---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



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



For the Quarterly Period Ended December 31, 2005



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



MAD CATZ INTERACTIVE, INC.

(Exact
name of Registrant as specified in its charter)



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



(619) 683-9830

(Registrants telephone number, including area code)



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 filer 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 54,244,383 shares of the registrants Common Stock issued and outstanding as of February 8, 2006.



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MAD CATZ INTERACTIVE, INC.

FORM 10-Q

FOR THE PERIOD ENDED DECEMBER 31, 2005



TABLE OF CONTENTS



|                               |  |                                                                                                                  |  |   
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION |  | 3                                                                                                               
|                               |  |                                                                                                                 
|Item 1.                        |  | Financial Statements                                                                                             |  | 3 
|                               |  |                                                                                                                 
|.                              |  | Consolidated Balance Sheets as of December 31, 2005 and March 31, 2005 (unaudited)                               |  | 3 
|                               |  |                                                                                                                 
|                               |  | Consolidated Statements of Operations for the three and nine months ended December 31, 2005 and 2004 (unaudited) |  | 4 
|                               |  |                                                                                                                 
|                               |  | Consolidated Statements of Cash Flows for the nine months ended December 31, 2005 and 2004 (unaudited)           |  | 5 
|                               |  |                                                                                                                 
|                               |  | Notes to Consolidated Financial Statements (unaudited)                                                           |  | 6 
|                               |  |                                                                                                                 
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 17
|                               |  |                                                                                                                 
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 30
|                               |  |                                                                                                                 
|Item 4.                        |  | Controls and Procedures                                                                                          |  | 30
|                               | 
|PART II  OTHER INFORMATION    |  | 32                                                                                                              
|                               |  |                                                                                                                 
|Item 1.                        |  | Legal Proceedings                                                                                                |  | 32
|                               |  |                                                                                                                 
|Item 6.                        |  | Exhibits                                                                                                         |  | 32
|                               | 
|SIGNATURES                     |  | 33                                                                                                              



2



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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)

(unaudited)



|                                                                                                                                          |  |                   |         |   |                |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | -------------- | - | ------- | -
|                                                                                                                                          |  | December 31, 2005 |         |   | March 31, 2005 |  
|Assets                                                                                                                                    |  |                   |         |   |                |   |         |  
|Current assets:                                                                                                                           |  |                   |         |   |                |   |         |  
|Cash                                                                                                                                      |  | $                 | 3,455   |   |                | $ | 1,085   |  
|Accounts receivable, net of allowances of $8,464 and $6,329 at December 31, 2005 and March 31, 2005, respectively                         |  |                   | 31,271  |   |                |   | 17,549  |  
|Other receivables                                                                                                                         |  |                   | 533     |   |                |   | 1,804   |  
|Inventories                                                                                                                               |  |                   | 19,767  |   |                |   | 26,865  |  
|Deferred tax assets                                                                                                                       |  |                   | 2,659   |   |                |   | 3,636   |  
|Income taxes receivable                                                                                                                   |  |                   | 2,199   |   |                |   |        |  
|Other current assets                                                                                                                      |  |                   | 1,794   |   |                |   | 895     |  
|                                                                                                                                          |  |                   |         |   |                |   |         |  
|Total current assets                                                                                                                      |  |                   | 61,678  |   |                |   | 51,834  |  
|Deferred tax assets                                                                                                                       |  |                   | 104     |   |                |   | 578     |  
|Property and equipment, net                                                                                                               |  |                   | 2,278   |   |                |   | 1,831   |  
|Intangible assets, net                                                                                                                    |  |                   | 2,835   |   |                |   | 3,438   |  
|Goodwill                                                                                                                                  |  |                   | 22,395  |   |                |   | 21,455  |  
|                                                                                                                                          |  |                   |         |   |                |   |         |  
|Total assets                                                                                                                              |  | $                 | 89,290  |   |                | $ | 79,136  |  
|                                                                                                                                          |  |                   |         |   |                |   |         |  
|                                                                                                                                          |  |                  
|Liabilities and Shareholders Equity                                                                                                      |  |                   |         |   |                |   |         |  
|Current liabilities:                                                                                                                      |  |                   |         |   |                |   |         |  
|Bank loan                                                                                                                                 |  | $                 | 25,423  |   |                | $ | 12,100  |  
|Accounts payable                                                                                                                          |  |                   | 19,461  |   |                |   | 19,209  |  
|Accrued liabilities                                                                                                                       |  |                   | 3,980   |   |                |   | 3,434   |  
|Accrued income taxes payable                                                                                                              |  |                   |        |   |                |   | 1,490   |  
|                                                                                                                                          |  |                   |         |   |                |   |         |  
|Total current liabilities                                                                                                                 |  |                   | 48,864  |   |                |   | 36,233  |  
|Shareholders equity:                                                                                                                     |  |                   |         |   |                |   |         |  
|Common stock, no par value, unlimited shares authorized; 54,244,383 shares issued and outstanding at December 31, 2005 and March 31,
2005 |  |                   | 46,746  |   |                |   | 46,746  |  
|Accumulated other comprehensive income                                                                                                    |  |                   | 7,365   |   |                |   | 6,514   |  
|Accumulated deficit                                                                                                                       |  |                   | (13,685 | ) |                |   | (10,357 | )
|                                                                                                                                          |  |                   |         |   |                |   |         |  
|Total shareholders equity                                                                                                                |  |                   | 40,426  |   |                |   | 42,903  |  
|                                                                                                                                          |  |                   |         |   |                |   |         |  
|Total liabilities and shareholders equity                                                                                                |  | $                 | 89,290  |   |                | $ | 79,136  |  
|                                                                                                                                          |  |                   |         |   |                |   |         |  



See accompanying notes
to consolidated financial statements.



3



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MAD CATZ INTERACTIVE, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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



|                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                      |  | Three Months Ended December 31, |            |   | Nine Months Ended December 31, |  
|                                      |  | 2005                            |            |   | 2004*                          |   |            | 2005 |  |   | 2004*      |  
|Net sales                             |  | $                               | 44,989     |   |                                | $ | 52,844     |      |  | $ | 83,525     |   |  | $ | 90,233     |  
|Cost of sales                         |  |                                 | 38,323     |   |                                |   | 39,596     |      |  |   | 70,483     |   |  |   | 67,829     |  
|                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                          |  |                                 | 6,666      |   |                                |   | 13,248     |      |  |   | 13,042     |   |  |   | 22,404     |  
|Operating expenses:                   |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Sales and marketing                   |  |                                 | 4,332      |   |                                |   | 4,723      |      |  |   | 9,705      |   |  |   | 9,220      |  
|General and administrative            |  |                                 | 2,023      |   |                                |   | 1,897      |      |  |   | 5,674      |   |  |   | 4,899      |  
|Research and development              |  |                                 | 229        |   |                                |   | 300        |      |  |   | 1,188      |   |  |   | 692        |  
|Amortization of intangible assets     |  |                                 | 201        |   |                                |   | 201        |      |  |   | 603        |   |  |   | 603        |  
|                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses              |  |                                 | 6,785      |   |                                |   | 7,121      |      |  |   | 17,170     |   |  |   | 15,414     |  
|                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Operating income (loss)               |  |                                 | (119       | ) |                                |   | 6,127      |      |  |   | (4,128     | ) |  |   | 6,990      |  
|Interest expense, net                 |  |                                 | (437       | ) |                                |   | (381       | )    |  |   | (1,056     | ) |  |   | (839       | )
|Foreign exchange loss, net            |  |                                 | (676       | ) |                                |   | (7         | )    |  |   | (707       | ) |  |   | (131       | )
|Other income                          |  |                                 | 211        |   |                                |   | 152        |      |  |   | 426        |   |  |   | 183        |  
|                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes     |  |                                 | (1,021     | ) |                                |   | 5,891      |      |  |   | (5,465     | ) |  |   | 6,203      |  
|Income tax expense (benefit)          |  |                                 | (1,026     | ) |                                |   | 2,025      |      |  |   | (2,137     | ) |  |   | 2,225      |  
|                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                     |  | $                               | 5          |   |                                | $ | 3,866      |      |  | $ | (3,328     | ) |  | $ | 3,978      |  
|                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net income per share:                 |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic                                 |  | $                               | 0.00       |   |                                | $ | 0.07       |      |  | $ | (0.06      | ) |  | $ | 0.07       |  
|                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Diluted                               |  | $                               | 0.00       |   |                                | $ | 0.07       |      |  | $ | (0.06      | ) |  | $ | 0.07       |  
|                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Number of shares used in computation: |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic                                 |  |                                 | 54,244,383 |   |                                |   | 53,462,716 |      |  |   | 54,244,383 |   |  |   | 53,462,716 |  
|                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Diluted                               |  |                                 | 54,287,470 |   |                                |   | 53,540,476 |      |  |   | 54,244,383 |   |  |   | 53,495,794 |  
|                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

---

|* | Recasted in accordance with U.S. GAAP. See Note 1.
|- | --------------------------------------------------



See accompanying notes to consolidated financial statements.



4



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MAD CATZ INTERACTIVE, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands of U.S. dollars)



|                                                                                     |  |                                |         |   |       |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------------ | ------- | - | ----- | - | ------- | -
|                                                                                     |  | Nine Months Ended December 31, |        
|                                                                                     |  | 2005                           |         |   | 2004* |  
|Cash flows from operating activities:                                                |  |                                |         |   |       |   |         |  
|Net income (loss)                                                                    |  | $                              | (3,328  | ) |       | $ | 3,978   |  
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                                |         |   |       |   |         |  
|Depreciation and amortization                                                        |  |                                | 1,410   |   |       |   | 1,396   |  
|Gain on disposals of assets                                                          |  |                                | (1      | ) |       |   |        |  
|Foreign exchange loss                                                                |  |                                | 707     |   |       |   | 131     |  
|Deferred tax assets                                                                  |  |                                | 1,451   |   |       |   |        |  
|Changes in operating assets and liabilities:                                         |  |                                |         |   |       |   |         |  
|Accounts receivable                                                                  |  |                                | (14,094 | ) |       |   | (23,503 | )
|Other receivables                                                                    |  |                                | 1,271   |   |       |   | 197     |  
|Inventories                                                                          |  |                                | 7,164   |   |       |   | (8,607  | )
|Other current assets                                                                 |  |                                | (902    | ) |       |   | 588     |  
|Accounts payable                                                                     |  |                                | 310     |   |       |   | 14,656  |  
|Accrued liabilities                                                                  |  |                                | 630     |   |       |   | 306     |  
|Income taxes receivable/payable                                                      |  |                                | (3,689  | ) |       |   | 1,455   |  
|                                                                                     |  |                                |         |   |       |   |         |  
|Net cash used in operating activities                                                |  |                                | (9,071  | ) |       |   | (9,403  | )
|                                                                                     |  |                                |         |   |       |   |         |  
|Cash flows from investing activities:                                                |  |                                |         |   |       |   |         |  
|Purchases of property and equipment                                                  |  |                                | (1,258  | ) |       |   | (865    | )
|                                                                                     |  |                                |         |   |       |   |         |  
|Net cash used in investing activities                                                |  |                                | (1,258  | ) |       |   | (865    | )
|                                                                                     |  |                                |         |   |       |   |         |  
|Cash flows from financing activities:                                                |  |                                |         |   |       |   |         |  
|Bank loan                                                                            |  |                                | 13,323  |   |       |   | 12,105  |  
|                                                                                     |  |                                |         |   |       |   |         |  
|Net cash provided by financing activities                                            |  |                                | 13,323  |   |       |   | 12,105  |  
|                                                                                     |  |                                |         |   |       |   |         |  
|Effects of foreign exchange on cash                                                  |  |                                | (624    | ) |       |   | (377    | )
|                                                                                     |  |                                |         |   |       |   |         |  
|Net increase in cash                                                                 |  |                                | 2,370   |   |       |   | 1,460   |  
|Cash, beginning of period                                                            |  |                                | 1,085   |   |       |   | 1,728   |  
|                                                                                     |  |                                |         |   |       |   |         |  
|Cash, end of period                                                                  |  | $                              | 3,455   |   |       | $ | 3,188   |  
|                                                                                     |  |                                |         |   |       |   |         |  
|Supplemental cash flow information:                                                  |  |                                |         |   |       |   |         |  
|Income taxes paid                                                                    |  | $                              | 94      |   |       | $ | 1,099   |  
|                                                                                     |  |                                |         |   |       |   |         |  
|Interest paid                                                                        |  | $                              | 1,060   |   |       | $ | 745     |  
|                                                                                     |  |                                |         |   |       |   |         |  

---

|* | Recasted in accordance with U.S. GAAP. See Note 1.
|- | --------------------------------------------------



See accompanying notes to consolidated financial statements.



