    
    
    
    (2,839
    )Effects of foreign exchange on cash
    
    
    195
    
    
    
    314
    
    
    
    (119
    )Net increase (decrease) in cash
    
    $
    (2,592
    )
    
    $
    672
    
    
    
    (3,264
    )
  Cash Flows from Operating Activities
  th st st
 Cash Flows from Investing Activities
  Cash Flows from Financing Activities
  18




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##### Table of Contents



Contractual Obligations and Commitments
     EBITDA
  Three months ended
    
    
    Six months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (1,239
    )
    
    $
    872
    
    
    $
    (2,016
    )
    
    $
    690Adjustments:Interest expense
    
    
    525
    
    
    
    110
    
    
    
    992
    
    
    
    209Income tax expense (benefit)
    
    
    (124
    )
    
    
    616
    
    
    
    (633
    )
    
    
    651Depreciation and amortization
    
    
    1,063
    
    
    
    436
    
    
    
    2,165
    
    
    
    884EBITDA
    
    $
    225
    
    
    $
    2,034
    
    
    $
    508
    
    
    $
    2,434
 19




---



##### Table of Contents



Recent Accounting Pronouncements
 Fair
Value Measurements
 Business Combinations
   Forward-Looking Statements
   20




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
   
    
    Developing and implementing new reporting instructions and checklists for the newly-acquired
foreign subsidiaries accounting functions.
 
    
    Pursuing alternatives to upgrade our information technology tools to minimize the manual
process currently required to record, process, summarize and report information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, as amended.
 
    
    Retaining additional senior accounting personnel with specific responsibilities to improve
the oversight and review of financial reporting.
 
    
    Implementing additional management reviews of manually prepared schedules.
   21




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  We have a substantial amount of goodwill on our balance sheet that may have the effect of
decreasing our earnings or increasing our losses in the event that we are required to recognize an
impairment charge to goodwill.
  Goodwill and Other Intangible Assets
  Current economic, political and market conditions may adversely affect our revenue growth and
operating results.
   Funding for our future growth may depend upon obtaining new financing, which may be difficult to
obtain given prevalent economic conditions and the general credit crisis.
  22




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    Election of Directors
 For
    
    Withheld
    
    Invalid
    
    Non-VotesThomas R. Brown
    
    
    13,202,122
    
    
    
    805,320
    
    
    
    0
    
    
    
    0Darren Richardson
    
    
    12,582,505
    
    
    
    1,424,937
    
    
    
    0
    
    
    
    0Robert J. Molyneaux
    
    
    13,193,226
    
    
    
    814,216
    
    
    
    0
    
    
    
    0William Woodward
    
    
    13,194,322
    
    
    
    813,120
    
    
    
    0
    
    
    
    0
 2.
    
    Proposal to appoint KPMG LLP as our Independent Registered Public Accounting Firm and Auditor
and to authorize the Board of Director to approve the Independent Registered
Public Accounting Firm and Auditors remuneration.
 For
    
    Withheld
    
    Invalid
    
    Non-Votes13,779,526
    
    227,916
    
    0
    
    0
 
 Item 6. Exhibits
 31.1
    
    Certification of Registrants Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Registrants Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Registrants Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this
Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.32.2
    
    Certification of Registrants Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this
Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.
 23




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##### Table of Contents



MAD CATZ INTERACTIVE, INC.November 17, 2008
    /s/ Darren RichardsonDarren RichardsonPresident and Chief Executive OfficerNovember 17, 2008
    /s/ Stewart A. HalpernStewart A. HalpernChief Financial Officer 24