5



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MAD CATZ INTERACTIVE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



(1) Description of Business and Summary of Significant Accounting Policies



Mad Catz Interactive, Inc. is a corporation incorporated under the Canada
Business Corporations Act. Mad Catz Interactive, Inc. and its subsidiaries (collectively, the Company) design, manufacture (primarily through third parties), market and distribute accessories for all major console based video game
systems. The Companys products include control pads, steering wheels, joysticks, memory cards, video cables, light guns, dance pads, microphones, car adapters and carry cases. The Company also markets game enhancement software, publishes video
game titles and distributes video game software.



The
accompanying consolidated financial statements include the accounts of Mad Catz Interactive, Inc. and its subsidiaries. The information furnished is unaudited and consists of only normal recurring adjustments that, in the opinion of management, are
necessary to provide a fair statement of the results for the interim periods presented. Interim operating results are not necessarily indicative of operating results expected in subsequent periods or for the year as a whole. These unaudited
consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Companys Annual Report on Form 10-K for the year ended March 31, 2005 as filed with the
United States Securities and Exchange Commission (SEC).



Prior to the fourth quarter of fiscal 2005, the Company prepared its financial statements in accordance with accounting principles generally accepted in Canada (Canadian GAAP), and filed its Annual Reports on Form 20-F with the
SEC as a foreign private issuer. During the fourth quarter of fiscal 2005, the Company determined that it no longer met the foreign share ownership requirements applicable to foreign private issuers. Therefore, the consolidated financial statements
presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). As a result of this change, certain prior period information has been recasted in accordance
with U.S. GAAP.



Reclassifications



Certain prior period amounts have been reclassified to conform to the
current period presentation.



Use of Estimates



The preparation of financial statements in conformity with U.S. GAAP
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 revenue and
expenses during the year. Actual results could differ from those estimates.



Revenue Recognition



The Company
recognizes 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 its 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. Payment arrangements with the Companys customers
typically provide net 30 and 60-day terms.



Revenues 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 is approved.
Allowances for estimated future returns, cooperative advertising and volume rebates 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 a reduction of revenue or operating expense in accordance with EITF 01-9.



6



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Software Development Costs



Software development costs primarily consist of payments made to independent software developers under development
agreements. The Company accounts for software development costs in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, which provides for the capitalization of
certain software development costs incurred after technological feasibility of the software is established or for development costs that have alternative future uses. Under the Companys current practice of developing new products, the
technological feasibility of the underlying software is not established until substantially all product development is complete and the first playable version is delivered. Software development costs of approximately $186,000 are included in other
current assets as of December 31, 2005 and will be amortized over the estimated life of the product, starting at the products release for sale.



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 payments to independent software developers are payments for the development of intellectual property related to the
Companys video game titles.



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. With regard to payments made to independent software developers and co-publishing
affiliates, the Company is generally subject to development risk prior to the general release of the product. Accordingly, payments that are due prior to completion of the product are generally expensed as research and development as the services
are incurred. Payments due after the general release of the product (primarily royalty-based in nature) are typically expensed as cost of sales at the higher of the contractual or effective royalty rate based on net product sales.



Advertising



Advertising costs are expensed as incurred or accrued and amounted to $2,901,000 and $5,079,000 for the three and nine
months ended December 31, 2005, respectively. Advertising expense was $3,221,000 and $5,152,000 for the three and nine months ended December 31, 2004, respectively. Cooperative advertising with distributors and retailers is accrued when
revenue is recognized and such amounts are included in sales and marketing expense if there is a separate identifiable benefit with an estimable fair value. Otherwise, such costs are recognized as a reduction of revenue.



Stock-Based Compensation



The Company accounts for its stock-based employee compensation plan using
the intrinsic value method under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,and related interpretations. Accordingly, compensation cost for stock options issued
to employees is measured as the excess, if any, of the quoted market price of the Companys stock at the date of the grant over the exercise price of the underlying stock options. In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based CompensationTransition and Disclosurean amendment of SFAS No. 123.SFAS No. 148 requires certain additional disclosures of the estimated fair value of stock-based compensation. Such
estimated fair value is determined through the use of the Black-Scholes option pricing model. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting periods. There were
no options granted during the three months ended December 31, 2005 or 2004.



7



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Had compensation expense for these plans been determined consistent with SFAS 123, the Company would have
recorded net income (loss) and basic and diluted net income (loss) per share for the three months ended December 31, 2005 and 2004 as follows (in thousands):



|                                                          |  |                                 |      |   |                                |   |       |      |  |   |        |   |  |   |       |  
|--------------------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                          |  | Three Months Ended December 31, |      |   | Nine Months Ended December 31, |  
|                                                          |  | 2005                            |      |   | 2004                           |   |       | 2005 |  |   | 2004   |  
|Net income (loss) as reported                             |  | $                               | 5    |   |                                | $ | 3,866 |      |  | $ | (3,328 | ) |  | $ | 3,978 |  
|Stock based compensation using the fair value method      |  |                                 | (26  | ) |                                |   | (38   | )    |  |   | (99    | ) |  |   | (206  | )
|                                                          |  |                                 |      |   |                                |   |       |      |  |   |        |   |  |   |       |  
|Pro forma net income (loss)                               |  | $                               | (21  | ) |                                | $ | 3,828 |      |  | $ | (3,427 | ) |  | $ | 3,772 |  
|                                                          |  |                                 |      |   |                                |   |       |      |  |   |        |   |  |   |       |  
|Net income (loss) per common share:                       |  |                                 |      |   |                                |   |       |      |  |   |        |   |  |   |       |  
|Basic and diluted net income (loss) per shareas reported |  | $                               | 0.00 |   |                                | $ | 0.07  |      |  | $ | (0.06  | ) |  | $ | 0.07  |  
|                                                          |  |                                 |      |   |                                |   |       |      |  |   |        |   |  |   |       |  
|Basic and diluted net income (loss) per sharepro forma   |  | $                               | 0.00 |   |                                | $ | 0.07  |      |  | $ | (0.06  | ) |  | $ | 0.07  |  
|                                                          |  |                                 |      |   |                                |   |       |      |  |   |        |   |  |   |       |  



Recent Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 123
(revised 2004) (SFAS No. 123R), Share-Based Payments. SFAS 123R replaced SFAS 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS 123R will require companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments including stock options and other forms of stock-based compensation. SFAS
No. 123R allows measurement of the cost of share-based payment transactions to employees at the fair value of the award on the grant date and recognition of expense over the requisite service or vesting period. SFAS No. 123R allows
implementation using a modified version of prospective application, under which compensation expense for the unvested portion of previously granted awards and all new awards will be recognized on or after the date of adoption. SFAS No. 123R
also allows companies to adopt SFAS No. 123R by restating previously issued financial statements, basing the amounts on the expense previously calculated and reported in their pro forma footnote disclosures required under SFAS No. 123. In
addition, in March 2005, the SEC released SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB No. 107). SAB No. 107 provides the SEC staffs position regarding the application of SFAS
No. 123R and certain SEC rules and regulations, and also provides the staffs views regarding the valuation of share-based payment arrangements for public companies. In April 2005, the SEC approved an amendment to Rule 4-01(a) of
Regulation S-X to amend the date for compliance with SFAS No. 123R. In accordance with this amendment, the accounting provisions of SFAS No. 123R are effective for annual periods beginning after June 15, 2005. The Company is required
to adopt SFAS No. 123R no later than the first quarter of fiscal 2007. The Company is evaluating the requirements of SFAS No. 123R and SAB No. 107 and it does not expect the adoption of these pronouncements to have a material impact
on the Companys consolidated financial statements.



In
November 2004, the FASB issued SFAS No. 151, Inventory Costsan Amendment of ARB 43, Chapter 4, to provide clarification that abnormal amounts of idle facility expense, freight, handling costs, and wasted material be
recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this standard are
effective for fiscal years beginning after June 15, 2005. The adoption of this standard is not expected to have a material impact on the Companys future consolidated financial statements.



In December 2004, the FASB issued SFAS No. 153, Exchange of
Non-monetary Assetsan amendment of APB Opinion No. 29.SFAS No. 153 amends APB No. 29, Accounting for Non-monetary Transactions to eliminate the exception for non-monetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS No. 153 is effective for non-monetary exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of this standard is not expected to have a material impact on the Companys future consolidated financial statements.



8



---

(2) Inventories



Inventories consist of the following (in thousands):



|                                    |  |                   |        |                |   |       
|----------------------------------- |  | ----------------- | ------ | -------------- | - | ------
|                                    |  | December 31, 2005 |        | March 31, 2005
|Raw materials                       |  | $                 | 1,974  |                | $ | 2,228 
|Finished goods                      |  |                   | 17,791 |                |   | 24,635
|Packaging materials and accessories |  |                   | 2      |                |   | 2     
|                                    |  |                   |        |                |   |       
|Inventories                         |  | $                 | 19,767 |                | $ | 26,865
|                                    |  |                   |        |                |   |       



(3) Property and Equipment



Property and equipment consist of the following (in
thousands):



|                                                |  |                   |        |   |                |   |        |  
|----------------------------------------------- |  | ----------------- | ------ | - | -------------- | - | ------ | -
|                                                |  | December 31, 2005 |        |   | March 31, 2005 |  
|Molds                                           |  | $                 | 3,226  |   |                | $ | 2,835  |  
|Computer equipment and software                 |  |                   | 2,188  |   |                |   | 1,515  |  
|Manufacturing and office equipment              |  |                   | 460    |   |                |   | 346    |  
|Furniture and fixtures                          |  |                   | 304    |   |                |   | 221    |  
|Assets not yet in service                       |  |                   | 234    |   |                |   | 255    |  
|Leasehold improvements                          |  |                   | 416    |   |                |   | 414    |  
|                                                |  |                   |        |   |                |   |        |  
|                                                |  |                   | 6,828  |   |                |   | 5,586  |  
|Less: Accumulated depreciation and amortization |  |                   | (4,550 | ) |                |   | (3,755 | )
|                                                |  |                   |        |   |                |   |        |  
|Property and equipment, net                     |  | $                 | 2,278  |   |                | $ | 1,831  |  
|                                                |  |                   |        |   |                |   |        |  



Depreciation and
amortization expense associated with property and equipment amounted to $282,000 and $807,000 for the three and nine month periods ended December 31, 2005, respectively, and $267,000 and $793,000 for the three and nine month periods ended
December 31, 2004, respectively.



(4) Intangible Assets



In January 2003, the Company acquired the rights to the GameShark brand,
intellectual property, and the www.gameshark.com web site from InterAct, a subsidiary of Recoton Corporation, for total cash consideration of $5,083,000. GameShark is the industry leader in video game enhancement software, which enables players to
take full advantage of the secret codes, short cuts and hints incorporated by video game publishers into their game offerings. In connection with the GameShark acquisition, the Company entered into a five-year technology agreement with Fire
International, Ltd. (Fire) to incorporate Fires technology in the GameShark brand of video game enhancements. Effective December 2, 2005, the minimum purchase requirement of the five-year technology agreement was eliminated
(see Note 6). The amounts of the intangible assets and their respective useful lives were determined based upon the allocation of the actual purchase price to the various categories of intellectual property as determined by an independent external
valuation analysis completed in May 2003. In addition, the Company considered the eight year history of the GameShark brand prior to our acquisition and the lifecycle and installed base of the console systems on which GameShark products can be used.
The acquired intangible assets are summarized as follows (in thousands):



|                  |  |      |       |                                               |   |                                     |  |                                  |       |                     |   |       |  |  
|----------------- |  | ---- | ----- | --------------------------------------------- | - | ----------------------------------- |  | -------------------------------- | ----- | ------------------- | - | ----- |  | -
|                  |  | Cost |       | Accumulated Amortization at December 31, 2005 |   | Net Book Value at December 31, 2005 |  | Net Book Value at March 31, 2005 |       | Useful life (years)
|Trademarks        |  | $    | 4,112 |                                               | $ | 1,615                               |  | $                                | 2,497 |                     | $ | 2,937 |  | 7
|Copyrights        |  |      | 514   |                                               |   | 300                                 |  |                                  | 214   |                     |   | 291   |  | 5
|Website           |  |      | 457   |                                               |   | 333                                 |  |                                  | 124   |                     |   | 210   |  | 4
|                  |  |      |       |                                               |   |                                     |  |                                  |       |                     |   |       |  |  
|Intangible assets |  | $    | 5,083 |                                               | $ | 2,248                               |  | $                                | 2,835 |                     | $ | 3,438 |  |  
|                  |  |      |       |                                               |   |                                     |  |                                  |       |                     |   |       |  |  



9



---

(5) Bank Loan



The Company has a Credit Facility with Wachovia Capital Finance Corporation (Central) (Wachovia), formerly Congress Financial Corporation
(Central), 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%. The line of credit must be repaid in United States dollars. At December 31, 2005 the interest rate was 7.0%. In addition, the Company is required to pay a monthly service fee of $2,000 and a
fee equal to 0.25% of the unused line. The Credit Facility is secured by a first priority interest in the inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc., the Companys primary operating subsidiary
(MCI), and by a pledge of all of the capital stock of the Companys subsidiaries and is guaranteed by the Company. In addition, the Company is required, monthly, under the Credit Facility to meet a consolidated tangible net worth
covenant.



The Company also has an additional $10 million line
of credit under the Credit Facility which may be utilized, with Wachovias consent, for acquisition purposes under the same conditions and terms as the lines of credit described above. To date, the Company has not drawn against this line of
credit.



The Credit Facility was renewed for an additional year
in September 2005, and is now scheduled to expire on September 25, 2006. Although Wachovia has extended the expiration date of the Credit Facility in the current fiscal year and in prior fiscal years, the Company does not know the likelihood
that Wachovia will agree to further extend the expiration of the Credit Facility following September 25, 2006. The Company expects to continue to renew or obtain new financing in the ordinary course of business.



(6) Commitments and Contingencies



Leases



The Company is obligated under certain non-cancelable operating leases, primarily for warehouses and office space. Total
future minimum lease commitments under operating leases as of December 31, 2005 are as follows (in thousands):



|                             |  |   |    
|---------------------------- |  | - | ---
|Fiscal Year Ending March 31: |  |   |    
|2006 (remaining 3 months)    |  | $ | 242
|2007                         |  |   | 360
|2008                         |  |   | 74 
|2009                         |  |   | 10 
|                             |  |   |    
|                             |  | $ | 686
|                             |  |   |    



Royalty and License Agreements



The Company has license agreements to utilize
existing design and utility technology with its products. The Company also has royalty agreements for use of licensed trademarks or other intellectual property. These agreements have royalty and license fees based on different percentages of certain
types of sales or a predetermined amount per unit. Royalty and license expenses were $571,000 and $1,313,000 for the quarters ended December 31, 2005 and December 31, 2004, respectively. The minimum amount due under royalty and license
agreements for the remainder of fiscal year 2006 is approximately $2,195,000, which includes several new agreements for distribution of licensed product.



Purchase Commitments



The Company had a five-year agreement with Fire under which the Company was required to purchase a minimum of $5 million of products per fiscal year,
through March 31, 2008. Although the Company met the minimum purchase requirement during the first year of the agreement, the Company did not purchase the required $5 million dollars of product during fiscal 2005. On February 1, 2005, the
Company entered into an agreement with the vendor providing that the minimum purchase requirement for the period from April 1, 2004 until March 31, 2005 would be waived for that year and deferred and made part of the minimum purchase
requirement for the period from April 1, 2005 until March 31, 2006. On December 2, 2005, the Company entered a fourth amending agreement with Fire under which the minimum purchase requirement was eliminated in exchange for a
$2,000,000 cash payment.



10



---

Legal Proceedings



On February 10, 2003, Electro Source, LLC (Electro Source) filed a complaint against MCI and Fire, as well as other defendants, in the
Superior Court in Los Angeles County, California entitled, Electro Source, LLC v. Fire International, Ltd., et al., Case No. BC 290076. On or about November 18, 2003, Electro Source amended its complaint to add Mad Catz Interactive, Inc.
as a defendant. In its amended complaint, Electro Source asserted claims against the Company and MCI alleging misappropriation of trade secrets, conspiracy to defraud, interference with contractual relationship and interference with prospective
economic advantage in connection with Fires agreement to supply the Company with product to be marketed under the Companys GameShark brand and for the termination of Fires alleged prior business relationship with Electro Source.



Electro Source moved for a temporary restraining order to
prevent MCI from marketing or otherwise distributing the GameShark products. After a hearing on the matter, the Court denied Electro Sources motion and refused to enter the temporary restraining order. The parties have engaged in written and
oral discovery, including depositions. On February 17, 2005, the Company filed a cross-complaint against Electro Source alleging false advertising, state and federal unfair competition, libel per se, and trade libel arising out of certain
advertisements and internet statements. Discovery is proceeding on the cross-complaint. On July 29, 2005, the Court denied the Companys motions for summary judgment, and on August 26, 2005, the Court denied the Companys motion
for summary adjudication as to the plaintiffs claim for intentional interference with contract. Currently there is no trial date. The parties are attempting to finish discovery as soon as practicable. The parties have a hearing before the
Court on February 17, 2006, to advise the Court concerning the status of discovery and provide trial estimates. The Court may assign a trial date at that hearing. While the Company intends to vigorously defend this matter, there can be no
guarantee that it will ultimately prevail or that damages will not be assessed against the Company. An adverse determination by the Court or jury could seriously impact the Companys revenues and its ability to continue to distribute the
GameShark products.



On or about May 2, 2005, 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. MCI answered, denying the allegation in the complaint. The 6,280,327 patent is under reexamination by the patent and trademark office. Discovery is continuing and a trial date has been
set for May 2, 2006. The Company intends to vigorously defend the allegations of the complaint, however there can be no guarantee that it will ultimately prevail, that damages will not be assessed against MCI, or that the Company will not be
prohibited from producing or marketing certain of its products.



On July 14, 2005, the Company was served with a lawsuit filed in the United States District Court for the District of Texas, Marshall Division entitled Konami Corporation v. Roxor Games, Inc.,Case No. 02-05cv-173. The
complaint alleges that the Companys MC Groovz Dance Craze product violates U.S. patent number 6,410,835. Trial has been set for January 16, 2007. Discovery continues. On January 10, 2006, the Company received a letter
from Konami Corporation asserting that Pump It Up:Exceed, which the Company distributes on behalf of Mastiff, LLC, also infringes the claims of the 6,410,835 patent and demanded that the Company cease all sales and offers to sell Pump It
Up:Exceed. While the Company intends to vigorously defend the allegations of the complaint and if necessary to seek indemnification from the manufacturers of Pump It Up:Exceed, there can be no guarantee that it will ultimately prevail, that
damages will not be assessed against the Company, or that the Company will not be prohibited from producing or marketing certain of its products.



On December 7, 2005, Mad Catz voluntarily dismissed, without prejudice, its declaratory relief action against Take-Two Interactive Software, Inc.,
and RockStar Games, Inc., after reaching a non-monetary understanding with both parties.



11



---

(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 and nine months ended December 31, 2005 and 2004 consists of the following components (in thousands):



|                                        |  |                                |      |                               |      |   |       |  |   |        |   |  |   |      
|--------------------------------------- |  | ------------------------------ | ---- | ----------------------------- | ---- | - | ----- |  | - | ------ | - |  | - | -----
|                                        |  | Three Months EndedDecember 31, |      | Nine Months EndedDecember 31,
|                                        |  | 2005                           |      |                               | 2004 |   | 2005  |  |   | 2004  
|Net income (loss)                       |  | $                              | 5    |                               |      | $ | 3,866 |  | $ | (3,328 | ) |  | $ | 3,976
|Foreign currency translation adjustment |  |                                | (182 | )                             |      |   | 1,225 |  |   | 851    |   |  |   | 1,820
|                                        |  |                                |      |                               |      |   |       |  |   |        |   |  |   |      
|Comprehensive income (loss)             |  | $                              | (177 | )                             |      | $ | 5,091 |  | $ | (2,477 | ) |  | $ | 5,796
|                                        |  |                                |      |                               |      |   |       |  |   |        |   |  |   |      



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



(8) Net Income (Loss) per Share



Shares used in basic net income (loss) per share are computed using the weighted average number of common shares outstanding during each period. Shares
used in diluted net income (loss) per share include the potentially dilutive effect of common shares issuable upon the exercise of stock options. The reconciliation of shares used to calculate basic and diluted net income (loss) per share consists
of the following (in thousands, except share and per share data):



|                                                                          |  |                                |            |                                |   |            |  |   |            |   |  |   |           
|------------------------------------------------------------------------- |  | ------------------------------ | ---------- | ------------------------------ | - | ---------- |  | - | ---------- | - |  | - | ----------
|                                                                          |  | Three Months EndedDecember 31, |            | Nine Months Ended December 31,
|                                                                          |  | 2005                           |            | 2004                           |   | 2005       |  |   | 2004      
|Net income (loss)                                                         |  | $                              | 5          |                                | $ | 3,866      |  | $ | (3,328     | ) |  | $ | 3,978     
|                                                                          |  |                                |            |                                |   |            |  |   |            |   |  |   |           
|Shares used in basic and diluted net income (loss) per share computation: |  |                                |            |                                |   |            |  |   |            |   |  |   |           
|Weighted average common shares outstanding - basic                        |  |                                | 54,244,383 |                                |   | 53,462,716 |  |   | 54,244,383 |   |  |   | 53,462,716
|Dilutive potential common shares                                          |  |                                | 43,087     |                                |   | 77,760     |  |   |           |   |  |   | 33,078    
|                                                                          |  |                                |            |                                |   |            |  |   |            |   |  |   |           
|Weighted average common shares outstanding - diluted                      |  |                                | 54,287,470 |                                |   | 53,540,476 |  |   | 54,244,383 |   |  |   | 53,495,794
|                                                                          |  |                                |            |                                |   |            |  |   |            |   |  |   |           
|Basic and diluted net income (loss) per share                             |  | $                              | 0.00       |                                | $ | 0.07       |  | $ | (0.06      | ) |  | $ | 0.07      
|                                                                          |  |                                |            |                                |   |            |  |   |            |   |  |   |           



Because the Company
incurred a loss for the nine months ended December 31, 2005, the effect of dilutive securities totaling 351,845 have been excluded from the diluted net loss per share computation as their impact would be antidilutive.



(9) Geographic Data



Net sales are attributed to the following geographic regions (in thousands):



|                |  |                                |        |                               |   |        |  |      |        |  |   |       
|--------------- |  | ------------------------------ | ------ | ----------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                |  | Three months endedDecember 31, |        | Nine months endedDecember 31,
|                |  | 2005                           |        | 2004                          |   | 2005   |  | 2004
|Net sales:      |  |                                |        |                               |   |        |  |      |        |  |   |       
|United States   |  | $                              | 33,652 |                               | $ | 42,864 |  | $    | 60,696 |  | $ | 73,886
|Canada          |  |                                | 3,732  |                               |   | 5,254  |  |      | 6,875  |  |   | 8,231 
|Europe          |  |                                | 7,553  |                               |   | 4,644  |  |      | 15,807 |  |   | 7,895 
|Other countries |  |                                | 52     |                               |   | 82     |  |      | 147    |  |   | 221   
|                |  |                                |        |                               |   |        |  |      |        |  |   |       
|                |  | $                              | 44,989 |                               | $ | 52,844 |  | $    | 83,525 |  | $ | 90,233
|                |  |                                |        |                               |   |        |  |      |        |  |   |       



12



---

Revenue is attributed to geographic regions based on the location of the customer. During the third
quarter of fiscal 2006, two customers with gross sales greater than 10% of the Companys gross sales, merged into one customer. As such, during the three months and nine months ended December 31, 2005, three customers individually
accounted for at least 10% of the Companys gross sales, for a combined total of 55% and 53% of gross sales, respectively. During the three and nine months ended December 31, 2004, four customers and three customers, respectively,
individually accounted for at least 10% of the Companys gross sales, for a combined total of 57% and 46% of gross sales, respectively.



The Companys property and equipment, goodwill and intangible assets are attributed to the following geographic regions (in thousands):



|                                |  |                  |        |               |   |       
|------------------------------- |  | ---------------- | ------ | ------------- | - | ------
|                                |  | December 31,2005 |        | March 31,2005
|Property and equipment:         |  |                  |        |               |   |       
|United States                   |  | $                | 2,062  |               | $ | 1,721 
|Europe and Asia                 |  |                  | 209    |               |   | 101   
|Canada                          |  |                  | 7      |               |   | 9     
|                                |  |                  |        |               |   |       
|                                |  |                  | 2,278  |               |   | 1,831 
|                                |  |                  |        |               |   |       
|Goodwill and intangible assets: |  |                  |        |               |   |       
|United States                   |  |                  | 2,835  |               |   | 3,438 
|Canada                          |  |                  | 22,395 |               |   | 21,455
|                                |  |                  |        |               |   |       
|                                |  |                  | 25,230 |               |   | 24,893
|                                |  |                  |        |               |   |       
|                                |  | $                | 27,508 |               | $ | 26,724
|                                |  |                  |        |               |   |       



(10) Differences Between Accounting
Principles Generally Accepted in the United States and in Canada



The consolidated financial statements to which these notes relate have been prepared in accordance with U.S. GAAP. In certain respects, U.S. GAAP differs from Canadian GAAP. Reconciliation of net income determined in accordance with U.S.
GAAP to net income determined under Canadian GAAP follows (in thousands):



|                                                                                |  |                                |      |   |                               |   |       |      |  |   |        |   |  |   |       |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ---- | - | ----------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                                                |  | Three months endedDecember 31, |      |   | Nine months endedDecember 31, |  
|                                                                                |  | 2005                           |      |   | 2004*                         |   |       | 2005 |  |   | 2004*  |  
|Net income (loss), as reported                                                  |  | $                              | 5    |   |                               | $ | 3,866 |      |  | $ | (3,328 | ) |  | $ | 3,978 |  
|Stock-based compensation  options grants (a)                                   |  |                                | (26  | ) |                               |   | (38   | )    |  |   | (99    | ) |  |   | (206  | )
|                                                                                |  |                                |      |   |                               |   |       |      |  |   |        |   |  |   |       |  
|Net income (loss) in accordance with Canadian GAAP                              |  | $                              | (21  | ) |                               | $ | 3,828 |      |  | $ | (3,427 | ) |  | $ | 3,772 |  
|                                                                                |  |                                |      |   |                               |   |       |      |  |   |        |   |  |   |       |  
|Net income (loss) per share in accordance with Canadian GAAP, basic and diluted |  | $                              | 0.00 |   |                               | $ | 0.07  |      |  | $ | (0.06  | ) |  | $ | 0.07  |  
|                                                                                |  |                                |      |   |                               |   |       |      |  |   |        |   |  |   |       |  

---

|* | Recasted in accordance with U.S. GAAP. See Note 1.
|- | --------------------------------------------------



The areas of material difference between United States and Canadian GAAP and their impact on the consolidated financial statements of the Company are
described below:



(a) Stock-Based CompensationOption Grants



Under U.S. GAAP, the Company accounts for its
stock-based employee compensation plan using the intrinsic value method under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock



13



---

Issued to Employees,and related Interpretations. For purposes of Canadian GAAP, under the transitional provisions of the Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3870 (Section 3870), Stock-based Compensation and Other Stock-based Payments,the Company would have adopted the fair value method of accounting for stock options on a retroactive
basis, with prior periods restated.



(b) Depreciation Presentation



Under U.S. GAAP, the Company allocates depreciation
and amortization expense related to property and equipment to cost of sales, sales and marketing, general and administrative and research and development expenses. Under Canadian GAAP, the Company presented depreciation and amortization, together
with amortization of intangible assets, as a separate line item.



(c)
Canadian GAAP Financial Statements



Mad Catz
Interactive, Inc.

Consolidated Balance Sheets

December 31, 2005 and March 31, 2005

(in thousands of U.S. dollars)

(Unaudited)



|                                           |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|------------------------------------------ |  | -------------------- | ------- | - | -------------- | - | ---- | ----- |  | -- | ------------ |  | - | -------------------- | - |  | ----------- | ------- | - | ----- | - | ---- | ------------ |  | -- | - |  | - | ------- | -
|                                           |  | December 31, 2005    |         |   | March 31, 2005 |  
|                                           |  | US GAAP(as reported) |         |   | Differences    |   |      | Notes |  |    | CanadianGAAP |  |   | US GAAP(as reported) |   |  | Differences |         |   | Notes |   |      | CanadianGAAP | 
|Assets                                     |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|Current assets:                            |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|Cash                                       |  | $                    | 3,455   |   |                | $ |     |       |  |    |              |  | $ | 3,455                |   |  | $           | 1,085   |   |       | $ |     |              |  |    |   |  | $ | 1,085   |  
|Accounts receivable                        |  |                      | 31,271  |   |                |   |     |       |  |    |              |  |   | 31,271               |   |  |             | 17,549  |   |       |   |     |              |  |    |   |  |   | 17,549  |  
|Other receivables                          |  |                      | 533     |   |                |   |     |       |  |    |              |  |   | 533                  |   |  |             | 1,804   |   |       |   |     |              |  |    |   |  |   | 1,804   |  
|Inventories                                |  |                      | 19,767  |   |                |   |     |       |  |    |              |  |   | 19,767               |   |  |             | 26,865  |   |       |   |     |              |  |    |   |  |   | 26,865  |  
|Deferred tax assets                        |  |                      | 2,659   |   |                |   |     |       |  |    |              |  |   | 2,659                |   |  |             | 3,636   |   |       |   |     |              |  |    |   |  |   | 3,636   |  
|Income taxes receivable                    |  |                      | 2,199   |   |                |   |     |       |  |    |              |  |   | 2,199                |   |  |             |        |   |       |   |     |              |  |    |   |  |   |        |  
|Other current assets                       |  |                      | 1,794   |   |                |   |     |       |  |    |              |  |   | 1,794                |   |  |             | 895     |   |       |   |     |              |  |    |   |  |   | 895     |  
|                                           |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|Total current assets                       |  |                      | 61,678  |   |                |   |     |       |  |    |              |  |   | 61,678               |   |  |             | 51,834  |   |       |   |     |              |  |    |   |  |   | 51,834  |  
|Deferred tax assets                        |  |                      | 104     |   |                |   |     |       |  |    |              |  |   | 104                  |   |  |             | 578     |   |       |   |     |              |  |    |   |  |   | 578     |  
|Property and equipment, net                |  |                      | 2,278   |   |                |   |     |       |  |    |              |  |   | 2,278                |   |  |             | 1,831   |   |       |   |     |              |  |    |   |  |   | 1,831   |  
|Intangible assets, net                     |  |                      | 2,835   |   |                |   |     |       |  |    |              |  |   | 2,835                |   |  |             | 3,438   |   |       |   |     |              |  |    |   |  |   | 3,438   |  
|Goodwill                                   |  |                      | 22,395  |   |                |   |     |       |  |    |              |  |   | 22,395               |   |  |             | 21,455  |   |       |   |     |              |  |    |   |  |   | 21,455  |  
|                                           |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|Total assets                               |  | $                    | 89,290  |   |                | $ |     |       |  |    |              |  | $ | 89,290               |   |  | $           | 79,136  |   |       | $ |     |              |  |    |   |  | $ | 79,136  |  
|                                           |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|Liabilities and Shareholders Equity       |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|Current liabilities:                       |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|Bank loan                                  |  | $                    | 25,423  |   |                | $ |     |       |  |    |              |  | $ | 25,423               |   |  | $           | 12,100  |   |       | $ |     |              |  |    |   |  | $ | 12,100  |  
|Accounts payable                           |  |                      | 19,461  |   |                |   |     |       |  |    |              |  |   | 19,461               |   |  |             | 19,209  |   |       |   |     |              |  |    |   |  |   | 19,209  |  
|Accrued liabilities                        |  |                      | 3,980   |   |                |   |     |       |  |    |              |  |   | 3,980                |   |  |             | 3,434   |   |       |   |     |              |  |    |   |  |   | 3,434   |  
|Accrued taxes payable                      |  |                      |        |   |                |   |     |       |  |    |              |  |   |                     |   |  |             | 1,490   |   |       |   |     |              |  |    |   |  |   | 1,490   |  
|                                           |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|Total current liabilities                  |  |                      | 48,864  |   |                |   |     |       |  |    |              |  |   | 48,864               |   |  |             | 36,233  |   |       |   |     |              |  |    |   |  |   | 36,233  |  
|Shareholders equity:                      |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|Common stock                               |  |                      | 46,746  |   |                |   | 730  |       |  | (1 | )            |  |   | 47,476               |   |  |             | 46,746  |   |       |   | 631  |              |  | (1 | ) |  |   | 47,377  |  
|Accumulated other comprehensive income     |  |                      | 7,365   |   |                |   |     |       |  |    |              |  |   | 7,365                |   |  |             | 6,514   |   |       |   |     |              |  |    |   |  |   | 6,514   |  
|Accumulated deficit                        |  |                      | (13,685 | ) |                |   | (730 | )     |  | (1 | )            |  |   | (14,415              | ) |  |             | (10,357 | ) |       |   | (631 | )            |  | (1 | ) |  |   | (10,988 | )
|                                           |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|Total shareholders equity                 |  |                      | 40,426  |   |                |   |     |       |  |    |              |  |   | 40,426               |   |  |             | 42,903  |   |       |   |     |              |  |    |   |  |   | 42,903  |  
|                                           |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  
|Total liabilities and shareholders equity |  | $                    | 89,290  |   |                | $ |     |       |  |    |              |  | $ | 89,290               |   |  | $           | 79,136  |   |       | $ |     |              |  |    |   |  | $ | 79,136  |  
|                                           |  |                      |         |   |                |   |      |       |  |    |              |  |   |                      |   |  |             |         |   |       |   |      |              |  |    |   |  |   |         |  

---

|(1) | See Note 10 (a)
|--- | ---------------



14



---



Mad Catz Interactive, Inc.

Consolidated Statements of Operations

Three and Nine Months Ended December 31, 2005 and 2004

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

(Unaudited)



|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|------------------------------------------------------ |  | ------------------------------- | ---------- | - | ----------- | - | ---- | ----- |  | -- | ------------ |  | - | --------------------- | - |  | ----------- | ---------- | - | ----- | - | ---- | ------------ |  | -- | - |  | - | ---------- | -
|                                                       |  | Three Months Ended December 31, |           
|                                                       |  | 2005                            |            |   | 2004        |  
|                                                       |  | US GAAP (as reported)           |            |   | Differences |   |      | Notes |  |    | CanadianGAAP |  |   | US GAAP (as reported) |   |  | Differences |            |   | Notes |   |      | CanadianGAAP | 
|Net sales                                              |  | $                               | 44,989     |   |             | $ |     |       |  |    |              |  | $ | 44,989                |   |  | $           | 52,844     |   |       | $ |     |              |  |    |   |  | $ | 52,844     |  
|Cost of sales                                          |  |                                 | 38,323     |   |             |   | (177 | )     |  | (2 | )            |  |   | 38,146                |   |  |             | 39,596     |   |       |   | (198 | )            |  | (2 | ) |  |   | 39,398     |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Gross profit                                           |  |                                 | 6,666      |   |             |   | 177  |       |  |    |              |  |   | 6,843                 |   |  |             | 13,248     |   |       |   | 198  |              |  |    |   |  |   | 13,446     |  
|Operating expenses:                                    |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Sales and marketing                                    |  |                                 | 4,332      |   |             |   | (52  | )     |  | (2 | )            |  |   | 4,280                 |   |  |             | 4,723      |   |       |   | (34  | )            |  | (2 | ) |  |   | 4,689      |  
|General and administrative                             |  |                                 | 2,023      |   |             |   | (41  | )     |  | (2 | )            |  |   | 1,982                 |   |  |             | 1,897      |   |       |   | (29  | )            |  | (2 | ) |  |   | 1,868      |  
|Research and development                               |  |                                 | 229        |   |             |   | (12  | )     |  | (2 | )            |  |   | 217                   |   |  |             | 300        |   |       |   | (6   | )            |  | (2 | ) |  |   | 294        |  
|Stock-based compensation                               |  |                                 |           |   |             |   | 26   |       |  | (1 | )            |  |   | 26                    |   |  |             |           |   |       |   | 38   |              |  | (1 | ) |  |   | 38         |  
|Depreciation and amortization                          |  |                                 |           |   |             |   | 282  |       |  | (2 | )            |  |   | 282                   |   |  |             |           |   |       |   | 267  |              |  | (2 | ) |  |   | 267        |  
|Amortization of intangible assets                      |  |                                 | 201        |   |             |   |     |       |  |    |              |  |   | 201                   |   |  |             | 201        |   |       |   |     |              |  |    |   |  |   | 201        |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Total operating expenses                               |  |                                 | 6,785      |   |             |   | 203  |       |  |    |              |  |   | 6,988                 |   |  |             | 7,121      |   |       |   | 236  |              |  |    |   |  |   | 7,357      |  
|Operating income (loss)                                |  |                                 | (119       | ) |             |   | (26  | )     |  |    |              |  |   | (145                  | ) |  |             | 6,127      |   |       |   | (38  | )            |  |    |   |  |   | 6,089      |  
|Interest expense, net                                  |  |                                 | (437       | ) |             |   |     |       |  |    |              |  |   | (437                  | ) |  |             | (381       | ) |       |   |     |              |  |    |   |  |   | (381       | )
|Foreign exchange gain (loss), net                      |  |                                 | (676       | ) |             |   |     |       |  |    |              |  |   | (676                  | ) |  |             | (7         | ) |       |   |     |              |  |    |   |  |   | (7         | )
|Other income                                           |  |                                 | 211        |   |             |   |     |       |  |    |              |  |   | 211                   |   |  |             | 152        |   |       |   |     |              |  |    |   |  |   | 152        |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Income (loss) before income taxes                      |  |                                 | (1,021     | ) |             |   | (26  | )     |  |    |              |  |   | (1,047                | ) |  |             | 5,891      |   |       |   | (38  | )            |  |    |   |  |   | 5,853      |  
|Income tax expense (benefit)                           |  |                                 | (1,026     | ) |             |   |     |       |  |    |              |  |   | (1,026                | ) |  |             | 2,025      |   |       |   |     |              |  |    |   |  |   | 2,025      |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Net income (loss)                                      |  | $                               | 5          |   |             | $ | (26  | )     |  |    |              |  | $ | (21                   | ) |  | $           | 3,866      |   |       | $ | (38  | )            |  |    |   |  | $ | 3,828      |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Basic and diluted net income (loss) per share          |  | $                               | 0.00       |   |             | $ |     |       |  |    |              |  | $ | 0.00                  |   |  | $           | 0.07       |   |       | $ |     |              |  |    |   |  | $ | 0.07       |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Shares used in calculating net income (loss) per share |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Basic                                                  |  |                                 | 54,244,383 |   |             |   |     |       |  |    |              |  |   | 54,244,383            |   |  |             | 53,462,716 |   |       |   |     |              |  |    |   |  |   | 53,462,716 |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Diluted                                                |  |                                 | 54,287,470 |   |             |   |     |       |  |    |              |  |   | 54,287,470            |   |  |             | 53,540,476 |   |       |   |     |              |  |    |   |  |   | 53,540,476 |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|                                                       | 
|                                                       |  | Nine Months Ended December 31,  |           
|                                                       |  | 2005                            |            |   | 2004        |  
|                                                       |  | US GAAP (as reported)           |            |   | Differences |   |      | Notes |  |    | CanadianGAAP |  |   | US GAAP (as reported) |   |  | Differences |            |   | Notes |   |      | CanadianGAAP | 
|Net sales                                              |  | $                               | 83,525     |   |             | $ |     |       |  |    |              |  | $ | 83,525                |   |  | $           | 90,233     |   |       | $ |     |              |  |    |   |  | $ | 90,233     |  
|Cost of sales                                          |  |                                 | 70,483     |   |             |   | (548 | )     |  | (2 | )            |  |   | 69,935                |   |  |             | 67,829     |   |       |   | (580 | )            |  | (2 | ) |  |   | 67,249     |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Gross profit                                           |  |                                 | 13,042     |   |             |   | 548  |       |  |    |              |  |   | 13,590                |   |  |             | 22,404     |   |       |   | 580  |              |  |    |   |  |   | 22,984     |  
|Operating expenses:                                    |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Sales and marketing                                    |  |                                 | 9,705      |   |             |   | (126 | )     |  | (2 | )            |  |   | 9,579                 |   |  |             | 9,220      |   |       |   | (104 | )            |  | (2 | ) |  |   | 9,116      |  
|General and administrative                             |  |                                 | 5,674      |   |             |   | (103 | )     |  | (2 | )            |  |   | 5,571                 |   |  |             | 4,899      |   |       |   | (90  | )            |  | (2 | ) |  |   | 4,809      |  
|Research and development                               |  |                                 | 1,188      |   |             |   | (30  | )     |  | (2 | )            |  |   | 1,158                 |   |  |             | 692        |   |       |   | (19  | )            |  | (2 | ) |  |   | 673        |  
|Stock-based compensation                               |  |                                 |           |   |             |   | 99   |       |  | (1 | )            |  |   | 99                    |   |  |             |           |   |       |   | 206  |              |  | (1 | ) |  |   | 206        |  
|Depreciation and amortization                          |  |                                 |           |   |             |   | 807  |       |  | (2 | )            |  |   | 807                   |   |  |             |           |   |       |   | 793  |              |  | (2 | ) |  |   | 793        |  
|Amortization of intangible assets                      |  |                                 | 603        |   |             |   |     |       |  |    |              |  |   | 603                   |   |  |             | 603        |   |       |   |     |              |  |    |   |  |   | 603        |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Total operating expenses                               |  |                                 | 17,170     |   |             |   | 647  |       |  |    |              |  |   | 17,817                |   |  |             | 15,414     |   |       |   | 786  |              |  |    |   |  |   | 16,200     |  
|Operating income (loss)                                |  |                                 | (4,128     | ) |             |   | (99  | )     |  |    |              |  |   | (4,227                | ) |  |             | 6,990      |   |       |   | (206 | )            |  |    |   |  |   | 6,784      |  
|Interest expense, net                                  |  |                                 | (1,056     | ) |             |   |     |       |  |    |              |  |   | (1,056                | ) |  |             | (839       | ) |       |   |     |              |  |    |   |  |   | (839       | )
|Foreign exchange gain (loss), net                      |  |                                 | (707       | ) |             |   |     |       |  |    |              |  |   | (707                  | ) |  |             | (131       | ) |       |   |     |              |  |    |   |  |   | (131       | )
|Other income                                           |  |                                 | 426        |   |             |   |     |       |  |    |              |  |   | 426                   |   |  |             | 183        |   |       |   |     |              |  |    |   |  |   | 183        |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Income (loss) before income taxes                      |  |                                 | (5,465     | ) |             |   | (99  | )     |  |    |              |  |   | (5,564                | ) |  |             | 6,203      |   |       |   | (206 | )            |  |    |   |  |   | 5,997      |  
|Income tax expense (benefit)                           |  |                                 | (2,137     | ) |             |   |     |       |  |    |              |  |   | (2,137                | ) |  |             | 2,225      |   |       |   |     |              |  |    |   |  |   | 2,225      |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Net income (loss)                                      |  | $                               | (3,328     | ) |             | $ | (99  | )     |  |    |              |  | $ | (3,427                | ) |  | $           | 3,978      |   |       | $ | (206 | )            |  |    |   |  | $ | 3,772      |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Basic and diluted net income (loss) per share          |  | $                               | (0.06      | ) |             | $ |     |       |  |    |              |  | $ | (0.06                 | ) |  | $           | 0.07       |   |       | $ |     |              |  |    |   |  | $ | 0.07       |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Shares used in calculating net income (loss) per share |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Basic                                                  |  |                                 | 54,244,383 |   |             |   |     |       |  |    |              |  |   | 54,244,383            |   |  |             | 53,462,716 |   |       |   |     |              |  |    |   |  |   | 53,462,716 |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  
|Diluted                                                |  |                                 | 54,244,383 |   |             |   |     |       |  |    |              |  |   | 54,244,383            |   |  |             | 53,495,794 |   |       |   |     |              |  |    |   |  |   | 53,495,794 |  
|                                                       |  |                                 |            |   |             |   |      |       |  |    |              |  |   |                       |   |  |             |            |   |       |   |      |              |  |    |   |  |   |            |  

---

|(1) | See Note 10 (a)
|--- | ---------------



|(2) | See Note 10 (b)
|--- | ---------------



15



---

Mad Catz Interactive, Inc.

Consolidated Statements of Cash Flows

Nine Months Ended December 31,
2005 and 2004

(in thousands of U.S. dollars)

(Unaudited)



|                                                                                     |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | -------------------- | ------- | - | ----------- | - | --- | ------------ |  | - | -------------------- | - |  | ----------- | ------- | - | ------------ | - | ---- | - |  | - | ------- | -
|                                                                                     |  | 2005                 |         |   | 2004        |  
|                                                                                     |  | US GAAP(as reported) |         |   | Differences |   |     | CanadianGAAP |  |   | US GAAP(as reported) |   |  | Differences |         |   | CanadianGAAP |  
|Cash flows from operating activities:                                                |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Net income (loss)                                                                    |  | $                    | (3,328  | ) |             | $ | (99 | )            |  | $ | (3,427               | ) |  | $           | 3,978   |   |              | $ | (206 | ) |  | $ | 3,772   |  
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Depreciation and amortization                                                        |  |                      | 1,410   |   |             |   |    |              |  |   | 1,410                |   |  |             | 1,396   |   |              |   |     |   |  |   | 1,396   |  
|Loss on disposal of assets                                                           |  |                      | (1      | ) |             |   |    |              |  |   | (1                   | ) |  |             |        |   |              |   |     |   |  |   |        |  
|Stock-based compensation                                                             |  |                      |        |   |             |   | 99  |              |  |   | 99                   |   |  |             |        |   |              |   | 206  |   |  |   | 206     |  
|Foreign exchange loss                                                                |  |                      | 707     |   |             |   |    |              |  |   | 707                  |   |  |             | 131     |   |              |   |     |   |  |   | 131     |  
|Deferred tax assets                                                                  |  |                      | 1,451   |   |             |   |    |              |  |   | 1,451                |   |  |             |        |   |              |   |     |   |  |   |        |  
|Changes in operating assets and liabilities:                                         |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Accounts receivable                                                                  |  |                      | (14,094 | ) |             |   |    |              |  |   | (14,094              | ) |  |             | (23,503 | ) |              |   |     |   |  |   | (23,503 | )
|Other receivables                                                                    |  |                      | 1,271   |   |             |   |    |              |  |   | 1,271                |   |  |             | 197     |   |              |   |     |   |  |   | 197     |  
|Inventories                                                                          |  |                      | 7,164   |   |             |   |    |              |  |   | 7,164                |   |  |             | (8,607  | ) |              |   |     |   |  |   | (8,607  | )
|Other current assets                                                                 |  |                      | (902    | ) |             |   |    |              |  |   | (902                 | ) |  |             | 588     |   |              |   |     |   |  |   | 588     |  
|Accounts payable                                                                     |  |                      | 310     |   |             |   |    |              |  |   | 310                  |   |  |             | 14,656  |   |              |   |     |   |  |   | 14,656  |  
|Accrued liabilities                                                                  |  |                      | 630     |   |             |   |    |              |  |   | 630                  |   |  |             | 306     |   |              |   |     |   |  |   | 306     |  
|Income taxes receivable/payable                                                      |  |                      | (3,689  | ) |             |   |    |              |  |   | (3,689               | ) |  |             | 1,455   |   |              |   |     |   |  |   | 1,455   |  
|                                                                                     |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Net cash used in operating activities                                                |  |                      | (9,071  | ) |             |   |    |              |  |   | (9,071               | ) |  |             | (9,403  | ) |              |   |     |   |  |   | (9,403  | )
|                                                                                     |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Cash flows from investing activities:                                                |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Purchases of property and equipment                                                  |  |                      | (1,258  | ) |             |   |    |              |  |   | (1,258               | ) |  |             | (865    | ) |              |   |     |   |  |   | (865    | )
|                                                                                     |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Net cash used in investing activities                                                |  |                      | (1,258  | ) |             |   |    |              |  |   | (1,258               | ) |  |             | (865    | ) |              |   |     |   |  |   | (865    | )
|                                                                                     |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Cash flows from financing activities:                                                |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Bank loan                                                                            |  |                      | 13,323  |   |             |   |    |              |  |   | 13,323               |   |  |             | 12,105  |   |              |   |     |   |  |   | 12,105  |  
|                                                                                     |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Net cash provided by financing activities                                            |  |                      | 13,323  |   |             |   |    |              |  |   | 13,323               |   |  |             | 12,105  |   |              |   |     |   |  |   | 12,105  |  
|                                                                                     |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Effects of foreign exchange on cash                                                  |  |                      | (624    | ) |             |   |    |              |  |   | (624                 | ) |  |             | (377    | ) |              |   |     |   |  |   | (377    | )
|Net increase in cash                                                                 |  |                      | 2,370   |   |             |   |    |              |  |   | 2,370                |   |  |             | 1,460   |   |              |   |     |   |  |   | 1,460   |  
|Cash, beginning of period                                                            |  |                      | 1,085   |   |             |   |    |              |  |   | 1,085                |   |  |             | 1,728   |   |              |   |     |   |  |   | 1,728   |  
|                                                                                     |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Cash, end of period                                                                  |  | $                    | 3,455   |   |             | $ |    |              |  | $ | 3,455                |   |  | $           | 3,188   |   |              | $ |     |   |  | $ | 3,188   |  
|                                                                                     |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Supplemental cash flow information:                                                  |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Income taxes paid                                                                    |  | $                    | 94      |   |             | $ |    |              |  | $ | 94                   |   |  | $           | 1,099   |   |              | $ |     |   |  | $ | 1,099   |  
|                                                                                     |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  
|Interest paid                                                                        |  | $                    | 1,060   |   |             | $ |    |              |  | $ | 1,060                |   |  | $           | 745     |   |              | $ |     |   |  | $ | 745     |  
|                                                                                     |  |                      |         |   |             |   |     |              |  |   |                      |   |  |             |         |   |              |   |      |   |  |   |         |  



16



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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 Risk Factors in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2005. 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 year ended March 31, 2005.



Overview



Our Business



We are a leading provider of video game accessories and software marketed under the Mad Catz and GameShark brands. We
design, manufacture (primarily through third parties in Asia), market and distribute accessories for all major video game platforms, including the Microsoft Xbox and Xbox 360; Nintendo GameCube, Game Boy Advance, Game Boy Advance SP, DS, N64 and
Nintendo Micro; Sony PlayStation, PlayStation 2 and PSP; and Nokia N-Gage QD. In addition, we design, manufacture (primarily through third parties in Asia), market and distribute accessories for the Apple iPod. Our products include video game
accessories of all types, such as control pads, steering wheels, joysticks, memory cards, video cables, light guns, dance pads, microphones, car adapters and carry cases. We also market game enhancement software, distribute video game software and
publish video game titles.



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 under Net Sales
below.



Transition to Next-Generation Consoles



Our industry is cyclical and we believe it is now in a transition stage
entering into the next cycle. Beginning with the release of Microsofts Xbox 360 in November 2005 and continuing with releases by Sony and Nintendo during the next eighteen months, we expect two new video game consoles to be introduced into the
market. Upon release of the Xbox 360 we were a licensee with rights to officially market a full range of accessories compatible with the Xbox 360. Continuing through this transition, we also intend to develop and market a range of accessories that
are compatible with the new console systems to be introduced by Sony and Nintendo, as well as continue to provide accessories to the significant installed base of current consoles in the marketplace. The transition of consoles provides an
opportunity for us to market products to the value-oriented consumer. As to the introductions of new platforms, until we have had an opportunity to fully evaluate the technology used by the first party manufacturers, we will be unable to determine
the extent to which we will be able to design and manufacture accessories that are compatible with all of the new video game consoles.



17



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Foreign Currency



During the third quarter of fiscal 2006, approximately 25% 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
both unrealized and realized, 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. During the nine months of fiscal 2006 and in fiscal 2005, we did
not hedge against foreign currency exposure and we cannot predict the effect foreign currency fluctuations will have on us during the remainder of fiscal 2006.



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 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



We generate revenue from the sale of our products, including interactive software licensed from third party developers. We recognize 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, we recognize revenue
when (1) there is persuasive evidence that an arrangement with our 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. Payment arrangements with our customers typically provide net 30 and 60-day terms.



Revenues from sales to authorized resellers are subject to terms allowing
price protection, certain rights of return and allowances for customer marketing programs. Reserves for price protection are recorded when the price protection program is approved. Allowances for estimated future returns and customer marketing
programs are provided for upon revenue recognition. Such amounts are estimated and periodically adjusted based on historical and anticipated rates of returns, inventory levels and other factors and are recorded as a reduction of revenue or operating
expense in accordance with EITF 01-9.



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 have sold the
product or committed to the program. Significant management judgments and estimates must be used to determine the cost of these programs in any accounting period.



18



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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 grant price protection credits 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 by a certain amount and issue credits to our customers to protect the customers from lower profit margins on
their inventory of our products as a result of reduction in competitive prices. 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 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.



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 historic 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 the general economic conditions, could cause actual write-offs to be materially different from the estimated allowance.



Inventories



We value inventories at the lower of cost or market value and we regularly review inventory quantities on hand and in the retail channel in order to
recognize any loss of utility in the period incurred.



Software Development
Costs



Software development costs primarily consist of
payments made to independent software developers under development agreements. We account for software development costs in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed, which provides for the capitalization of certain software development costs incurred after technological feasibility of the software is established or for development costs that have alternative future uses. Under our current
practice of developing new products, the technological feasibility of the underlying software is not established until substantially all product development is complete and the first playable version is delivered. Capitalized software development
costs that remain on the balance sheet to date will be amortized over the life of the product, starting upon the products release for sale.



19



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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 payments to independent software developers are payments for the development of intellectual
property related to our video game titles. 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. With regard to
payments made to independent software developers and co-publishing affiliates, the Company is generally subject to development risk prior to the general release of the product. Accordingly, payments that are due prior to completion of the product
are generally expensed as research and development as the services are incurred. Payments due after the general release of the product (primarily royalty-based in nature) are generally expensed as cost of sales at the higher of the contractual or
effective royalty rate based on net product sales.



Valuation of Goodwill



We have recorded goodwill in connection with the
acquisitions we have completed in prior periods. SFAS No. 142, Goodwill and Other Intangible Assets prohibits amortization of goodwill and intangible assets with indefinite useful lives but instead requires testing for
impairment at least annually. We review goodwill for impairment as of April 1of each fiscal year or when an event or a change in facts and or circumstances indicates the fair value of a reporting unit may be below its carrying amount. We
completed our annual assessment of impairment in accordance with SFAS No. 142, which did not indicate any impairment of goodwill as of March 31, 2005 and 2004.



RESULTS OF OPERATIONS



Net Sales



From a geographical perspective, our net sales for the three and nine months ended December 31, 2005 and 2004 were as follows (in thousands):



|                       |  |                                 |        |            |          |   |      |          |            |  |     |   |  |   |        |   |  |       |   
|---------------------- |  | ------------------------------- | ------ | ---------- | -------- | - | ---- | -------- | ---------- |  | --- | - |  | - | ------ | - |  | ----- | --
|                       |  | Three months ended December 31, |        |            | $ Change |   |      | % Change |           
|                       |  | 2005                            |        | % of total |          |   | 2004 |          | % of total |  |     |  
|United States          |  | $                               | 33,652 |            | 75       | % |      | $        | 42,864     |  | 81  | % |  | $ | (9,212 | ) |  | (21.5 | )%
|Canada                 |  |                                 | 3,732  |            | 8        | % |      |          | 5,254      |  | 10  | % |  |   | (1,522 | ) |  | (29.0 | )%
|Europe                 |  |                                 | 7,553  |            | 17       | % |      |          | 4,644      |  | 9   | % |  |   | 2,909  |   |  | 62.6  | % 
|Other countries        |  |                                 | 52     |            | 0        | % |      |          | 82         |  | 0   | % |  |   | (30    | ) |  | (36.6 | )%
|                       |  |                                 |        |            |          |   |      |          |            |  |     |   |  |   |        |   |  |       |   
|Consolidated net sales |  | $                               | 44,989 |            | 100      | % |      | $        | 52,844     |  | 100 | % |  | $ | (7,855 | ) |  | (14.9 | )%
|                       |  |                                 |        |            |          |   |      |          |            |  |     |   |  |   |        |   |  |       |   



|                       |  |                                |        |            |          |   |      |          |            |  |     |   |  |   |         |   |  |       |   
|---------------------- |  | ------------------------------ | ------ | ---------- | -------- | - | ---- | -------- | ---------- |  | --- | - |  | - | ------- | - |  | ----- | --
|                       |  | Nine months ended December 31, |        |            | $ Change |   |      | % Change |           
|                       |  | 2005                           |        | % of total |          |   | 2004 |          | % of total |  |     |  
|United States          |  | $                              | 60,696 |            | 73       | % |      | $        | 73,886     |  | 82  | % |  | $ | (13,190 | ) |  | (17.9 | )%
|Canada                 |  |                                | 6,875  |            | 8        | % |      |          | 8,231      |  | 9   | % |  |   | (1,356  | ) |  | (16.5 | )%
|Europe                 |  |                                | 15,807 |            | 19       | % |      |          | 7,895      |  | 9   | % |  |   | 7,912   |   |  | 100.2 | % 
|Other countries        |  |                                | 147    |            | 0        | % |      |          | 221        |  | 0   | % |  |   | (74     | ) |  | (33.5 | )%
|                       |  |                                |        |            |          |   |      |          |            |  |     |   |  |   |         |   |  |       |   
|Consolidated net sales |  | $                              | 83,525 |            | 100      | % |      | $        | 90,233     |  | 100 | % |  | $ | (6,708  | ) |  | (7.4  | )%
|                       |  |                                |        |            |          |   |      |          |            |  |     |   |  |   |         |   |  |       |   



20



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For the three months ended December 31, 2005, consolidated net sales decreased 14.9% as compared to
the three months ended December 31, 2004. The decline in U.S. net sales in the third quarter of fiscal 2006 is attributable to a decline in sales of core products (non-licensed control pads, steering wheels, bundles and game enhancement
software) due to competitive pricing and overall slowed industry demand as the first of the new gaming platforms was released in November 2005, offset by sales of licensed products (primarily control pads) not offered in the prior year quarter. The
decrease in Canadian net sales in the current third quarter is primarily due to a decline in core product sales, slightly offset by sales of iPod bundles not offered in the prior year quarter. The increase in net sales in Europe during the third
quarter is primarily due to product expansion within existing customers (primarily software distribution and accessories) and continued expansion into the French marketplace where we have added several major retailers.



For the nine months ended December 31, 2005, net sales decreased 7.4% as
compared to the nine months ended December 31, 2004. The decline in U.S. net sales is due primarily to a decline of core product sales (non-licensed control pads and steering wheels) because of slowed demand and competitive pricing, offset by
the sale of new licensed products. The decrease in net sales in Canada is due to a decline in core product sales (primarily non-licensed control pads) to existing customers. The increase in European net sales is due to product expansion within
existing customers, software not offered in the prior year and the continued expansion into the French marketplace.



Our sales by product group for the three and nine months ended December 31, 2005 and 2004 were as follows:



|                     |  |                                |   |  |      |  
|-------------------- |  | ------------------------------ | - |  | ---- | -
|                     |  | Three months endedDecember 31, |  
|                     |  | 2005                           |   |  | 2004 |  
|PlayStation 2        |  | 31                             | % |  | 29   | %
|Xbox                 |  | 23                             | % |  | 25   | %
|Xbox 360             |  | 1                              | % |  |     |  
|GameCube             |  | 12                             | % |  | 17   | %
|Handheld Consoles(a) |  | 16                             | % |  | 11   | %
|PlayStation          |  | 2                              | % |  | 2    | %
|All others           |  | 15                             | % |  | 16   | %
|                     |  |                                |   |  |      |  
|Total                |  | 100                            | % |  | 100  | %
|                     |  |                                |   |  |      |  
|                     | 
|                     |  | Nine months endedDecember 31,  |  
|                     |  | 2005                           |   |  | 2004 |  
|PlayStation 2        |  | 32                             | % |  | 30   | %
|Xbox                 |  | 24                             | % |  | 24   | %
|Xbox 360             |  | 1                              | % |  |     |  
|GameCube             |  | 12                             | % |  | 16   | %
|Handheld Consoles(a) |  | 15                             | % |  | 10   | %
|PlayStation          |  | 2                              | % |  | 3    | %
|All others           |  | 14                             | % |  | 17   | %
|                     |  |                                |   |  |      |  
|Total                |  | 100                            | % |  | 100  | %
|                     |  |                                |   |  |      |  

---

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



21



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Our sales by product category for the three and nine months ended December 31, 2005 and 2004 were as
follows:



|                |  |                                |   |  |      |  
|--------------- |  | ------------------------------ | - |  | ---- | -
|                |  | Three months endedDecember 31, |  
|                |  | 2005                           |   |  | 2004 |  
|Control pads    |  | 48                             | % |  | 45   | %
|Bundles         |  | 14                             | % |  | 16   | %
|Software(b)     |  | 11                             | % |  | 12   | %
|Steering wheels |  | 7                              | % |  | 11   | %
|Memory          |  | 5                              | % |  | 4    | %
|All others      |  | 15                             | % |  | 12   | %
|                |  |                                |   |  |      |  
|Total           |  | 100                            | % |  | 100  | %
|                |  |                                |   |  |      |  
|                | 
|                |  | Nine months endedDecember 31,  |  
|                |  | 2005                           |   |  | 2004 |  
|Control pads    |  | 48                             | % |  | 46   | %
|Bundles         |  | 14                             | % |  | 14   | %
|Software(b)     |  | 12                             | % |  | 11   | %
|Steering wheels |  | 6                              | % |  | 10   | %
|Memory          |  | 5                              | % |  | 5    | %
|All others      |  | 15                             | % |  | 14   | %
|                |  |                                |   |  |      |  
|Total           |  | 100                            | % |  | 100  | %
|                |  |                                |   |  |      |  

---

|(b) | Software includes game enhancement software, published software and exclusive software distribution with related accessories.
|--- | -----------------------------------------------------------------------------------------------------------------------------



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 and nine months ended December 31, 2005 and 2004 (in thousands):



|              |  |                                 |        |               |          |   |      |          |               |  |       |   |  |   |        |   |  |       |   
|------------- |  | ------------------------------- | ------ | ------------- | -------- | - | ---- | -------- | ------------- |  | ----- | - |  | - | ------ | - |  | ----- | --
|              |  | Three months ended December 31, |        |               | $ Change |   |      | % Change |              
|              |  | 2005                            |        | % of NetSales |          |   | 2004 |          | % of NetSales |  |       |  
|Net sales     |  | $                               | 44,989 |               | 100.0    | % |      | $        | 52,844        |  | 100.0 | % |  | $ | (7,855 | ) |  | (14.9 | )%
|Cost of sales |  |                                 | 38,323 |               | 85.2     | % |      |          | 39,596        |  | 74.9  | % |  |   | (1,273 | ) |  | (3.2  | )%
|              |  |                                 |        |               |          |   |      |          |               |  |       |   |  |   |        |   |  |       |   
|Gross profit  |  | $                               | 6,666  |               | 14.8     | % |      | $        | 13,248        |  | 25.1  | % |  | $ | (6,582 | ) |  | (49.7 | )%
|              |  |                                 |        |               |          |   |      |          |               |  |       |   |  |   |        |   |  |       |   
|              |  |                                 |       
|              |  | Nine months ended December 31,  |        |               | $ Change |   |      | % Change |              
|              |  | 2005                            |        | % of NetSales |          |   | 2004 |          | % of NetSales |  |       |  
|Net sales     |  | $                               | 83,525 |               | 100.0    | % |      | $        | 90,233        |  | 100.0 | % |  | $ | (6,708 | ) |  | (7.4  | )%
|Cost of sales |  |                                 | 70,483 |               | 84.4     | % |      |          | 67,829        |  | 75.2  | % |  |   | 2,654  |   |  | 3.9   | % 
|              |  |                                 |        |               |          |   |      |          |               |  |       |   |  |   |        |   |  |       |   
|Gross profit  |  | $                               | 13,042 |               | 15.6     | % |      | $        | 22,404        |  | 24.8  | % |  | $ | (9,362 | ) |  | (41.8 | )%
|              |  |                                 |        |               |          |   |      |          |               |  |       |   |  |   |        |   |  |       |   



Gross profit for the
three and nine months ended December 31, 2005 decreased 49.7% and 41.8%, respectively, while gross

profit as a percentage of net sales, or gross
profit margin, decreased to 14.8% from 25.1% and to 15.6% from 24.8%, respectively. The decrease in gross profit margin in the third quarter was due in part to a $2 million payment for the early termination of a long-term purchase commitment, a 4.4%
impact on margin, the write-down of certain United States inventory to market value, including exclusively distributed software and non-core product bundles and price protection on specific products as agreed with certain customers in the United
States. The decrease in the nine-month margin was attributable to the third quarter items and to the foreign exchange loss reclassification in the second quarter, inventory adjustments, additional customer discounts granted in an effort to expand
our European customer base, price protection primarily on wireless control pads, competitive pricing and additional product costs due to royalties and licensing.



22



---

Operating Expenses



Operating expenses for the three and nine months ended December 31, 2005 and 2004 were as follows (in thousands):



|                                  |  |                                 |       |                |      |   |      |   |                |  |      |          |  |   |          |   |  |       |   
|--------------------------------- |  | ------------------------------- | ----- | -------------- | ---- | - | ---- | - | -------------- |  | ---- | -------- |  | - | -------- | - |  | ----- | --
|                                  |  | Three months ended December 31, |       |                |      |   |      |   |               
|                                  |  | 2005                            |       | % of Net Sales |      |   | 2004 |   | % of Net Sales |  |      | $ Change |  |   | % Change |  
|Sales and marketing               |  | $                               | 4,332 |                | 9.6  | % |      | $ | 4,723          |  | 8.9  | %        |  | $ | (391     | ) |  | (8.3  | )%
|General and administrative        |  |                                 | 2,023 |                | 4.5  | % |      |   | 1,897          |  | 3.6  | %        |  |   | 126      |   |  | 6.7   | % 
|Research and development          |  |                                 | 229   |                | 0.5  | % |      |   | 300            |  | 0.6  | %        |  |   | (71      | ) |  | (23.7 | )%
|Amortization of intangible assets |  |                                 | 201   |                | 0.4  | % |      |   | 201            |  | 0.4  | %        |  |   | 0        |   |  | 0     | % 
|                                  |  |                                 |       |                |      |   |      |   |                |  |      |          |  |   |          |   |  |       |   
|Total operating expenses          |  | $                               | 6,785 |                | 15.1 | % |      | $ | 7,121          |  | 13.5 | %        |  | $ | (336     | ) |  | (4.7  | )%
|                                  |  |                                 |       |                |      |   |      |   |                |  |      |          |  |   |          |   |  |       |   



|                                  |  |                                |        |                |      |   |      |   |                |  |      |          |  |          |       |  |      |  
|--------------------------------- |  | ------------------------------ | ------ | -------------- | ---- | - | ---- | - | -------------- |  | ---- | -------- |  | -------- | ----- |  | ---- | -
|                                  |  | Nine months ended December 31, |        |                |      |   |      |  
|                                  |  | 2005                           |        | % of Net Sales |      |   | 2004 |   | % of Net Sales |  |      | $ Change |  | % Change |      
|Sales and marketing               |  | $                              | 9,705  |                | 11.6 | % |      | $ | 9,220          |  | 10.2 | %        |  | $        | 485   |  | 5.3  | %
|General and administrative        |  |                                | 5,674  |                | 6.8  | % |      |   | 4,899          |  | 5.4  | %        |  |          | 775   |  | 15.8 | %
|Research and development          |  |                                | 1,188  |                | 1.4  | % |      |   | 692            |  | 0.8  | %        |  |          | 496   |  | 71.7 | %
|Amortization of intangible assets |  |                                | 603    |                | 0.7  | % |      |   | 603            |  | 0.7  | %        |  |          | 0     |  | 0    | %
|                                  |  |                                |        |                |      |   |      |   |                |  |      |          |  |          |       |  |      |  
|Total operating expenses          |  | $                              | 17,170 |                | 20.6 | % |      | $ | 15,414         |  | 17.1 | %        |  | $        | 1,756 |  | 11.4 | %
|                                  |  |                                |        |                |      |   |      |   |                |  |      |          |  |          |       |  |      |  



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 of 8.3% during the three months ended December 31, 2005 is due to less commission-based sales, less co-operative advertising expense due to decreased sales and less advertising,
offset by increased salaries and travel due to additional headcount. The increase in sales and marketing expenses of 5.3% for the nine months ended December 31, 2005 is primarily due to salaries and travel resulting from additional headcount,
increased advertising expense and increased trade show costs, travel costs and increased costs related to product samples.



General and Administrative. General and administrative expenses include salaries and benefits for our executive and administrative
personnel and other expenses, such as facilities costs and professional services, such as legal and accounting. The increase in general and administrative expenses of 6.7% for the three months ended December 31, 2005 relates to additional legal
expenses related to the progression of existing cases, consulting fees and travel. The increase in general and administrative expenses of 15.8% for the nine months ended December 31, 2005 is primarily due to increased legal fees, salaries
resulting from additional headcount, increased travel, increased audit fees associated with the Companys change in status from a foreign private issuer to a U.S. filer and consulting costs associated with Sarbanes-Oxley compliance.



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 decrease in research and development expenses of 23.7% in the three months ended December 31, 2005
relates primarily to delayed software development, offset by an increase in salaries and travel due to additional headcount. The increase in research and development of 71.7% for the nine months ended December 31, 2005 is primarily a result of
an increase in product development costs in support of the first party console changes that began in the fall of calendar 2005, development of new video game titles and increased salaries and travel resulting from additional headcount.



Amortization of Intangible Assets. Amortization of
intangible assets results from our acquisition of GameShark in January 2003. Intangible assets with defined useful lives are being amortized over the estimated useful life of the assets ranging from 3 to 7 years.



23



---

Interest Expense, Foreign Exchange Gain (Loss) and Other Income



Interest expense, foreign exchange loss and other income for the three and
nine months ended December 31, 2005 and 2004 were as follows (in thousands):



|                      |  |                                 |      |   |                |     |   |      |   |      |                |  |     |          |  |          |     |  |       |  
|--------------------- |  | ------------------------------- | ---- | - | -------------- | --- | - | ---- | - | ---- | -------------- |  | --- | -------- |  | -------- | --- |  | ----- | -
|                      |  | Three months ended December 31, |      |   |                |     |   |     
|                      |  | 2005                            |      |   | % of Net Sales |     |   | 2004 |   |      | % of Net Sales |  |     | $ Change |  | % Change |    
|Interest expense      |  | $                               | (437 | ) |                | 1.0 | % |      | $ | (381 | )              |  | 0.7 | %        |  | $        | 56  |  | 14.7  | %
|Foreign exchange loss |  | $                               | (676 | ) |                | 1.5 | % |      | $ | (7   | )              |  | 0.0 | %        |  | $        | 669 |  | 9,557 | %
|Other income          |  | $                               | 211  |   |                | 0.5 | % |      | $ | 152  |                |  | 0.3 | %        |  | $        | 59  |  | 38.8  | %



|                      |  |                                |        |   |                |     |   |      |   |      |                |  |     |          |  |          |     |  |       |  
|--------------------- |  | ------------------------------ | ------ | - | -------------- | --- | - | ---- | - | ---- | -------------- |  | --- | -------- |  | -------- | --- |  | ----- | -
|                      |  | Nine months ended December 31, |        |   |                |     |   |     
|                      |  | 2005                           |        |   | % of Net Sales |     |   | 2004 |   |      | % of Net Sales |  |     | $ Change |  | % Change |    
|Interest expense      |  | $                              | (1,056 | ) |                | 1.3 | % |      | $ | (839 | )              |  | 0.9 | %        |  | $        | 217 |  | 25.9  | %
|Foreign exchange loss |  | $                              | (707   | ) |                | 0.9 | % |      | $ | (131 | )              |  | 0.2 | %        |  | $        | 576 |  | 439.7 | %
|Other income          |  | $                              | 426    |   |                | 0.5 | % |      | $ | 183  |                |  | 0.2 | %        |  | $        | 243 |  | 132.8 | %



The increase in
interest expense is attributable to higher bank loan balances and higher interest rates during the three and nine months ended December 31, 2005. The foreign exchange loss, which is primarily unrealized, in the three and nine months ended
December 31, 2005 results from the strengthening of the U.S. dollar and directly relates to the revaluation of intercompany payables arising from product purchases at the Companys foreign subsidiaries to support increased sales transacted
outside of the United States by the foreign subsidiaries. The year to date foreign exchange loss is partially offset by the year-to-date reclassification of foreign exchange loss in the second quarter of fiscal 2006 to direct cost of sales due to
the Companys change in estimated exchange rates used when converting foreign currency transactions. 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 for the three and nine months ended December 31, 2005 is due to higher advertising income as a result of additional advertisements and increased website traffic, as well as
increased royalties due to greater product distribution by the third party distributor.



Income Tax Expense (Benefit)



Income
tax expense (benefit) for the three and nine months ended December 31, 2005 and 2004 was as follows (in thousands):



|                                |        |   |                    |       |   |      |   |                    |  |      |          |  |   |          |   |  |        |   
|------------------------------- | ------ | - | ------------------ | ----- | - | ---- | - | ------------------ |  | ---- | -------- |  | - | -------- | - |  | ------ | --
|Three months ended December 31, |        |   |                    |       |   |      |  
|2005                            |        |   | Effective Tax Rate |       |   | 2004 |   | Effective Tax Rate |  |      | $ Change |  |   | % Change |  
|$                               | (1,026 | ) |                    | 100.5 | % |      | $ | 2,025              |  | 34.4 | %        |  | $ | (3,051   | ) |  | (150.7 | )%
|                                |        |  
|Nine months ended December 31,  |        |   |                    |       |   |      |  
|2005                            |        |   | Effective Tax Rate |       |   | 2004 |   | Effective Tax Rate |  |      | $ Change |  |   | % Change |  
|$                               | (2,137 | ) |                    | 39.1  | % |      | $ | 2,225              |  | 35.9 | %        |  | $ | (4,362   | ) |  | (196.0 | )%



The increase in the
income tax benefit in the third quarter of fiscal 2006 was not in proportion with the increase in the net loss in the third quarter of fiscal 2006, as the Company adjusted its year-to-date effective tax rate as a result of the third quarter loss
before income taxes. The effective tax rate is a blended rate for different jurisdictions in which the Company operates.



24



---

Net Income (Loss) and Net Income (Loss) Per Share



Net income (loss) for the three and nine months ended December 31, 2005
and 2004 was as follows (in thousands):



|                                |   |                |     |   |      |   |                |  |     |          |  |   |          |   |  |       |   
|------------------------------- | - | -------------- | --- | - | ---- | - | -------------- |  | --- | -------- |  | - | -------- | - |  | ----- | --
|Three months ended December 31, |   |                |     |   |      |   |               
|2005                            |   | % of Net Sales |     |   | 2004 |   | % of Net Sales |  |     | $ Change |  |   | % Change |  
|$                               | 5 |                | 0.0 | % |      | $ | 3,866          |  | 7.3 | %        |  | $ | (3,861   | ) |  | (99.9 | )%



25



---

|                               |        |   |                |     |   |      |   |                |  |     |          |  |   |          |   |  |        |   
|------------------------------ | ------ | - | -------------- | --- | - | ---- | - | -------------- |  | --- | -------- |  | - | -------- | - |  | ------ | --
|Nine months ended December 31, |        |   |                |     |   |      |  
|2005                           |        |   | % of Net Sales |     |   | 2004 |   | % of Net Sales |  |     | $ Change |  |   | % Change |  
|$                              | (3,328 | ) |                | 4.0 | % |      | $ | 3,978          |  | 4.4 | %        |  | $ | (7,306   | ) |  | (183.7 | )%



Net income (loss) for
the three-month and nine-month period ended December 31, 2005 decreased primarily due to the reasons discussed above. Basic and diluted net income (loss) per share for the three and nine months ended December 31, 2005 was $0.00and $(0.06),
respectively, compared to basic and diluted net income per share of $0.07 for both the three and nine months ended December 31, 2004. Net income (loss) per share is calculated using the weighted average number of basic and diluted shares
outstanding.



Liquidity and Capital Resources



Sources of Liquidity



|                                      |  |                                                  |        |   |      |   |        |        |  |   |       |  
|------------------------------------- |  | ------------------------------------------------ | ------ | - | ---- | - | ------ | ------ |  | - | ----- | -
|                                      |  | As of and for the nine months ended December 31, |        |   |      |  
|(in thousands)                        |  | 2005                                             |        |   | 2004 |   |        | Change | 
|Cash                                  |  | $                                                | 3,455  |   |      | $ | 3,188  |        |  | $ | 267   |  
|                                      |  |                                                  |        |   |      |   |        |        |  |   |       |  
|Percentage of total assets            |  |                                                  | 3.9    | % |      |   | 3.2    | %      |  |   |       |  
|Cash used in operating activities     |  | $                                                | (9,071 | ) |      | $ | (9,403 | )      |  | $ | 332   |  
|Cash used in investing activities     |  |                                                  | (1,258 | ) |      |   | (865   | )      |  |   | (393  | )
|Cash provided by financing activities |  |                                                  | 13,323 |   |      |   | 12,105 |        |  |   | 1,218 |  
|Effects of foreign exchange on cash   |  |                                                  | (624   | ) |      |   | (377   | )      |  |   | (247  | )
|                                      |  |                                                  |        |   |      |   |        |        |  |   |       |  
|Net increase in cash                  |  | $                                                | 2,370  |   |      | $ | 1,460  |        |  |   |       |  
|                                      |  |                                                  |        |   |      |   |        |        |  |   |       |  



At December 31,
2005, available cash was approximately $3.5 million compared to cash of approximately $1.1 million at March 31, 2005 and $3.2 million at December 31, 2004. Our primary source of liquidity is our revolving line of credit (as discussed below
under Cash Flows from Financing Activities).



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 nine months ended December 31, 2005 cash used in operating
activities was $9.1 million, which was primarily the result of an increase in accounts receivable, the increase of our income tax benefit which generates income taxes receivable and the impact on net loss of the $2.0 million payment to terminate our
long-term purchase commitment, offset by a reduction in inventory and collection of other receivables.



Cash Flows from Investing Activities



Cash used in investing activities was $1.3 million during the nine months ended December 31, 2005 and $0.9 million during the nine months ended December 31, 2004. Investing activities consist of capital
expenditures to support the production of new products.



26



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Cash Flows from Financing Activities



Cash provided by financing activities during the nine months ended December 31, 2005 was a result of increased
borrowings under our line of credit to support operations and new product initiatives. For the nine months ended December 31, 2005, cash provided by financing activities was $13.3 million compared to cash provided of $12.1 million in the nine
months ended December 31, 2004. 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 (the Credit Facility) with Wachovia
Capital Finance Corporation (Central) (Wachovia), formerly Congress Financial Corporation (Central), which allows us 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 accrued interest on the daily outstanding balance at the U.S. prime rate plus 0.75% per annum through August 31, 2005. Following September 1,
2005, the line of credit accrues interest on the daily outstanding balance at the U.S prime rate plus 0.25%. The line of credit must be repaid in United States dollars. In addition, the Company is required to pay a monthly service fee of $2,000 and
an unused line fee equal to 0.25%. The Credit Facility is secured by a first priority security interest in the inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc., our primary operating subsidiary
(MCI), and a pledge in favor of Wachovia of all of the shares of capital stock of our subsidiaries and is guaranteed by us. The Credit Facility is guaranteed by the Company and requires us to adhere to specified financial operating
guidelines. See Note 5 to the consolidated financial statements included in Item 1. Financial Statements, elsewhere in this Form 10-Q.



The Credit Facility was renewed for an additional year in September 2005, and is now scheduled to expire on September 25, 2006. The Credit Facility
automatically renews for an additional one-year period unless either party gives written notice to the other party seeking to terminate the Credit Facility at least 60 days prior to the expiration date. Although Wachovia has extended the expiration
date of the Credit Facility in the current fiscal year and prior years, we do not know the likelihood that Wachovia will agree to further extend the expiration of the Credit Facility following September 25, 2006. If Wachovia is unwilling to
extend the expiration of the Credit Facility beyond September 25, 2006 on terms acceptable to us, or if we are unable to comply with the restrictive and financial covenants contained in the Credit Facility, Wachovia may declare the outstanding
borrowings under the facility immediately due and payable. In such an event, our liquidity will be materially adversely affected, which could in turn have a material adverse impact on our future financial position and results of operations. We
expect to continue to renew or obtain new financing in the ordinary course of business.



We also have an additional $10 million line of credit under the Credit Facility which may be utilized, with Wachovias consent, for acquisition purposes under the same conditions and terms as the lines of credit
described above. To date, we have not drawn against this line of credit.



At December 31, 2005 the outstanding balance on our line of credit was $25.4 million and our weighted average annualized interest rate during the nine-months ended December 31, 2005 was 7.2%. We must meet an
adjusted tangible net worth covenant to access the line of credit. At December 31, 2005 and March 31, 2005, we were in compliance with this loan covenant.



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.



27



---

Contractual Obligations and Commitments



The following summarizes our minimum contractual obligations as of December 31, 2005 (in thousands):



|                                         |  |              |        |                  |   |           |  |           |     |  |   |  
|---------------------------------------- |  | ------------ | ------ | ---------------- | - | --------- |  | --------- | --- |  | - | -
|                                         |  | Payments Due
|                                         |  | Total        |        | Less Than 1 Year |   | 1-3 Years |  | 3-5 Years
|Bank loan (excludes interest)            |  | $            | 25,423 |                  | $ | 25,423    |  | $         |    |  | $ | 
|Operating leases                         |  |              | 686    |                  |   | 242       |  |           | 444 |  |   | 
|Royalty & license guaranteed commitments |  |              | 2,389  |                  |   | 2,195     |  |           | 194 |  |   | 
|                                         |  |              |        |                  |   |           |  |           |     |  |   |  
|Total                                    |  | $            | 28,498 |                  | $ | 27,860    |  | $         | 638 |  | $ | 
|                                         |  |              |        |                  |   |           |  |           |     |  |   |  

---



As of December 31, 2005 and March 31, 2005, 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.



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 ended December 31, |        | Nine months ended December 31,
|(in thousands)                |  | 2005                            |        |                                | 2004 * |   | 2005  |  |   | 2004 *
|Net income (loss)             |  | $                               | 5      |                                |        | $ | 3,866 |  | $ | (3,328 | ) |  | $ | 3,978
|Adjustments:                  |  |                                 |        |                                |        |   |       |  |   |        |   |  |   |      
|Interest expense              |  |                                 | 437    |                                |        |   | 381   |  |   | 1,056  |   |  |   | 839  
|Income tax expense (benefit)  |  |                                 | (1,026 | )                              |        |   | 2,025 |  |   | (2,137 | ) |  |   | 2,225
|Depreciation and amortization |  |                                 | 483    |                                |        |   | 468   |  |   | 1,410  |   |  |   | 1,396
|                              |  |                                 |        |                                |        |   |       |  |   |        |   |  |   |      
|EBITDA                        |  | $                               | (101   | )                              |        | $ | 6,740 |  | $ | (2,999 | ) |  | $ | 8,438
|                              |  |                                 |        |                                |        |   |       |  |   |        |   |  |   |      

---

|* | Recasted in accordance with U.S. GAAP
|- | -------------------------------------



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.



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 our most recent Annual Report on Form 10-K under Managements Discussion and



28



---

Analysis of Financial Condition and Results of Operations  Risk Factors. 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,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The seasonality of our business, with the bulk of our sales coming in our fiscal third quarter,
| | - |  | -----------------------------------------------------------------------------------------------



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



| |  |  | Risks associated with the introduction of new video game consoles, including technological compatibility of our products and obsolescence of our older products,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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| |  |  | Potential adverse effects of domestic and international taxation and transfer pricing regulations, and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Fluctuations in the value of foreign currencies against the U.S. dollar.
| | - |  | ------------------------------------------------------------------------



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



Market Risk



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.



We are exposed to foreign currency risks
arising from transactions and translations between functional and reporting currencies in our European, Canadian and Chinese foreign subsidiaries. We are also exposed to the impact of foreign currency fluctuations due to the operations of and net
monetary asset and liability positions in our European, Canadian and Chinese foreign subsidiaries. Significant monetary assets and liabilities expected to be realized in the foreseeable future include trade receivables, trade payables and
intercompany payables that are not denominated in the local functional currencies of our subsidiaries. As of December 31, 2005, our European and Canadian subsidiaries were in a net monetary liability position and our Chinese foreign subsidiary
was in a net monetary asset position. The potential foreign currency translation adjustments from a hypothetical 10% adverse change in the exchange rates from the net asset or liability positions at December 31, 2005 were approximately $0.1
million loss, $3.3 million loss and $.9 million gain for the European, Canadian and Chinese subsidiaries, respectively.



In addition, we estimate that an immediate 10% adverse change in foreign exchange rates would increase our reported net loss by approximately $1.2 million
for the nine months ended December 31, 2005. This was estimated using a 10% deterioration factor to the average monthly exchange rates applied to net income or loss for each of the related subsidiaries in the respective period.



Due to the difficulty in determining and obtaining predictable cash flow
forecasts in our foreign operations based on the overall challenging economic environment and associated contract structures, we do not currently utilize any derivative financial instruments to hedge foreign currency risks. The volatility of the
British pound sterling, the Euro, the Canadian dollar and the Chinese yuan (and any other applicable currencies) will be monitored frequently throughout the coming year; and, if appropriate, we may enter into hedging transactions in order to
mitigate our risk from foreign currency fluctuations.



Interest Rate
Risk.



We are exposed to interest rate risk on
borrowings under the 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 increase reported net loss for the three or nine months ended December 31, 2005 by approximately $0.3 million.



|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



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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.



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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.



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



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Fourth Amending Agreement, dated December 2, 2005 between Mad Catz Interactive, Inc. and Fire International Ltd                                                                                                                                                                                                                                                                                                                           
|     | 
|31.1 |  | Certifications of Registrants Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                          
|     | 
|31.2 |  | Certifications of Registrants Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                          
|     | 
|32.1 |  | Certifications 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. These certifications are being
furnished solely to accompany this Quarterly Report on Form 10-Q and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the
Company.
|     | 
|32.2 |  | Certifications 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. These certifications are being
furnished solely to accompany this Quarterly Report on Form 10-Q and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the
Company.



32



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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.
|                  |  | 
|February 13, 2006 |  |  |  | /s/ DARREN RICHARDSON     
|                  |  |  |  |                            |  | Darren Richardson                    
|                  |  |  |  |                            |  | President and Chief Executive Officer
|                  |  | 
|February 13, 2006 |  |  |  | /s/ CYRIL TALBOT III      
|                  |  |  |  |                            |  | Cyril Talbot III                     
|                  |  |  |  |                            |  | Chief Financial Officer              



33